India and France recently moved to modernise their three-decade-old tax treaty, signing an Amending Protocol that gives clearer taxing rights on capital gains, reshapes dividend taxation and tightens cooperation against tax evasion.
The Finance Ministry recently disclosed the update to the 1992 India–France Double Taxation Avoidance Convention (DTAC) and said that it was designed to boost investment, provide tax certainty and align the treaty with the latest international standards.
Signed in New Delhi during the recent visit of the French President, the protocol was inked by CBDT Chairperson Ravi Agrawal and French Ambassador Thierry Mathou on behalf of the two governments.
What changes?
A key change is that capital gains on the sale of shares will now be taxed in the country where the company whose shares are being sold is resident, giving the “source” jurisdiction full taxing rights.
The protocol also deletes the much-debated Most-Favoured-Nation (MFN) clause from the original DTAC, ending disputes over whether India had to match the lower withholding tax rates it offered to some OECD countries in other treaties.
The old single 10 per cent rate is no longer applicable to dividends. It was replaced with a two-tier structure: 5 per cent withholding for shareholders holding at least 10 per cent of the capital, and 15 per cent for all other cases.
This is expected to make intra-group investments more attractive while still preserving some revenue for tax authorities, according to the ministry.
The definition of “Fees for Technical Services” was also tweaked to align the language used in the India–US tax treaty, and the concept of “Permanent Establishment” was expanded to include a Service PE, bringing more cross-border service activity into the tax net.
Information sharing and BEPS standards
The protocol updated provisions on exchange of information and adds a new article on assistance in tax collection, in line with OECD-led global standards.
It also folds into the bilateral treaty the relevant provisions of the BEPS Multilateral Instrument, which India and France have already signed and ratified, further tightening anti-avoidance safeguards.
The changes will take effect after both countries complete their internal legal procedures, including ratification and notification, and subject to the terms agreed between them.
The Finance Ministry said that the overhaul balances the interests of both sides and should strengthen flows of investment, technology and personnel between India and France.
Confirming the Centre’s stance, France’s Ministry of Economy and Finance, in its press communiqué, “France–Inde: un accord fiscal actualisé pour renforcer les échanges économiques”, announced the updated tax agreement, highlighting benefits for French companies. The French side, however, stressed that the move reduced withholding on intra-group dividends to 5 per cent, a narrower scope for technical services subject to Indian withholding tax, and modernised cooperation tools against tax fraud, focused on enhanced legal certainty and competitiveness for French investors in India.
