Context: 

Recently, the Swiss Finance Department has announced the suspension of the most favored nation status (MFN) clause in the Double Taxation Avoidance Agreement (DTAA) between India and Switzerland.

More on the news:

• The Swiss authorities said that the suspension was enforced due to a lack of “reciprocity” in the DTAA by the Indian government.
• This comes in response to the Indian Supreme Court’s ruling last year (in the Nestle case) that the MFN application requires a separate notification from India.

Reasons Behind MFN Suspension:

India signed tax treaties with Slovenia and Lithuania, which specified a 5% withholding tax rate on dividends (these two countries later became members of the OECD).

Switzerland believed that under the Most Favoured Nation (MFN) clause in its tax treaty with India, the 5% rate for dividends (from Slovenia and Lithuania's treaties) should automatically apply to the India-Switzerland treaty, replacing the original 10% rate. 

• Switzerland made this announcement in 2021.

In 2023, the Indian Supreme Court ruled that the MFN clause does not automatically apply when an existing treaty country (like Slovenia and Lithuania) joins the OECD. 

• It clarified that a formal notification under Section 90 of the Indian Income Tax Act is required for such changes to take effect.

Possible implications:

• Following the suspension of the MFN clause, Switzerland will from January 1, 2025, levy a 10% tax on dividends due to Indian tax residents who claim refunds for Swiss withholding tax and for Swiss tax residents who claim foreign tax credits.
• This could affect Swiss investments in India, as dividends will now face higher withholding taxes. 
• Income earned on or after January 1, 2025, may be taxed according to the terms of the original double taxation treaty between Switzerland and India (even if a more favorable rate is provided under the most favored nation clause).
• It also entails higher taxes on Indian companies operating in Switzerland.
• More countries may follow Switzerland’s move after this.