India and France agree to new tax treaty halving dividend taxes for major French companies.

India and France have reached an agreement to revise their 1992 tax treaty, introducing significant changes to bilateral taxation policies. The deal is set to halve the tax on dividends paid by Indian subsidiaries to their French parent companies, potentially resulting in millions in savings for major corporations operating in India. In exchange for this concession, India will gain broader powers to tax share sales by French investors and successfully revoke France's "most favoured nation" status, which previously granted it certain tax advantages.

The core change beneficial to large French corporations involves a reduction in dividend tax rates. French companies holding a stake exceeding 10% in an Indian entity will now be subject to a 5% tax on dividends received, down from the previous rate of 10%. This adjustment aims to boost investment flow and provide greater tax certainty for multinational corporations. The change could have significant financial implications for companies like Capgemini, Accor, Sanofi, and L'Oreal, which have expanded their presence in India. Capgemini Technology Services India alone declared a dividend of $500 million in the fiscal year 2023-24.

However, the new treaty introduces stricter rules for minority investors and foreign portfolio investors (FPIs). While large shareholdings benefit from a tax reduction, the dividend tax for minority French shareholdings (under 10%) will increase from 10% to 15%. Furthermore, India will remove the existing threshold that limited its ability to tax capital gains on share sales only when the French entity held more than 10% of an Indian company. The revised treaty grants India full source-based taxation rights for capital gains on equity shares, impacting French FPIs that currently own $21 billion worth of shares in Indian companies. According to market intelligence, more than 40 French companies hold stakes of less than 10% in Indian entities, which were previously exempt from this capital gains tax under the current treaty.

The agreement also addresses other areas of bilateral taxation. India has agreed to limit the taxation of fees for technical services, restricting taxation primarily to cases where a French provider transfers technical know-how. This change exempts most routine consultancy and support services, potentially benefiting French companies involved in design consultancy, cybersecurity, and market research.

A central element of the renegotiation involved the contentious "most-favoured nation" (MFN) clause. Disagreements over the interpretation of this clause escalated following a landmark 2023 Indian Supreme Court decision, which stated that countries cannot automatically claim lower tax rates negotiated by India with other OECD nations. This ruling led to significant legal and economic uncertainty for French companies, with potential additional tax costs estimated at 10 billion euros for existing contracts alone. To resolve this issue, India and France have agreed to delete the MFN clause entirely from their treaty, which Indian government documents state will put an end to related litigation and uncertainty.

Officials familiar with the deliberations have confirmed that the terms of the new treaty have been agreed upon and are expected to be signed in the coming weeks. In India, the deal requires final approval from Prime Minister Narendra Modi's cabinet. The revised protocol, which modernizes the treaty by adapting to global standards on tax transparency, aims to boost investment, technology, and personnel flow between the two nations, providing greater tax certainty for businesses operating in both countries.