India and France Revise Tax Treaty: Implications for Investors

India and France have reached an agreement to revise their 1992 tax treaty, aimed at modernizing tax regulations and enhancing bilateral economic relations. The new treaty will significantly alter the taxation landscape for French companies operating in India, particularly concerning dividend taxes and capital gains.

India, France near deal on tax treaty, to lower levy on dividends paid to French parent companies

Under the proposed treaty, the tax on dividends paid by Indian subsidiaries to French parent companies will be reduced from 10% to 5% for those holding more than a 10% stake. Conversely, for minority shareholders with stakes under 10%, the dividend tax will increase from 5% to 15%. Additionally, the treaty will allow India to impose taxes on share sales by any French entity, eliminating the previous requirement of holding a minimum 10% stake. This shift to a source-based taxation framework is expected to impact French foreign portfolio investors (FPIs), who currently own approximately $21 billion in Indian shares.

India, France near deal on tax treaty, to lower levy on dividends paid to French parent companiesThe Straits Times

The renegotiation of the treaty has been ongoing since 2023, primarily driven by a landmark Indian Supreme Court ruling that affected the interpretation of the "most favoured nation" (MFN) clause. This clause historically provided France with certain tax advantages, but its interpretation led to legal uncertainties and potential additional tax costs estimated at €10 billion for existing contracts. The decision to remove the MFN clause aims to resolve these disputes and provide greater tax certainty for French companies in India.

The Straits TimesIndia, France near deal on tax treaty, to lower levy on dividends paid to French parent companies

Indian government documents indicate that the new treaty is expected to enhance the flow of investment, technology, and personnel between the two nations. An official familiar with the negotiations noted that the terms have been agreed upon and are awaiting final approval from Prime Minister Narendra Modi's cabinet. However, some officials have cautioned that the draft agreement is still subject to revisions, particularly regarding the MFN clause.

The Straits Times

Critics of the proposed changes have raised concerns about the increased dividend tax for minority shareholders, arguing that it may deter investment from smaller French firms. Suresh Swamy, a partner at Price Waterhouse & Co LLP, noted that the higher tax rates could reduce after-tax yields for investors holding less than 10% equity in Indian companies. Additionally, there are apprehensions regarding the potential impact on the overall investment climate in India, especially for smaller French entities.

India, France near deal on tax treaty, to lower levy on dividends paid to French parent companies

The finalization of the treaty is anticipated in the coming weeks, pending cabinet approval in India. As both countries seek to strengthen their economic ties, the implications of these tax changes will be closely monitored by investors and analysts alike.

The Straits Times

• “The proposed amending protocol will boost flow of investment, technology and personnel between India and France, and will provide tax certainty,” — Indian Government Document

The Straits Times

• “This will impact French FPIs in India and also French companies holding minority interest in Indian companies.” — Riaz Thingna, Partner at Grant Thornton Bharat LLP

The Straits Times

• “The higher 15% dividend withholding tax , together with capital gains taxes on equity shares, may reduce after-tax yields for investors holding less than 10% equity in a company,” — Suresh Swamy, Partner at Price Waterhouse & Co LLP

India, France near deal on tax treaty, to lower levy on dividends paid to French parent companies