India and France have signed a key protocol amending the long-standing Double Taxation Avoidance Convention (DTAC) between the two nations, marking a significant shift in cross-border taxation rules. The agreement was signed during the recent visit of the French President to India, signalling deeper financial and economic cooperation between the two countries.

The amending protocol was formally signed by Ravi Agrawal, Chairperson of the Central Board of Direct Taxes (CBDT), representing the Government of India, and Thierry Mathou, Ambassador of France to India, on behalf of the French Republic.

Key Changes Introduced in the Treaty

According to a statement released by India’s Ministry of Finance, the revised protocol introduces several important changes:

1. Capital Gains Taxation

The amended agreement grants full taxing rights over capital gains arising from the sale of shares to the country where the company is a tax resident. This effectively gives India the authority to tax gains from the sale of shares of Indian companies by French investors.

2. Removal of the Most-Favoured-Nation (MFN) Clause

One of the most significant updates is the deletion of the Most-Favoured-Nation (MFN) clause from the protocol. The removal aims to eliminate interpretational disputes and bring clarity to tax treatment between the two nations.

This move follows legal debates in India, including the Supreme Court’s ruling in the Nestlé SA case, which clarified that MFN benefits cannot be automatically applied unless formally notified by the government.

3. Revised Dividend Tax Rates

The protocol replaces the earlier uniform 10% dividend tax rate with a two-tier structure:

• 5% tax for shareholders holding at least 10% of the company’s capital
• 15% tax in all other cases

This change introduces differentiated treatment based on the level of shareholding.

4. Alignment of ‘Fees for Technical Services’

The definition of “Fees for Technical Services” has been modified to align with provisions under the India-US tax treaty. This ensures consistency in interpretation and reduces potential disputes.

5. Expansion of Permanent Establishment (PE) Scope

The treaty now broadens the concept of Permanent Establishment by incorporating “Service PE,” expanding the circumstances under which business income may be taxed.

6. Strengthened Information Exchange and Tax Recovery

The protocol updates the Exchange of Information provisions and introduces a new article on Assistance in Collection of Taxes. These changes are aligned with international best practices and are expected to enhance transparency and cooperation between the two tax administrations.

7. Incorporation of BEPS Measures

The amended treaty also integrates relevant provisions of the Base Erosion and Profit Shifting (BEPS) Multilateral Instrument (MLI), reflecting commitments already made by both countries under global anti-tax avoidance frameworks.

The changes will come into force once both nations complete their respective domestic ratification procedures.

What This Means for Investors

The treaty revision carries particular importance in light of France’s role in the participatory notes (P-notes) market.

Participatory notes, issued by SEBI-registered Foreign Portfolio Investors (FPIs) and backed by Indian equities, have historically allowed overseas investors to gain exposure to Indian markets with relatively minimal documentation.

After India revised tax treaties with Mauritius and Singapore in 2017, France emerged as a comparatively attractive investment route, particularly because FPIs holding less than a 10% stake in Indian companies were not subject to capital gains tax on equity sales.

With the latest amendments, India is expected to secure the right to tax such transactions, effectively bringing the France treaty framework closer to those of Mauritius and Singapore.

Tax experts believe the revisions may lead investors to re-evaluate their holding structures. However, shifting to alternative jurisdictions such as the Netherlands or Belgium would require compliance with stricter substance requirements and anti-abuse provisions.

Overall, the revised treaty is expected to provide greater clarity, reduce litigation, and foster a more predictable tax environment, potentially supporting long-term investment and economic collaboration between India and France.

Summary

India and France have signed a protocol amending their Double Taxation Avoidance Convention. The revised agreement removes the Most-Favoured-Nation clause, grants India taxing rights over capital gains on shares of Indian companies, revises dividend tax rates, expands the scope of Permanent Establishment, strengthens information exchange provisions, and incorporates BEPS standards. The changes are expected to enhance tax certainty, align with international norms, and impact foreign investment structures, particularly those routed through France.

Disclaimer

This article is intended for informational purposes only and is based on official government statements and publicly available information at the time of publication. Tax regulations are subject to change and may vary depending on individual circumstances. Readers and investors are advised to consult qualified tax professionals or refer to official notifications before making financial or investment decisions.