India and France have signed a protocol amending the long-standing India-France Double Taxation Avoidance Convention (DTAC), marking a significant shift in bilateral tax arrangements between the two nations.
The amendment was formalised during the recent visit of the French President to India. The protocol was signed by Ravi Agrawal, Chairperson of the Central Board of Direct Taxes (CBDT), and Thierry Mathou, Ambassador of France to India, on behalf of their respective governments.
According to a statement issued by the Ministry of Finance, the revised protocol grants full taxing rights on capital gains arising from the sale of shares to the country where the company is a tax resident. This change is expected to strengthen India’s ability to tax equity transactions involving French investors.
One of the most notable revisions is the removal of the Most-Favoured-Nation (MFN) clause from the treaty protocol. The deletion resolves long-standing interpretational disputes surrounding the clause, especially in light of recent legal developments.
The amendment also revises the dividend taxation framework. Instead of a single 10% tax rate, the new structure introduces a split rate—5% for investors holding at least 10% of a company’s capital and 15% for others.
Additionally, the definition of ‘Fees for Technical Services’ has been aligned with the provisions under the India-US tax treaty. The scope of ‘Permanent Establishment’ has also been expanded to include Service Permanent Establishment (Service PE), broadening India’s taxing jurisdiction over certain business activities.
The protocol strengthens cooperation between the two countries by updating Exchange of Information provisions and introducing a new article on Assistance in the Collection of Taxes. These changes are aligned with global tax transparency standards and are intended to facilitate smoother information sharing and enforcement.
Further, the amendment integrates relevant provisions of the Base Erosion and Profit Shifting (BEPS) Multilateral Instrument (MLI), which had already become applicable following ratification by both India and France.
The revised treaty will come into effect after both nations complete their respective domestic approval procedures.
Impact on Investors
The amendment holds particular importance given France’s role in the participatory notes (P-notes) market. P-notes, issued by Sebi-registered Foreign Portfolio Investors (FPIs), have been widely used by overseas investors to gain exposure to Indian equities with limited regulatory documentation.
After India amended its tax treaties with Mauritius and Singapore in 2017, France emerged as a comparatively favourable jurisdiction. Under the previous framework, FPIs holding less than a 10% stake in Indian companies were not liable for capital gains tax on equity sales.
With the revised treaty, India is expected to secure taxing rights over such transactions, effectively bringing the France treaty in line with those of Mauritius and Singapore.
The changes also follow the Supreme Court’s ruling in the Nestlé SA case, which clarified that MFN benefits cannot be automatically claimed unless formally notified.
Tax experts suggest the amendments may lead investors to re-evaluate their investment structures. However, shifting to other jurisdictions such as the Netherlands or Belgium would require compliance with strict substance requirements and anti-abuse regulations.
Overall, the updated protocol aims to modernise the tax framework in line with international standards while balancing the economic interests of both India and France. It is expected to provide greater tax certainty and further strengthen economic cooperation between the two countries.
Originally published on 24×7-news.com.
