India and France revise 1992 tax treaty, drop 'most favoured nation' clause

New Delhi: India and France signed a protocol to revise their 1992 tax treaty, tightening source-based taxation, scrapping the most favoured nation (MFN) clause and rewriting key provisions on dividends, technical fees and permanent establishment.

Under the amending protocol, capital gains from the sale of shares will now be fully taxable in the country where the company is resident, a significant shift for cross-border mergers and acquisitions and private equity transactions.



The move is consistent with India's broader treaty policy of reinforcing source-based taxation and plugging perceived revenue leakages.

Besides, French companies holding more than a 10% stake in an Indian entity will face a 5% tax on dividends, down from the existing 10%. However, for minority shareholders, dividend tax will increase to 15% from the current 5%.

The definition of 'fees for technical services' (FTS) has been aligned with the India-US treaty, and a service permanent establishment (PE) clause has been introduced. The clause expands the threshold for creating taxable presence in the source country, particularly for service providers operating without a fixed physical base. The protocol has also amended provisions on exchange of information, in line with international standards, and inserted a new article on assistance in collection of taxes, strengthening cross-border enforcement cooperation.

"The changes introduced through the Amending Protocol shall enter into effect subsequent to the completion of internal procedures under the laws of both the countries and subject to the terms agreed between the two countries," the Central Board of Direct Taxes (CBDT) said in a press release issued on Monday.

The revised protocol will provide greater tax certainty to taxpayers and boost flows of investment, technology and personnel between India and France, and thereby strengthen the economic relationship between the two countries, it said.

The rewrite signals tighter anti-avoidance guardrails and a need to revisit holding structures, service models and dividend planning, said experts.

"The protocol intends to vest the capital gains taxing rights with the source state irrespective of shareholding threshold," said Abheet Sachdeva, partner - M&A Tax, Nangia Global. "From India's standpoint, it secures capital gains tax revenue for the union treasury. However, it may act as a deterrent for French FPI (foreign portfolio investors)."

In recent years, India has renegotiated similar tax treaties with Singapore and Mauritius, ending the capital gains exemptions, rewarding substantial shareholding while preserving revenue in portfolio cases.

Negotiations between India and France to revise the tax treaty began in 2023 but were delayed, primarily due to disagreements over the MFN clause.