In a significant move aimed at modernising bilateral tax arrangements, India and France have signed a protocol to amend their longstanding Double Taxation Avoidance Convention (DTAC), originally signed on 29 September 1992. India France Tax Treaty Amendment 2026. The revised agreement introduces key structural changes, including the removal of the Most Favoured Nation (MFN) clause, a reworked dividend taxation framework, expanded definitions for technical services and permanent establishment, and stronger provisions for information exchange and tax collection cooperation.
The amendment was signed during the recent visit of the French President to India. Representing their respective governments were Ravi Agrawal, India France Tax Treaty Amendment 2026. Chairperson of the Central Board of Direct Taxes (CBDT), and Thierry Mathou, Ambassador of France to India.
The updated protocol is expected to provide greater clarity and certainty in tax matters, align the treaty with evolving global standards, and strengthen economic and financial cooperation between the two nations.
Background: The India–France DTAC
The India–France DTAC, signed in 1992, was designed to prevent double taxation of income earned in one country by residents of the other. Like similar agreements India has with other major economies, it aims to encourage cross-border trade, investment, and technology flows by clearly defining taxation rights.
Over the years, however, global tax standards have evolved significantly. Concerns about treaty shopping, base erosion, and profit shifting have prompted countries to update older treaties to ensure fairness, transparency, and alignment with international norms.
The newly signed amending protocol represents a comprehensive update of the existing framework to reflect these developments.
Full Taxing Rights on Capital Gains
One of the most consequential changes relates to capital gains taxation.
Under the amended protocol, full taxing rights on capital gains arising from the sale of shares of a company will lie with the country where the company is resident. India France Tax Treaty Amendment 2026. In practical terms, this means that if shares of an Indian company are sold by a French resident, India will have the right to tax the capital gains.
This change is significant because under certain interpretations of the earlier framework, some foreign investors could structure investments through France to avoid capital gains tax in India, especially in cases involving minority stakes. The amendment is expected to bring the France treaty more in line with India’s revised agreements with other jurisdictions such as Singapore and Mauritius.
Removal of the Most Favoured Nation (MFN) Clause
A major highlight of the amendment is the deletion of the Most Favoured Nation (MFN) clause from the protocol.
The MFN clause had allowed France to claim more favourable tax treatment if India granted such benefits to another country in a subsequent treaty. India France Tax Treaty Amendment 2026. Over time, this clause became a source of litigation and interpretational disputes.
The issue gained prominence following the Supreme Court ruling in the Nestlé SA case, India France Tax Treaty Amendment 2026. where the Court clarified that MFN benefits cannot be automatically invoked unless specifically notified by the Indian government.
By removing the MFN clause entirely, both countries aim to eliminate ambiguity and prevent further disputes. Tax experts view this as a step toward enhancing certainty and reducing prolonged litigation.
Dividend Tax Structure Reworked
Another key change involves taxation of dividend income.
Earlier, the treaty prescribed a single withholding tax rate of 10% on dividends. The amended protocol replaces this with a split-rate structure:
- A reduced rate of 5% will apply where the beneficial owner holds at least 10% of the capital of the company paying dividends.
- A higher rate of 15% will apply in all other cases.
What This Means for Investors
This change has different implications for various categories of investors:
Large Strategic Investors:
French companies holding substantial stakes (10% or more) in Indian companies will benefit from the reduced 5% dividend tax rate. This is expected to support long-term strategic investments.
Portfolio Investors:
Smaller shareholders and portfolio investors will face a 15% withholding rate, which is higher than the previous uniform 10%. This may affect short-term or minority investments.
The differentiated structure aligns the India–France treaty with many modern tax agreements globally, where concessional rates are granted to significant shareholders while higher rates apply to smaller holdings.
Impact on Participatory Notes and FPI Structures
The treaty revision assumes added importance due to France’s role in the participatory notes (P-notes) market.
Participatory notes are financial instruments issued by SEBI-registered foreign portfolio investors (FPIs) and backed by Indian equities. They enable overseas investors to gain exposure to Indian markets without directly registering with Indian regulators.
After India amended tax treaties with Mauritius and Singapore in 2017, France became relatively attractive for certain foreign investors. Under earlier interpretations, French investors holding less than 10% stake in Indian companies were not liable for capital gains tax in India on equity sales.
