Portfolio investors in Indian capital markets based in France will lose their long-held tax advantage and will soon be required to pay capital gains tax in India. This follows the Central Board of Direct Taxes (CBDT) proposing an “amending protocol” on Monday for the Double Taxation Avoidance Convention (DTAC) between the two countries.
The move could yield significant revenue gains for India, given that several foreign portfolio investors (FPIs) started to invest in Indian markets from France after New Delhi modified the treaties with tax havens Mauritius and Singapore in 2017.
Some of these investments are routed through P-notes issued by FPIs registered with the Securities and Exchange Board of India (Sebi), while many France-based FPIs also invest directly in India.
Any FPI from France with less than a 10% stake in an Indian company (FPI investments in a firm are anyway capped at 10%) currently pays no tax on capital gains, given the beneficial provisions under the 1992 bilateral tax convention.
Thanks to the 2017 amendments to the respective tax treaties, investors from Mauritious and Singapore are required to pay tax on profits from sale of Indian shares purchased on or after April 1 2017.
$21 billion worth of equity investments in India
France-based FPIs owned $21 billion worth of equity investments in India, as of January 2026, according to depository data.
The DTAC recast follows French President Emmanuel Macron’s recent India visit when the two countries announced greater defence cooperation to jointly produce Rafale fighter jets, as well as helicopters.
The latest amendments to the India-France tax convention also cut the dividend tax on French companies holding at least 10% in an Indian entity to 5% from 10% earlier. For shareholdings of under 10% in Indian companies, the dividend tax will, however, rise from 10% to 15%.
The changes will come into force only after both countries complete their respective domestic ratification procedures and notify each other, in accordance with the terms agreed upon in the protocol.
Greater tax certainity
According to the CBDT, the new protocol to modernise the DTAC would aim to provide greater tax certainty, resolve long-standing disputes, and promote stronger cross-border investment and economic cooperation.
“The amending protocol provides full taxing rights in respect of capital gains arising from the sale of shares of a company, to the jurisdiction where such company is a resident,” it stated.
Further, the controversial Most-Favoured-Nation (MFN) clause has been removed from the treaty, bringing an end to years of interpretational disputes and litigation surrounding its application.
Abheet Sachdeva, Partner – M&A Tax, Nangia Global, said the changes would serve the twin purpose of addressing ambiguity in provision of treaty benefits as well as equitable distribution of taxation rights.
Currently, dividends emanating from India are subject to 10% TDS, this tax outflow could be reduced with the application of the MFN clause, Sachdeva said.
Surajkumar Shetty, Partner, JSA Advocates & Solicitors, said that some of the changes were possibly made due to the Supreme Court ruling in the case of Nestle. “The Supreme Court had held that a notification is a mandatory condition to give effect to a protocol changing the terms or conditions of the DTAC.
Therefore, some of the beneficial provisions have now been built into the DTAC itself along with the deletion of the ‘most favoured nation’ clause,” Shetty said.
In addition, the definition of “fees for technical services” has been aligned with the wording used in the India-US tax treaty. The protocol introduces a Service Permanent Establishment clause, expanding the circumstances under which business profits become taxable in the source state.
It also updates and strengthens provisions on exchange of information and introduces a new article on assistance in tax collection in line with current international standards. This would enable and facilitate seamless exchange of information and strengthen mutual tax cooperation between India and France, the CBDT said.
“The amending protocol updates the India-France DTAC to reflect the latest international tax standards while carefully balancing the interests of both countries,” the CBDT said. “It will provide greater tax certainty to taxpayers, reduce disputes, and encourage increased flows of investment, technology, and skilled personnel between India and France.”
According to Sachdeva, the proposal to bifurcate dividend withholding tax under separate slabs –5% and 15% — 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 their home country.
Sandeep Sehgal, Partner-Tax, AKM Global, said the capital gains on share transfers will now be taxed in the country of company residence, offering clearer source-based rights than before. Alignment of FTS rules with the India-US treaty and the addition of Service PE tighten the taxation of cross-border services versus the existing DTAA.
Please click here to view the full story on Financial Express.