Full Breakdown
India and France Revise Tax Treaty: Implications for Foreign Investment
2/24/2026, 11:29:19 AM
Overview of the Tax Treaty Amendments
India and France have recently signed an Amending Protocol to their Double Taxation Avoidance Convention (DTAC), originally established in 1992. This revision aims to enhance tax certainty and strengthen economic ties between the two nations. The protocol was signed during French President Emmanuel Macron's visit to India by Ravi Agrawal, Chairperson of the Central Board of Direct Taxes (CBDT), and Thierry Mathou, Ambassador of France to India.
Key Changes in Taxation
The amended treaty introduces significant changes to capital gains and dividend taxation. Notably, it grants full taxing rights over capital gains from the sale of shares to the country where the company is resident. This shift aligns with India's broader strategy to reinforce source-based taxation and curb revenue leakages. Additionally, the protocol removes the Most-Favoured-Nation (MFN) clause, which had previously allowed France to claim favorable tax treatment based on India's agreements with other countries.
The dividend tax structure has also been revised. The previous uniform tax rate of 10% has been replaced with a two-tier system: a 5% rate for shareholders holding at least 10% of a company's capital and a 15% rate for minority shareholders. This bifurcation is expected to attract more foreign direct investment (FDI) from France by allowing companies to repatriate higher post-tax profits.
Impact on Participatory Notes (P-Notes)
The proposed changes are likely to affect the market for participatory notes (P-notes), which are popular among hedge funds and international investors seeking exposure to Indian equities with minimal disclosure. Currently, French foreign portfolio investors (FPIs) benefit from a capital gains tax exemption on equity sales if they hold less than 10% in a company. However, if the treaty revisions remove this exemption, the attractiveness of P-notes issued by French brokers may diminish, potentially leading to a decline in their usage.
Rajesh Gandhi, a partner at Deloitte India, noted that if the 10% threshold is eliminated, it would make investing through P-notes less appealing from a tax perspective. Parul Jain from Nishith Desai Associates echoed this sentiment, stating that the increased taxation would raise costs for P-note holders, particularly given the limited ability to claim tax credits in their home country.
Broader Implications and Responses
The amendments are seen as a response to the Supreme Court's ruling regarding the MFN clause, which clarified that such benefits cannot be automatically invoked without specific notification. This ruling has prompted a reassessment of tax structures by FPIs, who may consider relocating to jurisdictions like the Netherlands or Belgium, which still offer capital gains protection for sub-10% holdings.
Experts believe that while the changes may deter some French FPIs, they are designed to enhance tax certainty and attract long-term investments. Abheet Sachdeva from Nangia Global emphasized that the revised treaty framework aims to balance the interests of both countries while aligning with international standards.
Conclusion
The revised India-France tax treaty represents a significant shift in cross-border taxation, particularly affecting capital gains and dividend taxation. While it aims to foster greater investment certainty and strengthen economic ties, the implications for P-note trading and foreign investment strategies remain to be fully realized. The changes are expected to take effect following the completion of internal legal procedures in both countries.
