P-Notes Facing Scrutiny as India-France Tax Pact Complicates Offshore Investment Strategies

India-France Double Taxation Avoidance Agreement Amendment: Key Implications

Date: February 23, 2026

The India-France Double Taxation Avoidance Agreement (DTAA) amendment has been signed, allocating full source-based taxing rights on capital gains from share sales to India. This means that India now has the right to tax any profit made from the sale of shares in an Indian company by a French resident, ending the earlier exemption for French residents holding less than 10% of an Indian company.

Impact on P-Notes and FPI Inflows

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The amendment is expected to have a significant impact on P-Notes (Participatory Notes) and FPI (Foreign Portfolio Investment) inflows from France. P-Notes are financial instruments used by foreign investors to invest in Indian stock markets without having to register directly with the Securities and Exchange Board of India (SEBI). Market analysts have described the move as a potential "threat" or "hit" to P-Note trade and inflows through France.

However, some market experts assess the overall disruption as limited, given the small scale and P-Notes' reduced footprint. Recent SEBI trends and expert estimates show that P-Notes form around 1.5-2% of total FPI assets under custody or AUC.

Liquidity and Transparency Implications

The amendment may lead to short-term friction in equity liquidity as investors restructure. However, P-Notes' small share limits systemic effects. Sunil Badala, National Head of Tax at KPMG in India, views the change as indirectly aiding SEBI's goals by accelerating the move towards more direct FPI investments and improving data quality and regulatory oversight.

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Potential Impact on Inflows

The amendment could reduce the attractiveness of P-Notes routed from France as capital gains tax (typically 12.5% long-term plus surcharge/cess) will be imposed on exits, potentially leading to gradual unwinds, slower fresh inflows, or shifts to direct FPI registration.

Revenue Potential

The protocol clearly expands India's taxing rights, which should incrementally strengthen the capital gains tax base. Rajesh H Gandhi, Partner at Deloitte India, estimates that even a modest turnover of the $21 billion base could generate tens to hundreds of millions in tax revenue.

Key Statistics

• France-linked equity holdings stood at approximately $21 billion as of January 2026.
• P-Notes/ODIs form a portion of these holdings via issuances by French entities.
• P-Notes represent around 1.5-2% of total FPI assets under custody or AUC.