India revises tax treaty with France, removes most-favoured-nation clause

During French President Emmanuel Macron's recent visit to India, officials from the Indian Government and the Government of the French Republic signed a Protocol to amend the India-France Double Taxation Avoidance Convention, originally dated 29 September 1992 ('India-France DTAC').

Ravi Agrawal, Chairperson of India's Central Board of Direct Taxes, and Thierry Mathou, France's Ambassador to India, signed the Amending Protocol on behalf of their governments.

The Ministry of Finance issued a statement on the matter. It noted, "The Amending Protocol grants full taxing rights on capital gains from share sales to the country where the company is resident."

The Protocol also eliminates the Most-Favoured-Nation (MFN) Clause from the DTAC, resolving all related disputes.

Additionally, it reforms dividend income taxation by replacing the flat 10% rate with a tiered structure: 5% for holdings of at least 10% of capital, and 15% for all other cases," the statement continued.

The release further explained that the Amending Protocol aligns the definition of 'Fees for Technical Services' with that in the India-US Double Taxation Avoidance Agreement and broadens 'Permanent Establishment' to include Service PE.

It also modernizes Exchange of Information provisions and adds a new Article on Assistance in Collection of Taxes, following global standards. This will support smooth information sharing and deepen tax cooperation between India and France.

The Amending Protocol integrates relevant elements of the Base Erosion and Profit Shifting (BEPS) Multilateral Instrument (MLI), already in effect after both nations signed and ratified it.

These changes will take effect once both countries complete their domestic legal processes and as per mutually agreed terms.

Overall, the Amending Protocol modernizes the India-France DTAC to meet current international standards, fairly balancing interests of both nations.

It offers taxpayers greater certainty, encourages investment, technology transfer, and personnel exchanges between India and France, ultimately fortifying economic ties.

What changes for investors?

This treaty update is noteworthy given France's prominence in the participatory notes (P-notes) market and its prior favorable capital gains tax treatment.

P-notes, issued by SEBI-registered foreign portfolio investors (FPIs) and linked to Indian equities, allow overseas investors to gain market exposure with minimal paperwork.

Following India's 2017 updates to treaties with Mauritius and Singapore, France emerged as an appealing option, as FPIs with under 10% stakes in Indian firms faced no capital gains tax on equity sales.

The revisions grant India taxing rights on these transactions by French investors, likely harmonizing the France treaty with those of Singapore and Mauritius.

The moves align with the Supreme Court's Nestlé SA ruling, which held that MFN benefits require explicit notification and cannot apply automatically.

Tax specialists indicate these changes could lead investors to review their setups, though relocating to places like the Netherlands or Belgium would demand compliance with substance and anti-abuse rules.