In a big move ahead of New Year-2025, Switzerland has decided to withdraw the Most-Favored-Nation (MFN) status granted to India, citing an adverse court ruling involving the Indian Supreme Court and the Swiss-headquartered company, Nestlé. This change is set to impact Indian entities operating in Switzerland, as they will face higher tax rates on income generated in the country starting January 1, 2025.

Key Implications for Indian Entities

Switzerland announced that the MFN clause in its agreement with India for avoiding double taxation on income will no longer apply. Consequently, Indian companies will be subject to a withholding tax of 10% on dividends earned in Switzerland. This development follows Switzerland's interpretation of the Indian Supreme Court ruling in a case related to Nestlé, headquartered in Vevey.

The MFN clause, which previously facilitated equal treatment and lower tax rates for Indian entities, will be suspended, increasing the financial burden for Indian businesses operating in Switzerland.

What Is the Most-Favored-Nation (MFN) Clause?

The MFN clause ensures that a country offering a trade or tax concession to one trading partner extends the same benefits to all others. It promotes non-discriminatory trade practices and has been a cornerstone of international trade treaties for centuries. The principle is integral to the World Trade Organization (WTO), mandating equal treatment for all member nations.

In commercial law, MFN clauses are widely used to ensure equal treatment of all customers. However, they do not require reciprocal concessions unless agreed upon under specific trade agreements. For example, under WTO regulations, if a member country reduces tariffs for one partner, the same benefit must be extended to all members, without mandating reciprocal reductions from others.

Broader Impact of MFN Withdrawal

Switzerland’s decision aligns with broader interpretations of MFN clauses in international trade and commercial law. Historically, MFN clauses have evolved to include regional agreements such as NAFTA and its successor, the USMCA, which focus on equal treatment within specific trade blocs. The withdrawal of MFN status by Switzerland underscores the complexities of such agreements in a rapidly changing global trade environment.

The withdrawal of MFN status by Switzerland marks a notable shift in its trade and tax relationship with India. While the immediate impact will be felt by Indian companies operating in Switzerland, the move also highlights the evolving nature of international trade policies. For Indian businesses, the increased tax burden underscores the need for strategic adjustments in their operations and financial planning.