India and France have signed an updated tax treaty that changes key rules, including the removal of the “most favoured nation” (MFN) clause. The amendment was formalised during French President Emmanuel Macron’s visit to India last week.
What the Agreement Covers
India and France already have a Double Taxation Avoidance Convention (DTAC) from 1992. A DTAC ensures individuals and companies do not pay tax twice on the same income in both countries. For example, if a French company earns money in India, the treaty decides which country can tax the income, how much tax can be charged, and ways to avoid paying tax twice. The new protocol updates several parts of this treaty.
Background on the MFN Clause
The MFN clause was added earlier to guarantee fairness. If India later offered better tax terms to another country, France could automatically receive the same benefits. Example: If India signed a treaty with a country offering a 5% dividend tax, France could claim the same rate. The MFN clause has now been officially removed.
Impact of Removing the MFN Clause
Without the MFN clause, France will only get the benefits explicitly stated in its treaty with India. It cannot claim advantages from India’s agreements with other countries. This removes ambiguity and helps resolve long-standing tax disputes.
Changes to Capital Gains Tax
The updated treaty gives full taxing rights on capital gains from share sales to the country where the company is based. Example: If a French investor sells shares of an Indian company, India now has full rights to tax the gain. This eliminates confusion over which country can tax such income.
Revised Dividend Tax Rates
Previously, dividends were taxed at a flat 10%. The new rates are 5% if the investor owns at least 10% of the company and 15% for smaller investors.
Technical Services and Permanent Establishment
The treaty now provides a clearer definition of “Fees for technical services” in line with global standards. It also broadens the concept of “permanent establishment” to include a service-based presence. The amendment strengthens rules for sharing tax information and mutual assistance in tax collection.
Global Anti-Tax Avoidance Measures
The treaty incorporates international BEPS standards to prevent profit shifting to low-tax countries without real business activity. This helps curb tax avoidance.
Implementation Timeline
The new rules will take effect only after both countries complete their legal approval processes. Summary: Removing the MFN clause and updating other provisions modernises the treaty, provides clarity for businesses, and reduces tax disputes between India and France.
