India and France sign amending protocol: What are new dividend and capital gains rules

India amends tax treaty with France

• India and France update tax treaty, removing MFN clause
• Capital gains taxed by residency; split rates for dividend tax
• Treaty aligns fees, expands Permanent Establishment scope

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India and France have signed updated tax treaty that amend Double Taxation Avoidance Agreement (DTAA), providing for taxation of capital gains on the basis of residency of the company and deleting the Most-Favoured-Nation (MFN) clause to bring greater certainty in taxation.

The amending protocol also modifies the taxation of income from dividends by replacing a single rate of 10 per cent tax with a split rate, 5 per cent for those holding at least 10 per cent of capital and 15 per cent for all other cases.

Further, it modifies the definition of ‘Fees for Technical Services’ by aligning it with the definition in the India-US Double Taxation Avoidance Agreement and expands the scope of ‘Permanent Establishment’ by adding Service PE.

The protocol amending the India-France Double Taxation Avoidance Convention (DTAC) was signed during the recent visit of French President Emmanuel Macron to India. It was signed by Ravi Agrawal, Chairperson, Central Board of Direct Taxes (CBDT), and Thierry Mathou, Ambassador of France to India, on behalf of their respective governments.

The amending protocol also updates provisions on exchange of information and introduces a new Article on assistance in collection of taxes, in line with international standards.

“This would enable and facilitate seamless exchange of information and strengthen mutual tax cooperation between India and France,” the CBDT said in a statement.

The amending protocol provides full taxing rights in respect of capital gains arising from sale of shares of a company, to the jurisdiction where such company is a resident. It also deletes the so-called Most-Favoured-Nation (MFN) Clause from the protocol to the DTAC, thereby bringing to rest all issues relating to it, the CBDT added.

What is the MFN clause?

The MFN clause provides that if India extends more favourable tax treatment to another country under a subsequent tax treaty, the same benefit can be claimed by France.

In simple terms, if India later enters into a treaty with another country granting a lower dividend tax rate, say 5 per cent, France would be entitled to seek that reduced rate under the MFN provision.

What does removing the MFN clause mean?

Removing the Most Favoured Nation (MFN) clause eliminates the automatic extension of better tax benefits granted to other countries.

With its removal, the position becomes clearer and helps put an end to prolonged tax disputes between the two countries. France will now be entitled only to the benefits explicitly mentioned in its bilateral tax treaty with India and cannot claim more favourable terms that India may have agreed to with other nations.

When will the new rules take effect?

The new rules will come into force only after both countries complete their respective legal and approval procedures.

Overall, the removal of the MFN clause, along with other amendments, is intended to modernise the tax treaty and provide greater clarity for businesses operating between the two nations.