India, France Update Tax Treaty; Scrap MFN Clause

The amending protocol also revises the provisions on exchange of information and introduces a new Article on assistance in collection of taxes, as per 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 also modifies the taxation of income from dividends by replacing a single rate of 10 percent of tax with a split rate of 5 per cent for those holding at least 10 percent of capital and 15 percent of tax for all other cases. It also modifies the definition of 'Fees for 'technical services' by aligning it with the definition in 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 France 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 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.

The said protocol also incorporates within the DTAC, the applicable provisions of BEPS Multilateral Instrument (MLI) that had already become applicable consequent to the signing and ratification of MLI by India and France. The changes introduced through the amending protocol shall enter into effect subsequent to the completion of internal procedures under the laws of both the countries and subject to the terms agreed between the two countries.

“The Amending Protocol updates the India-France DTAC to the latest international standards, in a manner that balances the interests of both India and France, and updates it in accordance with international standards. It will provide greater tax certainty to the taxpayers and boost flow of investment, technology and personnel between India and France, and thereby strengthen the economic relationship between the two countries,” the CBDT said.

Nangia Global, Partner - M&A Tax, Abheet Sachdeva said the amendment serves the twin-fold purpose of addressing ambiguity in provision of treaty benefits as well as equitable distribution of taxation rights. As per the current version of the DTAC, dividends emanating from India are subject to 10 per cent TDS, this tax outflow could be reduced with application of MFN clause.

However, application and availability of MFN benefits have been a subject matter of debate with the Indian Supreme Court ruling that for application of MFN under a tax treaty, a separate specific notification needs to be issued by the government. “The proposal to bifurcate dividend withholding tax would serve as an impetus to attract French FDI into India and enable existing as well as potential French companies to upstream higher net-India tax profits back to home country,” Sachdeva said.