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India and France have agreed on a major update to their three-decade-old tax treaty, introducing lower dividend tax for French companies with significant holdings in India while giving New Delhi wider authority to tax capital gains from French investors. The revised framework also removes France’s earlier most-favoured nation benefit, which had been a point of dispute after a key Supreme Court ruling. The changes aim to modernise the treaty, improve tax clarity and reduce litigation, while also addressing concerns around technical services taxation. The agreement is expected to be signed in the coming weeks once India’s cabinet clears it.
India and France have agreed on a revised version of their 1992 tax treaty after months of discussions between officials from both sides. The updated terms introduce a lower dividend tax for French companies with substantial shareholding in Indian entities, while also expanding India’s authority to tax share sales by French investors. The move reflects the growing economic engagement between the two countries, supported by rising trade volumes and increased corporate activity by French multinationals in India. Advertisement
The documents reviewed show that French companies holding more than 10% in an Indian entity will face a reduced 5% tax on dividends, compared with the earlier 10%. For minority stakes below 10%, the dividend tax will rise to 15% from 10%. Several French companies with large Indian operations — including Capgemini, Accor, Sanofi, Pernod Ricard, Danone and L’Oréal — may see a change in tax outflows. Capgemini’s Indian arm had declared dividends worth USD 500 million in the 2023–24 financial year, as per regulatory filings.
In exchange for the revised dividend terms, India will gain full source-based taxation rights on capital gains from French investors, removing the earlier threshold that limited taxation to shareholdings above 10%. This change is expected to affect France-based foreign portfolio investors, who collectively held USD 21 billion in Indian equities recently. More than 40 French companies currently hold minority stakes in Indian firms, according to data from Tracxn.
Tax experts noted that these investors were previously not covered under capital gains taxation, and the new framework brings clarity on India’s rights to tax such transactions. Officials familiar with the matter said both nations have already reached agreement on the treaty text, and India’s cabinet is expected to give its final approval soon before the pact is signed.
Another key revision addresses France’s long-standing request on taxation of technical services. Under the new arrangement, India will tax fees only in cases where technical know-how is transferred, effectively excluding routine consultancy, design assistance, cybersecurity support and similar services from additional Indian tax. Industry advisors said this will offer greater clarity for French service providers operating in India.
The removal of the most-favoured nation clause marks another significant shift. The clause had historically given France certain tax benefits, but its interpretation had become contentious after a Supreme Court ruling in late 2023 held that countries could not automatically claim lower rates granted to other nations. French authorities had raised concerns that the ruling created uncertainty and potential additional tax costs estimated at around 10 billion euros for existing agreements. To resolve long-pending disputes and avoid further litigation, both countries agreed to delete the clause from the treaty.
The renegotiation aligns with India’s broader efforts to update older tax treaties to global transparency standards. Switzerland had earlier suspended application of the MFN clause in its treaty with India for similar reasons following the court ruling.
Source Reuters
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