India-France Tax Treaty Faces Overhaul: Key Provisions Investors Need to Monitor

India-France Double Taxation Avoidance Convention Amended

Key Highlights:

• The 1992 Double Taxation Avoidance Convention between India and France has been amended, marking a significant overhaul of the bilateral tax treaty.
• The protocol reflects India's continued pivot towards source-based taxation and tighter anti-abuse rules, aligning with global standards and the Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) initiative.

Tax Treatment of Cross-Border Investments:

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• India will tax capital gains on the sale of shares of Indian companies, removing the current ownership threshold of 10%.
• Investors, particularly funds and Foreign Portfolio Investors (FPIs), will need to reassess the impact of this change on return expectations and deal economics.
• Grandfathering relief for existing investments is unclear, which may affect investors who relied on treaty protection.

Dividend Tax Rate Recalibrated:

• The existing flat rate of 10% tax on dividends will be replaced with a new structure:
  • Investors with at least 10% stake will be taxed at a lower rate of 5%.
  • Other investors will be taxed at 15%.

Service Permanent Establishment (PE) Introduced:

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• A foreign enterprise will be considered to have a taxable presence in India if it provides services in India through employees for a specified period.
• Any profits attributable to such presence will be taxed in India at rates applicable to foreign entities.

Narrower Scope of Fees for Technical Services (FTS):

• The definition of FTS will be aligned with the India-US tax treaty, requiring services to make technical knowledge, skill, or know-how available to the service recipient in a manner that enables independent application.

Most-Favoured-Nation (MFN) Clause Removed:

• The protocol seeks to delete the MFN clause, removing ambiguities and introducing beneficial dividend tax rates and a narrower definition of taxable services.

Anti-Abuse Rules Codified:

• Anti-abuse measures, including the 'Principal Purpose Test', will be incorporated in the treaty itself under the protocol.
• These measures are currently part of the OECD's Multilateral Instrument (MLI) as ratified by India and France.

Seamless Exchange of Information:

• The protocol proposes to amend the provisions on exchange of information, introducing a new article on 'Assistance in Collection of Taxes' as per international standards.