The proposed amendments to the India-France tax treaty would force global investors, routing funds into India through French holding structures, to reassess their investments in India.
After India curtailed capital gains exemptions under its treaties with Mauritius and Singapore, France had become a preferred jurisdiction, with relatively favourable tax treatment for Indian equity investments.
Tax experts noted that several French banks and investment platforms over the years have built sizeable businesses taking advantage of the French tax treaty with India, including offshore derivative instruments (ODIs), participatory notes and other synthetic exposure products linked to Indian securities. However, with the amendments being implemented, France may lose some of its relative appeal as a treaty-driven holding or ODI-issuance jurisdiction.
“The amendment is likely to prompt many investors and fund sponsors to take a fresh look at how their French investment vehicles are structured -and, in some cases, consider restructuring. This is particularly true where the original choice of France as a platform was heavily influenced by treaty-based capital gains exemptions on investments in Indian equities,’’ said Suresh Swamy, Senior Partner at PwC.
Currently, capital gains arising from share transfers by investors holding less than 10% are generally taxed in the country of residence. The amendment shifts taxing rights to the source country and raises the dividend withholding tax for such small shareholders to 15%. Thus, French portfolio investors with sub-10% stakes are likely to face higher Indian tax exposure on both capital gains and dividends.
Tax experts said the withdrawal of capital gains relief for portfolio investors would mean exits by French shareholders are taxed under India’s domestic law, with long-term capital gains currently taxed at 12.5% rate plus applicable surcharge. “Lack of any grandfathering of prior investment makes the exit expensive across the board in these cases,” said Sumit Singhania, Partner, Deloitte India.
While the restructuring might take some time, in the near term, funds are likely to recalibrate return models to factor in the additional tax costs rather than unwind existing structures. “Over time, some managers may evaluate alternative jurisdictions offering comparable treaty outcomes. Any restructuring would therefore require careful evaluation of operational feasibility, on-ground practicalities and substance considerations,” said Priyanka Duggal, Partner, Deal structuring, Grant Thornton Bharat LLP.
Taken together, the existing French platforms will need to reassess whether they remain commercially viable in the absence of preferential capital gains treatment, emphasized tax advisors.