Dutch holding companies investing into India: the MFN clause, the Nestle judgment and dividend withholding

On 19 October 2023 the Supreme Court of India held, in Assessing Officer (International Taxation) v. Nestle SA, that a most-favoured-nation (MFN) clause in a protocol to an Indian double taxation avoidance agreement (DTAA) does not operate by itself: the better rate given to a later treaty partner reaches residents of the first country only when the Central Government notifies it under section 90 of the Income-tax Act, 1961, and the later partner must have belonged to the Organisation for Economic Co-operation and Development (OECD) when its treaty with India was entered into. For a Dutch holding company receiving dividends from India, the notified rate under the India-Netherlands DTAA therefore stays at 10 per cent, not the 5 per cent the Dutch assessees claimed. Section 159(1) of the Income-tax Act, 2025 keeps the notification language, and the Department of Economic Affairs lists the India-Netherlands bilateral investment treaty (BIT) as terminated on 1 December 2016.

What did the Supreme Court decide, and in which case?

The judgment is reported as 2023 INSC 928, in Civil Appeal No. 1420 of 2023, titled Assessing Officer Circle (International Taxation) 2(2)(2), New Delhi v. M/s Nestle SA, with connected appeals. Justice S. Ravindra Bhat wrote it for a bench with Justice Dipankar Datta, and the signed copy on the Court's website is dated 19 October 2023. The appeals came from the Delhi High Court and concerned MFN clauses in the protocols to India's treaties with the Netherlands, France and Switzerland, and the Netherlands matters were those of Concentrix Services Netherlands BV and Optum Global Solutions International BV, which sought a 5 per cent dividend rate. The Court allowed the revenue's appeals and set aside the High Court's orders. Its declarations, in paragraph 88, have three parts. A notification under section 90(1) is, in the Court's words, "necessary and a mandatory condition" for giving effect to a treaty or protocol that alters existing law. An MFN term does not automatically carry a later partner's better treatment into the first treaty; the earlier treaty must be amended by a separate notification under section 90. And the word "is" in the clause is in the present tense, so the date that counts is the date the third country enters its treaty with India, not a later date on which it joins the OECD.

What does the India-Netherlands clause say?

The DTAA was signed on 13 July 1988 and, as the judgment records it, was entered into on 21 January 1989 and notified on 27 March 1989. Article IV of its Protocol, quoted in paragraph 52 of the judgment, applies where India, after the signature, limits its source taxation on dividends, interest, royalties, fees for technical services or payments for the use of equipment to a lower rate or narrower scope in a treaty with a third State "which is a member of the Organisation for Economic Co-operation and Development". The same rate or scope then applies under the Dutch treaty "as from the date on which" the Indian treaty enters into force. Three later partners were in issue: Slovenia, Lithuania and Colombia. The judgment records that Slovenia signed with India on 13 January 2003, notified on 31 May 2005, and joined the OECD on 21 July 2010; that Lithuania signed on 26 July 2011, was notified on 25 July 2012, and joined on 5 July 2018; and that Colombia signed on 13 May 2011, was notified on 23 September 2014, and joined on 28 April 2020. None was an OECD member when it dealt with India. A Dutch tax decree of 28 February 2012, quoted in paragraph 67, treated Slovenia's 5 per cent rate as applying from 21 July 2010.

Why did the Court insist on a notification?

The Court began from Article 253 of the Constitution and the Union's exclusive treaty-making power, and from the settled position that India does not treat a treaty as domestic law until legislation or an enabling act gives it that force. Section 90(1) of the Income-tax Act, 1961 is that enabling provision for tax treaties: the Central Government may enter agreements and "by notification in the Official Gazette" make the provisions necessary to implement them. The notification is the step that turns a treaty term into a rule an assessing officer can apply. The second base was India's own practice, which the Court found uncontested. The Netherlands Protocol was triggered by treaties with Germany, Sweden, the United States and others, yet India gave effect to the lower rates only by a notification of 30 August 1999, which inserted 10 per cent dividend and interest rates with effect from 1 April 1997. The Court noted that the earlier dates on which those third treaties came into force did not by themselves extend any benefit to the Netherlands. It saw the same pattern for France, in a notification of July 2000. Paragraph 87 adds that the Dutch, Swiss and French practice of acting through executive decrees reflects their own constitutional arrangements and is dictated by conditions peculiar to their own constitutional regimes.

