What Happened
- India and France signed an Amending Protocol to their 34-year-old Double Taxation Avoidance Convention (DTAC) during French President Emmanuel Macron's visit to New Delhi in February 2026.
- The protocol was signed by CBDT Chairperson Ravi Agrawal and French Ambassador Thierry Mathou on behalf of the two governments.
- The key changes: dividend withholding tax reduced to 5% (for shareholdings of at least 10%) and 15% in other cases (from the earlier uniform 10%); full capital gains taxing rights granted to the source country (where the company is resident); and the controversial Most Favoured Nation (MFN) clause deleted.
- The treaty also modifies the definition of "Fees for Technical Services," aligns it with the India-US DTAA definition, and adds a "Service Permanent Establishment" provision.
- The amended treaty will take effect only after both countries complete their domestic legal approval processes.
Static Topic Bridges
Double Taxation Avoidance Convention (DTAC) — What It Is
A Double Taxation Avoidance Convention (DTAC), also called a Double Taxation Avoidance Agreement (DTAA), is a bilateral treaty that ensures that income earned across borders is not taxed twice — once in the country where it is earned (source country) and again in the country of residence of the taxpayer (resident country). India has DTAAs with over 90 countries. These treaties allocate taxing rights between the two countries for different categories of income: dividends, interest, royalties, capital gains, business profits, salaries, etc.
The India-France DTAC was originally signed on September 29, 1992, making it 34 years old. Tax treaties of this vintage often contain provisions that no longer reflect modern tax structures, digitalisation, or India's expanded tax base — hence the need for the amending protocol.
- India's DTAA network: 90+ countries (one of the widest in Asia)
- Nodal authority: Central Board of Direct Taxes (CBDT), under Ministry of Finance
- Legal basis: Sections 90 and 90A of the Income Tax Act, 1961 — empower the government to enter into and give effect to DTAAs
- Original India-France DTAC signed: September 29, 1992
- Types of income covered: dividends, interest, royalties, capital gains, technical services fees, employment income, etc.
- OECD Model Tax Convention: the global template most DTAAs (including India-France) are based on
Connection to this news: The amending protocol modernises the 1992 treaty to reflect current economic reality — including India's assertion of broader source-country taxing rights (capital gains) and the removal of provisions that had created interpretational conflicts (MFN clause).
Most Favoured Nation (MFN) Clause in Tax Treaties
The Most Favoured Nation (MFN) clause in a bilateral tax treaty provides that if one country later negotiates a more favourable tax rate or narrower scope of taxation with a third country (usually an OECD member), those better terms automatically flow through to the treaty partner that has the MFN clause.
In the India-France context, the MFN clause meant that whenever India negotiated a lower withholding tax rate in another treaty (e.g., India-Netherlands, India-Switzerland), France could claim the same lower rate automatically. This led to significant litigation in India — foreign investors argued they were entitled to rates as low as 5% on dividends based on MFN, whereas the plain treaty text said 10%.
The Indian Supreme Court's landmark ruling in Nestle SA v. ADIT (October 2023) held that the MFN clause in India's tax treaties with OECD countries is NOT automatically operative — it requires a notification under Section 90 of the Income Tax Act. This ruling settled much of the litigation but also prompted India and France to definitively delete the MFN clause from their treaty.
- MFN in tax treaties: not to be confused with trade MFN under WTO GATT Article I — tax treaty MFN is narrower and bilateral
- India's position: MFN clause requires explicit domestic notification (Section 90 ITA) to have effect — settled by Nestle SA (Supreme Court, 2023)
- Effect of deletion: France can no longer claim automatic benefit of lower rates India extends to other OECD nations in future treaties
- Countries affected by similar MFN litigation: Netherlands, Switzerland, France, Sweden (all had MFN clauses with India)
- CBDT Circular 3/2022: had tried to prospectively limit MFN claims — partially overturned and clarified by Nestle SA
Connection to this news: The deletion of the MFN clause from the India-France DTAC definitively ends a decade-long interpretational dispute and gives both countries clearer, more predictable taxing rights — aligning with India's broader push to assert source-country rights.
Dividend Withholding Tax and Capital Gains Taxing Rights
Withholding tax on dividends is the tax deducted at source when a company in one country pays dividends to shareholders resident in another country. Tax treaties set the maximum withholding tax rate — lower than domestic rates — to encourage cross-border investment. The revised India-France treaty sets two tiers: 5% for substantial holdings (at least 10% shareholding) and 15% for portfolio investors.
Capital gains on share sales in India: The amending protocol grants full taxing rights to India (the source country) on gains from the sale of shares of Indian companies by French investors. Previously, under some interpretations of the MFN clause, French investors could argue lower capital gains tax rates than those applicable to others. The new provision removes this ambiguity.
- Old dividend withholding rate (India-France): 10% (single rate)
- New rates: 5% (for ≥10% shareholding) and 15% (other cases)
- Capital gains: full taxing rights now vest with source country (India for Indian company shares)
- "Service PE" addition: if a French company sends employees to India for services for more than a threshold period, a "Permanent Establishment" is deemed to arise — subjecting business profits to Indian tax
- Technical Services definition: aligned with India-US DTAA definition (broader scope)
- CBDT will issue a notification under Section 90 ITA for the amended treaty to take effect domestically
Connection to this news: The lower 5% dividend rate for large French investors (holding ≥10%) makes India a more attractive destination for substantial French institutional investment (including French sovereign wealth and pension funds), while the capital gains clarification protects India's tax base.
Key Facts & Data
- Original India-France DTAC signed: September 29, 1992
- Amending Protocol signed: February 2026 (during Macron's visit to New Delhi)
- New dividend withholding tax: 5% (≥10% shareholding) / 15% (other cases); old rate was 10%
- Capital gains: full taxing rights vest with source country (India for Indian company shares)
- MFN clause: deleted from both Article 7 and the Protocol of the DTAC
- Nodal authority: CBDT (under Finance Ministry); Sections 90-90A of Income Tax Act, 1961
- India's DTAA network: 90+ countries
- Supreme Court's Nestle SA v. ADIT (2023): MFN clause not automatically operative without Section 90 notification
- France is among India's top 5 European FDI sources; French investment in India exceeds €10 billion cumulatively
- India-France bilateral trade: approximately $15 billion annually (2024-25)