India, France amend DTAC, capital gains tied to residency of a firm

New Delhi: India and France have signed a protocol amending their Double Taxation Avoidance Convention (DTAC), providing that capital gains from the sale of shares will be taxed in the country where the company is a resident and scrapping the Most-Favoured-Nation (MFN) clause to remove ambiguity.

The protocol was signed during the recent India visit of French President Emmanuel Macron by Ravi Agrawal, Chairman of the Central Board of Direct Taxes (CBDT), and French Ambassador Thierry Mathou.

Under the revised pact, dividends will now be taxed at a split rate—5 per cent where the beneficial owner holds at least 10 per cent of the company’s capital, and 15 per cent in other cases—replacing the earlier uniform 10 per cent rate.

The definition of “Fees for Technical Services” has been aligned with the India-US tax treaty, and the scope of “Permanent Establishment” has been expanded to include Service PE.

The amendment grants full taxing rights on capital gains to the jurisdiction of the company’s residence and removes the Most-Favoured-Nation clause, which had been the subject of litigation and interpretational disputes.

The CBDT said the changes would bring certainty and align the treaty with global standards, including provisions of the BEPS Multilateral Instrument already ratified by both nations.

The protocol also updates rules on exchange of information and introduces assistance in tax collection. It will take effect after completion of domestic procedures in both countries.

Tax experts said the changes aim to balance taxation rights and reduce ambiguity.

While the revised dividend regime may encourage French foreign direct investment into India, vesting capital gains taxing rights with the source state could affect some portfolio investors.

Overall, the government said the update would enhance tax certainty and strengthen bilateral economic ties.