What does this mean for dividend withholding rates?

For dividends from an Indian company to a Dutch resident, the operative rate is the one the notification of 30 August 1999 put into Article 10(2) of the DTAA: where the recipient is the beneficial owner, tax in India shall not exceed 10 per cent of the gross dividend. The judgment quotes the paragraph. The judgment does not suggest that the Protocol of 10 May 2012 altered Article 10. The 5 per cent rate that Concentrix and Optum sought is the Slovenian rate for a company that holds at least 10 per cent of the capital of the payer, as the Dutch decree describes it. After the Court's declarations, that rate reaches a Dutch holding company only if a notification under section 90 gives it, and the judgment records none. The certificates under section 197 of the 1961 Act that the Indian payers obtained in 2020 and 2021 showed 10 per cent, and the Court's order leaves that figure standing. Two conditions sit beside the rate. Treaty relief is claimed by a non-resident only with a certificate of residence from the other State, which sub-section (4) of section 90 required and sub-section (8) of section 159 of the 2025 Act now requires together with prescribed documents. And Article 10 as quoted gives the 10 per cent rate only where the recipient is the beneficial owner, so a Dutch intermediary that passes the dividend on may not meet the text, which turns on the facts of beneficial ownership.

An illustration of the arithmetic

An illustration. The company, the dividend and the rates below are hypothetical. The domestic rate is the 20 per cent that section 207 of the Income-tax Act, 2025 sets for dividends of a non-resident or foreign company, deducted at source under section 393(2). Surcharge and cess are left out.

A Dutch holding company, the beneficial owner of 100 per cent of an Indian
subsidiary, with a valid certificate of residence
  Dividend declared by the Indian subsidiary              INR 100 crore
  Withholding with no treaty (20 per cent)                INR 20 crore
  Withholding at the notified treaty rate (10 per cent)   INR 10 crore
  Withholding if the Slovenian 5 per cent applied         INR 5 crore
  Difference between the treaty rate and the 5 per cent   INR 5 crore

Under the Court's declarations the third line is the one that applies,
and the fourth line applies only if a notification under section 90
(section 159(1) of the 2025 Act) gives it.

Section 159(4) applies the Act only where more beneficial, so the notified 10 per cent displaces the domestic 20 per cent.

What does the Income-tax Act, 2025 say?

The Income-tax Act, 2025 came into force on 1 April 2026 and replaces the 1961 Act. Section 159 now does the work of section 90. Sub-section (1) authorises the Central Government to enter agreements with another country or a specified territory and to "by notification, make such provisions as necessary for implementing the agreement". Sub-section (3)(b) repeats the treaty-shopping language that section 90(1)(b) carried from 2021. Sub-section (6) applies Chapter XI, the general anti-avoidance rule, even where it is not beneficial to the assessee. The notification language of section 90(1) is therefore carried over in substance. The Supreme Court did not interpret section 159, so the statement that Nestle governs it is our reading from the near identity of the two provisions.

What happened to the India-Netherlands investment treaty?

The Department of Economic Affairs lists the Agreement between India and the Kingdom of the Netherlands for the promotion and protection of investments as signed on 6 November 1995, in force from 1 December 1996, with a date of termination of 1 December 2016. The text on the Department's site contains a survival clause in Article 16: for investments made before termination, the earlier articles "continue to be effective for a further period of fifteen years". On the words of Article 16, that runs to 1 December 2031. The two treaties do different work. The DTAA allocates taxing rights, and the BIT gave a Dutch investor a claim against India for expropriation or unfair treatment, with arbitration. Termination of the BIT does not affect the dividend rate, and the Nestle holding does not affect any BIT claim.

What remains unsettled?

Three points. Whether the Indian Government will notify a fresh protocol or amendment with the Netherlands that grants a lower dividend rate. The judgment says that any such effect requires a notification under section 90, and we have not seen one. Whether section 159(1) of the 2025 Act will be read as section 90(1) was. The notification limb is close, and no decision has applied it to an MFN clause. What the survival clause protects. The end date of 1 December 2031 rests on Article 16 and the listed termination date. Whether the termination was validly given, whether a Dutch investor's pre-December 2016 investment is covered after a restructuring, and how a tribunal would read "investments made before" are questions we have not found answered.