India, France overhaul double tax pact. Check key updates on dividend income, share sale gains, MFN status

India and France have amended the double taxation avoidance convention and have deleted the so-called Most-Favoured-Nation (MFN) Clause from the Protocol to the DTAC, which is expected to bring to rest all issues relating to it.

A statement from the Central Board of Direct Taxes (CBDT) explained that the Amending Protocol provides full taxing rights in respect of capital gains arising from the sale of shares of a company, to the jurisdiction where such company is a resident.

“It replaces the existing provision which allows source-based taxation only if the taxpayer holds more than 10% of shares,” it said, adding that this will enable India to tax capital gains arising from the sale of shares of Indian companies in all cases.

The Amending Protocol also modifies the taxation of income from dividends by replacing a single rate of 10% of tax with a split rate of 5% for those holding at least 10% of capital and 15% of tax for all other cases.

The protocol amending the DTAC was signed by India and France during the recent visit of French President Emmanuel Macron to India. The Amending Protocol was signed by Ravi Agrawal, Chairperson, CBDT and Thierry Mathou, Ambassador of France to India, on behalf of their respective Governments. The India-France DTAC was originally signed on September 29, 1992.

“It also modifies the definition of ‘Fees for Technical Services’ by aligning it with the definition in India US Double Taxation Avoidance Agreement and expands the scope of ‘Permanent Establishment’ by adding Service PE,” the CBDT said on February 23.

Experts pointed out that the amending protocol has been signed in the backdrop of the Supreme Court ruling in October 2023, which held that the “Most Favoured Nation” clause under tax treaties does not get automatically triggered until it is notified under the Income Tax Act.

Manoj Purohit, Partner - Financial Services Tax, Tax & Regulatory Advisory at BDO India, noted that France was one of the few countries that offered an exemption to a French resident on investments made in equity shares of Indian companies.

“The proposed amendment which is expected to tax gains without the erstwhile, limit of 10% will surely have some reaction from the capital market and the investor community,” he said, adding that one will have to drill down in depth to see the quantum of the impact of the proposed amendment including the possibility of insertion of grandfathering of investments in India-France treaty, if any.

Abheet Sachdeva, Partner - M&A Tax, Nangia Global, said that the intent of the proposed amending protocol to the India-France DTAC seems to serve a twin-fold purpose of addressing ambiguity in the provision of treaty benefits as well as equitable distribution of taxation rights. 

Per extant version of the DTAC, dividends emanating from India are subject to 10% TDS, this tax outflow could be reduced with application of MFN clause, he said, while pointing out that application and availability of MFN benefits have been a subject matter of debate, with the Indian Supreme Court ruling that for application of MFN under a tax treaty, a separate specific notification should be issued by the Government of India.  From an Indian standpoint, this secures capital gains tax revenue for the Union treasury; however, this may act as a deterrent for French FPI investors, he said.

The CBDT, however, said that the Amending Protocol is likely to bring greater tax certainty across all industries and is likely to facilitate greater economic relationships between the two countries in all sectors.

Following the signing of the Amending Protocol, it will now be ratified by India and France according to their respective internal laws. Each state will notify the other of the completion of its internal procedures. The Protocol will enter into force on the day after the date of receipt of the later of such notifications.