Double Taxation Avoidance Convention (DTAC)

Context

India and France signed a landmark Amending Protocol to update their 1992 Double Taxation Avoidance Convention. This update, signed during French President Emmanuel Macron’s official visit to India, aligns the three-decade-old treaty with modern international tax standards and the OECD’s BEPS (Base Erosion and Profit Shifting) framework.

About Double Taxation Avoidance Convention (DTAC)

What it is: A bilateral agreement between two nations designed to prevent the same income from being taxed twice, once in the Source Country (where it is earned) and once in the Resident Country (where the taxpayer lives).
Methods of Relief:
- Exemption Method: Income is taxed in only one country and is entirely exempt in the other.
- Tax Credit Method: Income is taxed in both, but the resident country provides a credit for taxes paid in the source country.

Key Features of the 2026 Amended India-France DTAC

The Amending Protocol introduces several sweeping changes to curb tax avoidance and simplify the investment landscape:

Full Capital Gains Taxing Rights: India (the source country) now has full rights to tax gains from the sale of shares of Indian companies. Previously, certain interpretations allowed for exemptions; this change puts the France treaty on par with India’s treaties with Mauritius and Singapore.
Tiered Dividend Taxation: The previous flat 10% rate has been replaced with a split-rate structure to reward strategic investors:
- 5% Tax: For shareholders holding at least 10% of the company’s capital.
- 15% Tax: For all other investors (portfolio/minority investors).
Deletion of the MFN Clause: The Most-Favoured-Nation (MFN) clause was formally removed. This follows a 2023 Supreme Court ruling (Nestle SA Case) and ends disputes where treaty partners automatically claimed lower rates granted to other nations.
Service Permanent Establishment (PE): A "Service PE" clause was added, expanding India's right to tax foreign entities that provide services within India for an extended period without a fixed physical base.
BEPS Integration: Directly incorporates Multilateral Instrument (MLI) provisions to prevent multinational corporations from using "treaty shopping" to avoid taxes.

Significance of the 2026 Protocol

Investment Boost: By providing a clear, dual-rate dividend structure, it incentivizes large-scale French Foreign Direct Investment (FDI) into India.
Legal Certainty: The removal of the MFN clause brings an end to years of litigation regarding "automatic" tax benefits, providing a predictable regime for global corporations like Capgemini, Sanofi, and L'Oreal.
Anti-Evasion: Enhanced provisions for the Exchange of Information and a new article on Assistance in Collection of Taxes strengthen the ability of both nations to track fiscal evasion and illegal financial flows.
Revenue Protection: Secures India's right to tax capital gains from the sale of domestic shares, protecting the national exchequer from profit shifting.

Conclusion

The 2026 amendment to the India-France DTAC marks a transition from a legacy treaty to a modern, anti-abuse tax framework. While it may increase the tax burden on certain portfolio investors (FPIs), it provides the long-term transparency and certainty required for the next phase of the India-France Strategic Partnership.

Double Taxation Avoidance Convention (DTAC)