New Delhi: In a move set to reshape cross-border taxation and deepen economic collaboration, India and France have formalized an amending protocol to their three-decade-old Double Taxation Avoidance Convention (DTAC). The update, signed amid strengthened diplomatic ties, introduces sweeping revisions aimed at aligning the treaty with global best practices, curbing tax avoidance, and fostering greater investment confidence between the two strategic partners.
Background of the India-France DTAC
The original Double Taxation Avoidance Convention between India and France dates back to September 29, 1992. This bilateral accord was crafted to shield residents of either nation from being taxed twice on the same earnings—one levy in the country of residence and another in the source country where income arises. Over more than 30 years, the DTAC has played a vital role in facilitating trade, direct investments, technology exchanges, and movement of skilled professionals across borders.
As global tax landscapes evolved—particularly with rising concerns over multinational profit shifting—the need for modernization became evident. The amending protocol addresses outdated elements while incorporating contemporary safeguards against erosion of tax bases.
Signing Ceremony Amid High-Level Diplomatic Engagement
The protocol was executed during French President Emmanuel Macron’s official visit to India in mid-February 2026. On behalf of their governments, Ravi Agrawal, Chairperson of India’s Central Board of Direct Taxes (CBDT), and Thierry Mathou, France’s Ambassador to India, placed their signatures on the document in New Delhi. This event coincided with broader discussions on defense cooperation, artificial intelligence, renewable energy, and strategic alliances, underscoring the multifaceted nature of Indo-French relations.
The Central Board of Direct Taxes and India’s Press Information Bureau released detailed statements on February 23, 2026, outlining the protocol’s provisions and intended benefits.
Core Revisions to Capital Gains Taxation
One of the protocol’s most impactful changes concerns taxation rights over capital gains from share disposals. The amendment assigns full authority to the jurisdiction where the underlying company maintains its residency. This source-country approach empowers the nation hosting the company to impose taxes on gains realized from share sales, regardless of the seller’s residence.
Previously, treaty interpretations sometimes limited source-country taxation or allowed residence-based exemptions in specific scenarios. The new rule strengthens India’s position to tax gains involving sales of shares in Indian-resident entities, even when French residents are involved. Experts anticipate this shift will protect domestic revenue streams while promoting equitable treatment in outbound investments.
Overhaul of Dividend Withholding Tax Structure
Dividend distributions across borders receive a tiered taxation model under the updated provisions. The former flat 10% withholding rate has been replaced with a dual-rate system:
- A preferential 5% rate applies when the beneficial owner directly holds at least 10% of the paying company’s capital.
- A standard 15% rate governs all remaining situations where ownership falls below this 10% threshold.
This structure rewards substantial, long-term shareholdings—often associated with strategic investments—by reducing the effective tax burden. Smaller or portfolio-style holdings face a modestly higher rate, reflecting a policy emphasis on encouraging committed capital inflows over short-term speculative movements.
Elimination of the Most-Favoured-Nation Clause
A significant point of contention in recent years has been resolved through the complete removal of the Most-Favoured-Nation (MFN) clause from the treaty’s protocol. Originating as a WTO-inspired principle of non-discrimination in trade, the MFN provision in tax contexts permitted automatic extension of more advantageous terms granted to third countries.
Its inclusion had sparked interpretive debates and litigation, particularly after India extended certain benefits to other treaty partners. By excising the clause outright, both governments eliminate lingering uncertainties, delivering enhanced predictability for taxpayers and reducing potential disputes.
Refinements to Fees for Technical Services and Permanent Establishment
The protocol harmonizes the definition of “Fees for Technical Services” with the wording found in the India-United States DTAA. This alignment standardizes the classification of payments for managerial, technical, or consultancy services, minimizing discrepancies in cross-border withholding obligations.
Additionally, the definition of Permanent Establishment expands to encompass a “Service PE.” This captures scenarios where personnel or service providers deliver activities in the host country for extended periods, potentially subjecting attributable business profits to local taxation. The measure counters arrangements designed to evade establishment status through short-term engagements.
Integration of BEPS Multilateral Instrument Provisions
To combat aggressive tax planning, the amendment embeds applicable elements of the OECD/G20 Base Erosion and Profit Shifting (BEPS) Multilateral Instrument (MLI). Adopted by both nations, the MLI modifies bilateral treaties collectively without requiring individual renegotiations.
Key BEPS objectives include preventing artificial profit shifts to low-tax jurisdictions and closing loopholes exploited by multinationals. Incorporating these rules reinforces treaty abuse safeguards and promotes fairer global tax distribution.
