- Overall, the revised India–France tax treaty is expected to enhance certainty for investors, promote sustained capital flows, and strengthen long-term economic cooperation
- By encouraging stable investments, reducing ambiguity, and refining service taxation rules, the amendments may also support greater technology transfer and mobility of skilled professionals between the two countries
India and France have agreed on a comprehensive update to their bilateral double taxation treaty, originally concluded in the early 1990s. The revised framework reflects current global tax norms and aims to rebalance taxing rights while offering greater predictability for cross-border investors and multinational enterprises operating between the two countries.
Negotiations to modernize the treaty began in 2024, driven by the need to align the agreement with evolving international standards on transparency, dispute reduction, and investment certainty. The outcome introduces targeted relief for long-term investors while expanding India’s ability to tax certain income streams linked to its domestic market.
Lower Dividend Taxes for Strategic Investors
A key feature of the revised treaty is the restructuring of dividend withholding tax. French companies holding more than 10 percent equity in an Indian company will benefit from a reduced withholding rate of 5 percent on dividends, compared with the earlier 10 percent rate. This change is designed to encourage stable, long-term shareholding structures.
In contrast, French investors with minority stakes of less than 10 percent will face a higher dividend withholding rate of 15 percent, up from 10 percent previously. The differential treatment clearly favors strategic investors over short-term or portfolio-based holdings.
Broader Capital Gains Taxing Rights for India
In return for dividend tax concessions, India has secured expanded rights to tax capital gains arising from the sale of shares by French investors. The revised treaty removes the earlier ownership threshold that limited India’s taxing authority to cases where French shareholders held more than 10 percent in an Indian entity.
- Under the new framework, capital gains from equity transfers may be taxed in India regardless of the size of the shareholding
- This change is significant given the scale of French investment exposure to India
France ranked among the top sources of foreign direct investment into India in 2024, with inflows of approximately US$859 million, while French portfolio investors are estimated to hold around US$21 billion in Indian equities.
Narrower Taxation of Technical Service Fees
The updated treaty also revises the treatment of fees for technical services. India has agreed to limit source-based taxation to cases involving the transfer of technical know-how. Routine services—such as consultancy, advisory work, cybersecurity support, and market research—are expected to fall outside the scope of taxation in India.
This narrower definition is likely to benefit French service providers and technology firms engaged in cross-border operations, while also supporting greater collaboration in knowledge-based sectors.
Removal of the Most Favored Nation Clause
Another notable change is the removal of the Most Favored Nation (MFN) clause. Historically, this provision allowed France to seek more favorable tax treatment if India later granted lower rates to other OECD countries. However, a 2023 Supreme Court of India ruling clarified that MFN benefits do not apply automatically, leading to legal uncertainty and disputes.
To eliminate ambiguity and reduce litigation risk, both countries agreed to delete the MFN clause from the treaty. Indian authorities view this as a necessary step to restore clarity and stability, mirroring similar developments such as Switzerland’s suspension of MFN benefits under its tax treaty with India in 2025.
Dividend Taxation Framework Under the Treaty
Under the dividend article of the India–France Double Taxation Avoidance Agreement, dividends paid by a company resident in one country to a resident of the other may be taxed in both the country of residence and the source country. To prevent excessive taxation, the treaty caps the withholding tax that may be levied at source, subject to the revised rates.
Dividends are broadly defined to include income from shares and other corporate distributions treated as dividends under domestic tax laws, excluding interest income.
