OPINION | India–France Tax Treaty Overhaul: Key changes investors must watch

India and France agree to a new tax structure

The tax treatment of cross-border investments, services and holding structures across India and France is all set to undergo a transformative shift. Both countries recently agreed to amend their 1992 Double Taxation Avoidance Convention, marking a significant overhaul of the bilateral tax treaty existing for over three decades.

The protocol reflects India’s continued pivot towards source-based taxation and tighter anti-abuse rules, while aligning the treaty with global standards and the Organisation for Economic Co-operation and Development (OECD)’s Base Erosion and Profit Shifting (BEPS) initiative.

While the exact language of the protocol is awaited, a few noteworthy features can be gleaned from the Central Board of Direct Taxes press release dated 23 February 2026. The proposed changes are particularly relevant for French foreign portfolio investors (FPI), investors in French holding structures, French strategic players and businesses having service arrangements with Indian entities.

India Gets the Upper Hand

Currently, there is no tax in India for French investors on the sale of shares of an Indian company, except where the shares derive substantial value from immovable property in India or where the seller holds 10% or more stake.

The protocol seeks to remove this ownership threshold and allows India to tax capital gains on any sale of shares of Indian companies.

There is currently no clarity on whether any grandfathering relief will be provided for existing investments where the seller holds less than 10% stake. Without such relief, investors, particularly funds and FPIs that relied on treaty protection while modelling returns, will have to reassess the impact of this change on the return expectations and deal economics, the tax costs of which would likely be passed on to the ultimate investors in such fund structures.

Dividend Tax Rate Recalibrated

The existing flat rate of 10% tax on dividends is proposed to be replaced with a new structure, wherein investors with at least 10% stake will be taxed at a lower rate of 5%, while other investors will be taxed at 15%.

The move clearly sweetens the deal for strategic and long-term investors with material shareholding while increasing the tax burden on minority and FPI investors.

Service Permanent Establishment (PE) Introduced

Under the “service PE” clause, a foreign enterprise is considered to have a taxable presence in India if it provides services in India through employees for a specified period. Any profits attributable to such presence are taxed in India at rates applicable to foreign entities. This expanded definition is expected to affect consulting firms, engineering companies and other project-based service providers which require local presence. Businesses may need to reassess operation models and explore employee secondment arrangements after considering the potential tax and compliance exposure in India.

Narrower scope of Fees for Technical Services (FTS)

Presently, FTS includes payments made in consideration for services of a managerial, technical or consultancy nature. The protocol proposes to align the definition of FTS with the definition in the India-US tax treaty wherein such services qualify as ‘FTS’ only if they make technical knowledge, skill or know-how available to the service recipient in a manner that enables independent application by the service recipient in future. This certainly narrows the scope of taxable services.

Most-Favoured-Nation (MFN) Clause Removed

The protocol seeks to delete the MFN clause under which France was able to enjoy a more favourable tax treatment granted to other OECD countries in certain cases. Removing this clause and introducing beneficial dividend tax rates as well as a narrower definition of taxable services in the treaty, are welcome steps and address ambiguities that were attached to the MFN clause.

Anti-Abuse Rules Codified

Anti-abuse measures, including the ‘Principal Purpose Test’, in line with BEPS standards, are to be incorporated in the treaty itself under the protocol. This test provides a basis to deny treaty benefits wherein an arrangement is motivated by tax benefit. These measures are currently part of OECD’s Multilateral Instrument (MLI) as ratified by India and France and the agreed positions thereunder.

Seamless exchange of information for assistance in collection of taxes

The protocol also proposes to amend the provisions on exchange of information by introducing a new article on ‘Assistance in Collection of Taxes’ as per international standards which will facilitate seamless information exchange and strengthen tax cooperation between the countries.

A Clear Policy Signal

Beyond the technical changes, the protocol underscores India’s broader policy direction: tightening treaty benefits, curbing treaty shopping and strengthening source-country taxation. While the details and fineprint of the protocol are awaited, French investors and businesses with India exposure should reassess structures proactively and factor the revised treaty landscape into future decisions.

(Ritu Shaktawat is Partner and Avin Jain is Principal Associate at Khaitan & Co.)

Views are personal and do not represent the stand of this publication.