What Is the Most Favoured Nation (MFN) Clause?
A Most Favoured Nation (MFN) clause is not one of the numbered articles of a Double Taxation Avoidance Agreement (DTAA) — it sits in the treaty's Protocol, the annexe signed alongside the main Convention. A handful of India's DTAAs — with the Netherlands, France, Switzerland, Sweden, Belgium and Spain among them — carry one. The clause promises that if India later signs a treaty with another OECD member state and, in that later treaty, limits its source-country tax on dividends, interest, royalties or fees for technical services (FTS) to a lower rate or a narrower definition than the present treaty provides, the same lower rate or narrower scope will extend automatically to the treaty partner that holds the MFN clause.
Not every Indian DTAA has one, and the ones that do are not worded identically. Some cover all four income categories; Spain's covers only royalties and FTS. Some name a cut-off date for the comparator treaty; others do not. Since the Supreme Court's 2023 ruling in Nestle SA, the clause's practical value has also narrowed: it no longer operates by itself. A fresh notification from India is required before any lower rate or narrower scope it points to can actually be claimed.
How the Clause Is Worded
MFN clauses are short, but their exact wording controls what can and cannot be imported. The Protocol to the India-Netherlands DTAA (Section IV, Ad Articles 10, 11 and 12, paragraph 2) reads:
"If after the signature of this convention under any Convention or Agreement between India and a third State which is a member of the OECD India should limit its taxation at source on dividends, interests, royalties, fees for technical services or payments for the use of equipment to a rate lower or a scope more restricted than the rate or scope provided for in this Convention on the said items of income, then as from the date on which the relevant Indian Convention or Agreement enters into force the same rate or scope as provided for in that Convention or Agreement on the said items of income shall also apply under this Convention."
Four conditions have to be read together: (1) the comparator treaty must be with a State that is a member of the OECD; (2) it must limit India's source-country tax to a lower rate or a narrower scope on the same income categories; (3) it takes effect from the date the comparator treaty enters into force, not from when it is signed; and (4) — per the Supreme Court, discussed below — the OECD membership has to exist at the point the comparator State signs its own treaty with India, not merely by the time the MFN benefit is claimed.
Other Indian MFN clauses vary this template. Spain's 1993 Protocol, point 7, restricts the import to royalties and FTS only — dividends and interest are untouched even though Spain's treaty rate on those items is higher. Sweden's 1997 protocol clause, by contrast, sets no cut-off date on when the comparator treaty must have been agreed. A page or adviser that treats "MFN clause" as one uniform rule across treaties will get individual treaties wrong.
The Nestle Ruling — Why the Clause Doesn't Apply Itself
For years, several treaty-country taxpayers argued that MFN clauses were self-executing: once India signed a later treaty — commonly cited were India's treaties with Colombia, Lithuania and Slovenia, each of which capped Indian-source dividends at 5% — the lower rate flowed automatically into earlier treaties carrying an MFN clause, such as the Netherlands, France and Switzerland conventions, without India having to do anything further. The Delhi High Court accepted this reading in Concentrix Services Netherlands B.V. and Optum Global Solutions International B.V., both decided in 2021.
The Supreme Court reversed that position on 19 October 2023 in Assessing Officer (International Taxation) v. Nestle SA (2023 INSC 928). One point the Court turned on was the timing of OECD membership: Colombia, Lithuania and Slovenia all joined the OECD only after they had already signed their own DTAAs with India, not before. Interpreting the present-tense wording common to these clauses, the Court held:
"[T]he expression 'is' has a present signification and it derives meaning from the context... when a third-party country enters into DTAA with India, it should be a member of OECD, for the earlier treaty beneficiary to claim parity."
Because none of the three comparator states was an OECD member on the date it signed its treaty with India, their 5% dividend rate could not be imported via the MFN clause at all — regardless of any notification question. The Court also examined the equivalent French clause in the same judgment, holding that whatever concession India had extended to France stood on the terms India had actually negotiated with France, not on a wider reading manufactured through the MFN route.
