NEW DELHI: In a major overhaul of the three-decade-old tax treaty, India and France have agreed to grant full taxing rights on capital gains arising from the sale of shares to the country where the company is resident, marking a major shift in the allocation of taxing powers under the bilateral framework.
The amending protocol to the India-France Double Taxation Avoidance Convention was signed in New Delhi during the recent visit of the French President to India. The protocol was signed by Ravi Agrawal, Chairperson of the Central Board of Direct Taxes (CBDT), on behalf of the Government of India, and Thierry Mathou, Ambassador of France to India, on behalf of the French Republic.
The capital gains amendment is seen as the most consequential change as France was one of the few countries which offered exemption to a French resident on investments made in equity shares of Indian companies. The amendment is also significant given the recent Supreme Court verdict on Tiger Global’s investment in Flipkart.
Alongside the capital gains revision, the protocol deletes the Most-Favoured-Nation (MFN) clause from the earlier agreement, putting to rest interpretational disputes that had arisen over its application in recent years.
“The tax regulator seems to plug the benefits taken by the entities in the India-France tax treaty, which was considered favourable in the good old days. The treaty lost its shine after the Supreme Court’s ruling in the case of Nestle ruling on availing the benefit under the MFN clause. The recent Tiger Global ruling has further tightened the possibility of availing tax exemption for global funds investing in India,” says Manoj Purohit, Partner - Financial Services Tax, Tax & Regulatory Advisory at BDO India.
The Supreme Court in January denied tax treaty benefits to Mauritius-based entities of Tiger Global on capital gains arising from the sale of unlisted Flipkart shares in 2018. The verdict marks a clear shift towards a substance-over-form approach in treaty interpretation and strengthens the tax department’s hand in probing alleged conduit structures.
Meanwhile, the amended India-France DTAC also modifies the taxation of dividend income. The earlier uniform 10% withholding tax rate has been replaced with a two-tier structure — a reduced 5% rate for shareholders holding at least 10% of the capital of a company, and a 15% rate in all other cases.
In addition, the definition of “Fees for Technical Services” (FTS) has been aligned with the formulation used in the India–US tax treaty, bringing greater clarity and consistency in interpretation. The scope of “Permanent Establishment” (PE) has also been expanded through the inclusion of a Service PE provision.
On the transparency and enforcement front, the protocol updates the Exchange of Information article and introduces a new provision on Assistance in Collection of Taxes, in line with global standards. It also incorporates applicable provisions of the Base Erosion and Profit Shifting (BEPS) Multilateral Instrument (MLI), reflecting commitments both countries have already undertaken at the multilateral level.
The amendments will enter into force after both countries complete their respective domestic ratification procedures and are subject to mutually agreed terms.
The government said the updated treaty aligns the bilateral framework with contemporary international standards, provides greater tax certainty to investors, and is expected to facilitate enhanced flows of investment, technology and skilled personnel between India and France.