India, France Amend Double Taxation Avoidance Agreement to Clarify Capital Gains, Remove MFN Clause

New Delhi, February 23: India and France have signed an amending protocol to their Double Taxation Avoidance Convention, introducing significant changes to capital gains taxation, dividend tax rates, and the scope of treaty benefits. The revised agreement is aimed at bringing greater certainty in taxation and aligning the framework with evolving international standards.

The protocol was signed during the recent visit of French President Emmanuel Macron to India. It was formalized by Ravi Agrawal, Chairperson of the Central Board of Direct Taxes, and Thierry Mathou, Ambassador of France to India, on behalf of their respective governments.

Capital Gains to Be Taxed Based on Company Residency​

A key amendment provides full taxing rights over capital gains arising from the sale of shares to the jurisdiction where the company is resident. This move clarifies the allocation of taxation rights between the two countries and is expected to eliminate ambiguity under the existing framework.

The protocol also deletes the Most Favored Nation clause from the DTAC protocol, resolving issues that had emerged regarding its interpretation and application.

Dividend Tax Structure Revised​

The amending protocol introduces a revised dividend taxation framework. The earlier single rate of 10 percent tax has been replaced with a split rate structure:

• 5 percent tax for shareholders holding at least 10 percent of the capital
• 15 percent tax in all other cases

Under the current version of the DTAC, dividends from India were subject to 10 percent tax deducted at source. The availability and application of MFN benefits had been a matter of debate, particularly after the Supreme Court ruled that a separate notification by the Government of India was required for applying MFN provisions under tax treaties.

Alignment with Global Standards and BEPS Framework​

The revised protocol modifies the definition of Fees for Technical Services by aligning it with the definition under the India United States Double Taxation Avoidance Agreement. It also expands the definition of Permanent Establishment by incorporating Service PE provisions.

In addition, the protocol incorporates applicable provisions of the Base Erosion and Profit Shifting Multilateral Instrument, which had already become applicable following ratification by both India and France.

The agreement updates provisions related to exchange of information and introduces a new article on assistance in the collection of taxes. According to the Central Board of Direct Taxes, these changes will enable seamless exchange of information and strengthen mutual tax cooperation between the two countries.

Implementation Timeline and Expected Impact​

The amended provisions will come into effect after both countries complete their internal legal procedures and in accordance with mutually agreed terms.

The CBDT stated that the updated DTAC aligns the India France tax framework with the latest international standards while balancing the interests of both countries. The revised treaty is expected to provide greater tax certainty to taxpayers and facilitate increased flow of investment, technology, and personnel between India and France, strengthening bilateral economic ties.