The ruling's second and broader effect is procedural: the MFN clause changes what a treaty says, but a change to what a treaty says still needs its own notification under India's domestic law before a taxpayer can rely on it. The Nestle bench sided with the tax department's position that, without a notification specific to the imported rate or scope, tax officers and taxpayers alike have no reliable, gazetted text to apply — a position the CBDT had already taken administratively in Circular No. 3 of 2022, dated 3 February 2022, whose paragraph 5 makes the MFN benefit available only where all four conditions are met: the treaty with the third State was entered into after the signature or entry into force (depending on the MFN clause's own wording) of the treaty with the first State; that third State was an OECD member at the time it signed its treaty with India; India actually limited its taxing rights on the relevant items of income in that later treaty; and India has issued a separate notification importing the benefit, as sub-section (1) of section 90 requires. The effect is that an MFN clause identifies what India has agreed, in principle, to extend; it does not by itself put that extension into legal effect.
How Section 159 Governs the Notification Step
India gives effect to any DTAA, and to any amendment of one, through section 159 of the Income-tax Act, 2025 (section 90 of the Income-tax Act, 1961). Section 159(1) is the power under which the Central Government notifies a treaty or protocol; section 159(4) (old section 90(2)) is the rule that lets a non-resident apply whichever is more beneficial, the treaty or domestic law; section 159(6) preserves India's General Anti-Avoidance Rule (GAAR) override; and section 159(8) requires a non-resident to hold a Tax Residency Certificate issued by their own government before claiming any treaty relief. An MFN-imported rate or scope is, in substance, an amendment to the original treaty text, so post-Nestle it needs a notification of its own under this same section before an Indian payer can rely on it when deducting withholding tax under section 393(2), and before a non-resident can claim it on Form 41.
Where the Clause Currently Stands, Treaty by Treaty
Because each notification stands or falls on its own, the same MFN clause language can be settled for one country and dead for another:
- Netherlands: the 1988 Protocol's MFN clause was given effect well before Nestle, by Notification S.O. 693(E) of 30 August 1999, which consolidated dividend, interest, royalty and FTS rates to a uniform 10% with effect from 1 April 1997. Because that notification exists, the 10% rate is safe. No notification has ever been issued for a 5% dividend rate, so the post-Nestle position is that the Netherlands' dividend rate stays at 10%.
- Spain: the one MFN notification confirmed to have issued after Nestle. Notification No. 33/2024 [S.O. 1484(E)], dated 19 March 2024, cut Spain's royalty and FTS rate from 20% to 10%, drawing on the India-Germany treaty rate, effective from AY 2024-25. Because Spain's protocol only ever covered royalties and FTS, dividends and interest are unaffected.
- Sweden: the MFN clause sits in the Protocol to the 1997 Convention and was notified with it, as GSR 705(E) of 17 December 1997 — but no notification has ever imported a lower rate or a narrower scope under that clause. Sweden's 10% rates on dividends, interest, royalties and FTS stand as negotiated; a narrower, make-available-style FTS definition cannot be brought in from another treaty without a notification that does not exist.
- Switzerland: the MFN paragraph carried by the 2010 amending protocol was itself notified, as S.O. 2903(E) of 27 December 2011, but India has never issued a notification importing a rate under it — so the 5% dividend rate some taxpayers claimed by reference to Slovenia, Lithuania and Colombia never had a legal basis on the Indian side. Switzerland itself had unilaterally applied a 5% rate to Indian residents from 2021, then formally suspended that application from 1 January 2025 following Nestle. Swiss-source dividends to India, and Indian-source dividends to Switzerland, are both back at the treaty's plain 10% rate.
