India-France Revised Tax Treaty Protocol

India and France have updated their 1992 tax treaty through a new protocol, introducing key changes aimed at tightening source-based taxation and updating several provisions on dividends, technical fees, and permanent establishment.

Key Changes Introduced

• Source-based Taxation:
  • Capital gains from share sales will now be taxable in the country of the company's residence, impacting cross-border mergers and private equity transactions.
  • This aligns with India’s broader treaty policy to strengthen source-based taxation and reduce revenue leakages.
• Dividend Taxation:
  • French companies with over a 10% stake in Indian entities will face a reduced 5% tax on dividends, down from 10%.
  • For minority shareholders, dividend tax will increase to 15% from the current 5%.
• Technical Services and Permanent Establishment:
  • The definition of 'fees for technical services' aligns with the India-US treaty.
  • A new service permanent establishment clause is introduced, expanding the taxable presence threshold in the source country.
• Exchange of Information and Tax Collection Assistance:
  • Provisions are amended to meet international standards.
  • A new article on assistance in tax collection is included, enhancing cross-border enforcement cooperation.

Implications and Expert Insights

The revised protocol aims to provide greater tax certainty and stimulate investment, technology, and personnel flows between India and France, strengthening their economic relationship.

• Anti-avoidance Measures:
  • The protocol implements tighter anti-avoidance measures, prompting a reevaluation of holding structures, service models, and dividend planning.
• Capital Gains Taxation:
  • The protocol grants capital gains taxing rights to the source state regardless of shareholding thresholds, securing revenue for India's union treasury but potentially deterring French foreign portfolio investors.
• Historical Context:
  • India has previously renegotiated similar treaties with Singapore and Mauritius, removing capital gains exemptions to preserve revenue in portfolio cases.

Procedural and Implementation Notes

The changes through the Amending Protocol will take effect after both countries complete their internal procedures. The Central Board of Direct Taxes (CBDT) emphasized these changes will enhance the economic ties between India and France.