Enhanced Administrative Cooperation Mechanisms
Transparency and enforcement receive a boost through updated Exchange of Information clauses, conforming to current international benchmarks. A dedicated new article on Assistance in Collection of Taxes enables mutual support in recovering unpaid tax dues, strengthening bilateral enforcement capabilities.
Path to Implementation and Expected Outcomes
The protocol’s provisions will activate only after both countries complete domestic ratification processes and exchange formal notifications. Once effective, the changes promise several advantages:
- Increased tax certainty for individuals and corporations engaged in bilateral activities.
- Reduced compliance complexities arising from outdated or ambiguous rules.
- Encouragement of higher investment volumes, technology transfers, and personnel mobility.
- Balanced protection of revenue interests alongside incentives for substantial economic engagement.
Analysts view the revisions as a pragmatic response to evolving fiscal priorities. While the capital gains shift and dividend adjustments may influence certain investment strategies—potentially favoring long-term commitments over transient portfolio plays—the overall framework is expected to support sustained growth in Indo-French economic linkages.
This protocol exemplifies India’s ongoing efforts to refresh its network of tax treaties in line with international norms, while affirming France’s commitment to robust partnerships in one of the world’s most dynamic markets. As implementation nears, businesses on both sides are preparing to adapt structures accordingly, positioning the updated DTAC as a foundation for future prosperity.
FAQs
1. What is the India-France DTAC, and why was it amended in 2026?
The Double Taxation Avoidance Convention (DTAC), also known as a Double Taxation Avoidance Agreement (DTAA), is a bilateral treaty signed between India and France on September 29, 1992. Its primary purpose is to prevent the same income from being taxed twice—once in the country where it is earned (source country) and again in the taxpayer’s country of residence. The amending protocol, signed on February 23, 2026, during French President Emmanuel Macron’s visit to India, updates the 1992 treaty to reflect modern international tax standards. It incorporates anti-avoidance measures, resolves long-standing interpretive issues, enhances administrative cooperation, and promotes greater tax certainty to encourage cross-border investments, technology transfers, and personnel mobility between the two countries.
2. What are the main changes to capital gains taxation under the new protocol?
The protocol shifts taxing rights on capital gains from the sale of shares to grant full authority to the country where the company is resident (the source jurisdiction). Previously, taxing rights were sometimes limited or allocated differently, potentially allowing residence-based exemptions in certain cases. Now, if shares in an Indian-resident company are sold (even by a French resident), India has primary taxing rights over the resulting gains. The same applies reciprocally for French-resident companies. This source-based approach strengthens revenue protection for both nations and aligns with contemporary global practices to prevent base erosion.
3. How has the taxation of dividends been revised in the amended DTAC?
The previous uniform withholding tax rate of 10% on dividends has been replaced with a two-tier structure to incentivize significant investments:
A higher rate of 15% applies in all other cases (such as portfolio or minority holdings below 10%). This change benefits major long-term investors by lowering their tax burden while maintaining a standard rate for smaller stakes, aiming to attract committed foreign capital flows.
A reduced rate of 5% applies when the beneficial owner holds at least 10% of the capital in the paying company (typically strategic or substantial shareholdings).
4. Why was the Most-Favoured-Nation (MFN) clause removed, and what impact does this have?
The MFN clause, originally part of the treaty’s protocol, created ambiguity and led to disputes over whether more favorable terms granted to third countries should automatically apply to France (or vice versa). These interpretational issues had escalated to legal challenges, including references to Supreme Court rulings in India. By completely deleting the MFN clause, the protocol eliminates all related uncertainties and disputes. This provides clearer, more predictable application of the treaty, reduces litigation risks for taxpayers, and allows both countries to negotiate future treaties independently without automatic extensions.
5. What other important updates does the protocol include, and when will the changes take effect?
Beyond capital gains, dividends, and the MFN clause, the protocol:
- Aligns the definition of “Fees for Technical Services” with the India-US DTAA for consistency in taxing managerial, technical, or consultancy payments.
- Expands the “Permanent Establishment” definition to include a Service PE, capturing cross-border service activities that create a taxable presence.
- Incorporates relevant provisions from the OECD/G20 BEPS Multilateral Instrument (MLI) to prevent treaty abuse and profit shifting.
- Updates exchange of information rules and adds a new article on assistance in tax collection to meet current international transparency standards.
The changes will enter into force after both countries complete their internal legal and ratification procedures, followed by the exchange of formal notifications. Once effective, they are expected to deliver balanced benefits, including reduced compliance burdens, stronger mutual cooperation against tax evasion, and a more investor-friendly environment for Indo-French economic ties. Businesses with cross-border operations are recommended to review their arrangements in light of these updates.