- Belgium: the royalty and FTS rate cut from 20% to 10% was properly notified by S.O. 54(E) of 19 January 2001. That rate is safe. A separate argument — that Belgium's FTS definition should also be narrowed by importing a "make available" scope test from another treaty — has never been notified, and is contested after Nestle; the safe compliance position is to withhold at the notified 10% rather than assume the narrower scope applies.
Rate Import and Scope Import Are Different Questions
Belgium's position illustrates a distinction that is easy to miss: an MFN clause can be used to import a lower rate without also importing a different scope or definition, and each requires its own notification. India notified Belgium's rate cut in 2001; it never notified any change to what counts as a taxable "fee for technical services" under the Belgium treaty. A taxpayer who assumes that because the rate was imported, a narrower definition comes along with it is extending the notification beyond what it actually covers. The same separation applies wherever an MFN clause is invoked: check the notification's own text for exactly what it changed, rather than assuming it covers everything the comparator treaty offers.
What This Means for Foreign Investors
Before assuming an MFN-derived benefit applies to a payment from India, confirm three things: first, that the specific treaty's protocol actually contains an MFN clause, and what income categories and conditions it names — Spain's, for instance, does not reach dividends or interest at all. Second, that a CBDT notification giving effect to the specific rate or scope claimed has actually been issued and gazetted; the Netherlands' 10% rates and Spain's 2024 royalty/FTS cut both have one, Sweden's and Switzerland's lower-rate claims do not. Third, that the comparator State was already an OECD member on the date it signed its own treaty with India — a later accession, as Nestle held, does not count. Where no notification exists, the payer's safe course under section 393(2) is to withhold at the treaty's stated rate, not at a rate or scope the MFN clause might, in principle, support; a lower or nil-withholding claim can instead be tested through a section 395(2) application for a lower-deduction certificate.
Frequently Asked Questions
Does an MFN clause automatically lower the withholding tax rate on a payment from India?
No. Since the Supreme Court's 2023 ruling in Nestle SA, an MFN clause only describes what India has agreed, in principle, to extend. The lower rate or narrower scope takes legal effect only once the Central Board of Direct Taxes issues a specific notification under section 159 (section 90 of the 1961 Act) giving effect to it. Without that notification, the treaty's original rate applies.
Why did the Supreme Court reject the 5% dividend rate claimed under the Netherlands, France and Switzerland treaties?
Taxpayers pointed to India's treaties with Colombia, Lithuania and Slovenia, which capped dividends at 5%. The Court held that for an MFN clause to apply, the comparator State had to already be an OECD member on the date it signed its own treaty with India. Colombia, Lithuania and Slovenia each joined the OECD only after signing their India treaties, so the 5% rate was never importable in the first place, independent of any notification question.
Does every Indian DTAA have an MFN clause?
No. Only a limited group of India's treaties — including the Netherlands, France, Switzerland, Sweden, Belgium and Spain — carry one, and the wording differs between them. Spain's clause, for example, reaches only royalties and fees for technical services, not dividends or interest. Always check the specific treaty's Protocol rather than assuming the clause exists or covers the same income types everywhere.
Has any country's MFN clause actually been given effect after the Nestle ruling?
Yes. Spain is the one confirmed case: Notification No. 33/2024 [S.O. 1484(E)], dated 19 March 2024, cut the India-Spain royalty and FTS rate from 20% to 10%, effective from AY 2024-25. It shows the MFN mechanism can still work — it simply requires India to complete the notification step, which had not happened for Sweden's or Switzerland's disputed lower-rate claims.
Can an MFN clause narrow the definition of fees for technical services, not just the rate?
In principle yes, but rate and scope changes are notified separately. Belgium's royalty/FTS rate cut to 10% was notified in 2001, but no notification has ever narrowed what counts as a taxable fee for technical services under that treaty. A claim that a payment falls outside FTS because of an imported "make available" test, without a matching notification, is a contested position after Nestle, not a settled one.
See also: Double Taxation Avoidance Agreement (DTAA), Limitation of Benefits (LOB) Clause, Treaty Shopping & Substance Requirements.
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