With the new amendment granting India taxing rights on capital gains, this relative advantage is expected to diminish. Consequently, foreign investors using French structures may reassess their strategies.
However, tax experts caution that shifting to alternative jurisdictions such as the Netherlands or Belgium would require compliance with substance requirements and anti-abuse provisions, making simple treaty shopping increasingly difficult.
Alignment of Fees for Technical Services (FTS)
The amended protocol also revises the definition of “Fees for Technical Services” (FTS), aligning it with the definition in the India–US Double Taxation Avoidance Agreement.
This alignment introduces greater clarity regarding what qualifies as taxable technical services. It may affect cross-border service arrangements, consultancy contracts, and technology licensing agreements between Indian and French entities.
The clearer definition reduces scope for interpretational disputes and brings consistency with India’s approach in other key bilateral agreements.
Expansion of Permanent Establishment (PE) Scope
Another significant change is the expansion of the definition of Permanent Establishment (PE) by including a Service PE clause.
A Service PE provision allows a country to tax foreign enterprises if they provide services in that country for a specified duration, even without a fixed physical office.
By adding Service PE, the amended treaty strengthens India’s ability to tax income arising from extended service operations conducted by French enterprises within Indian territory.
This is particularly relevant in sectors such as consulting, engineering, technology, and infrastructure services, where cross-border personnel deployment is common.
Strengthened Exchange of Information and Tax Collection Assistance
The amending protocol updates provisions relating to Exchange of Information (EOI) and introduces a new article on Assistance in Collection of Taxes, in line with international standards.
These measures are designed to:
- Facilitate seamless sharing of tax-related information between authorities.
- Strengthen cooperation in tax enforcement.
- Improve transparency.
- Combat tax evasion and aggressive tax planning.
By incorporating international best practices, the revised treaty enhances administrative collaboration and supports global efforts toward greater tax transparency.
Incorporation of BEPS Multilateral Instrument (MLI)
The amended protocol also integrates relevant provisions of the Base Erosion and Profit Shifting (BEPS) Multilateral Instrument (MLI), which both India and France have signed and ratified.
The BEPS initiative, developed under the OECD framework, aims to curb tax avoidance strategies that exploit gaps and mismatches in tax rules.
By incorporating MLI provisions into the bilateral treaty, India and France signal their commitment to international tax reform standards, including:
- Anti-abuse measures.
- Principal Purpose Test (PPT).
- Prevention of treaty shopping.
- Enhanced dispute resolution mechanisms.
When Will the Changes Take Effect?
The amendments will come into force after both countries complete their respective internal legal procedures and formally notify each other.
The exact effective date will depend on the completion of these procedures and the agreed timeline.
Broader Economic Implications
Greater Tax Certainty
One of the most important outcomes of the amended protocol is enhanced tax certainty. Clearer definitions, removal of contentious clauses, and alignment with international norms reduce interpretational disputes.
For multinational corporations and institutional investors, predictability in tax treatment is a crucial factor in investment decisions.
Balanced Approach to Growth and Revenue
The revised framework attempts to strike a balance:
- It supports genuine long-term investments through lower dividend tax for significant shareholdings.
- It safeguards India’s tax base by granting full capital gains taxing rights.
- It strengthens enforcement through information-sharing mechanisms.
Impact on Bilateral Trade and Investment
France remains a key strategic partner for India across sectors such as defence, infrastructure, renewable energy, aerospace, luxury goods, and technology.
The updated treaty is expected to:
- Encourage sustained French investment in India.
- Promote technology transfer.
- Facilitate movement of professionals.
- Strengthen economic ties.
While some short-term portfolio structures may undergo reassessment, long-term investors may benefit from greater clarity and stability.
Investor Response and Strategic Reassessment
Tax professionals anticipate that some investors may review their holding structures in response to the changes, particularly those relying on treaty benefits for capital gains exemption.
However, global anti-abuse norms and substance requirements limit the feasibility of shifting jurisdictions purely for tax arbitrage.
The overall direction of policy suggests that India seeks to move away from treaty-driven tax advantages toward a more uniform and transparent taxation framework.
🔗 Reuters: India amends tax treaty with France, cuts dividend tax
https://www.reuters.com/world/india/india-amends-tax-treaty-with-france-revises-dividend-tax-structure-2026-02-23/
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