Parth Nadpara
NEW DELHI: India and France have signed an updated tax treaty that changes several important rules, including removing the “most favoured nation” (MFN) clause. The amendment was signed during French President Emmanuel Macron’s recent visit to India last week.
The agreement
India and France have a Double Taxation Avoidance Convention (DTAC), first signed in 1992. A DTAC is a treaty that ensures individuals and companies do not pay tax twice on the same income in two countries.
For example, if a French company earns income in India, the treaty decides:
• Which country can tax the income
• How much tax can be charged
• How to avoid double taxation
The new protocol updates several parts of this treaty.
The most-favoured-nation clause was added earlier as part of the protocol linked to the 1992 tax treaty. It was meant to ensure fairness if India later offered better tax terms to another country. This clause has now been officially removed.
The MFN clause
The MFN clause meant that if India gave better tax benefits to another country in a future treaty, France could automatically claim the same benefit. For example, if India later signed a treaty with a country offering a 5 per cent dividend tax rate, France could automatically ask for the same rate.
Its removal brings clarity and ends long-running tax disputes between the two countries. Now, France will only get the benefits written directly in its treaty with India. It cannot claim better terms from India’s deals with other nations.
The updated treaty gives full taxing rights on capital gains from share sales to the country where the company is based.
For example, if a French investor sells shares of an Indian company, India will now have full rights to tax the gains. This rule clarifies which country can tax such income, eliminating confusion.
Earlier, dividends were taxed at a flat 10 per cent rate. The new rules introduce two rates:
• 5 per cent tax if the investor owns at least 10 per cent of the company
• 15 per cent tax for smaller investors
The treaty now uses a clearer definition of “fees for technical services”, aligned with global standards. It also expands the idea of “permanent establishment” by adding a service-based presence.
The amendment also improves rules for sharing tax information and helping each other collect taxes.
The treaty now includes provisions from international BEPS standards, which aim to stop companies from shifting profits to low-tax countries without real business activity. This helps prevent tax avoidance.
When will the new rules take effect?
The changes will start only after both countries complete their legal approval processes.
Overall, removing the MFN clause and implementing other updates aims to modernise the tax agreement and clarify it for businesses operating between the two countries.
