India-France Double Taxation Avoidance Convention (DTAC)

Why in the News?

During the recent visit of the President of France to India, the Government of the Republic of India and the Government of the French Republic have signed a Protocol amending the India-France Double Taxation Avoidance Convention (DTAC).

India-France Double Taxation Avoidance Convention (DTAC)

• A Double Taxation Avoidance Convention is an agreement between two countries to ensure that a person or company does not have to pay tax twice on the same income in both countries.
• For example, if a French company earns income in India, both India and France may claim the right to tax that income.
• A DTAC decides how this income will be taxed and in which country.
• This reduces confusion, avoids disputes and encourages cross-border investment.
• India has signed DTACs with many countries. India-France Double Taxation Avoidance Convention has been in force since 1992. However, due to changes in the global tax system, it required amendments.

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India-France Double Taxation Avoidance Convention (DTAC) Amendments

Key changes in the India-France Double Taxation Avoidance Convention are as follows: 

• Taxation of Capital Gains: The amendment gives full taxing rights on capital gains from the sale of shares to the country where the company is based. For example, if shares of an Indian company are sold, India will have the right to tax the capital gains. 
• Removal of the Most-Favoured-Nation (MFN) Clause: The amendment removes the MFN clause from the treaty. The MFN clause earlier created interpretational issues because it required India to extend certain benefits to France if similar benefits were given to another country. Its removal brings clarity and avoids future legal disputes.
• Changes in Dividend Taxation: Earlier, dividends were taxed at a single rate of 10%. The amendment introduces two different rates, 5% tax if the investor holds at least 10% of the company’s capital and 15% tax in all other cases. This structure encourages long-term and substantial investment, while still ensuring revenue for the source country.
• Clearer Definition of Technical Services: The definition of “Fees for Technical Services” has been aligned with India’s tax treaty with the United States. This reduces confusion about what kind of services can be taxed and ensures consistency across major tax agreements.
• Expansion of Permanent Establishment (PE): The amendment expands the definition of “Permanent Establishment” by including “Service PE.” This means that if a company from one country provides services in the other country for a significant period, it may become taxable there. This ensures that businesses pay tax where economic activity actually takes place.
• Stronger Information Sharing: The updated treaty improves provisions related to exchange of information between tax authorities. It also introduces a new article on assistance in collection of taxes. This allows India and France to cooperate more closely in preventing tax evasion and improving compliance.
• Alignment with Global Standards (BEPS):  The amendment incorporates provisions of the Base Erosion and Profit Shifting (BEPS) Multilateral Instrument (MLI), which both countries have already signed. This aligns the treaty with international efforts led by the OECD to prevent tax avoidance and profit shifting by multinational companies.

Significance of the Amendment

The updated DTAC is significant for several reasons:

• It provides greater tax certainty to businesses and investors.
• It reduces the risk of double taxation and legal disputes.
• It strengthens tax transparency and cooperation between the two countries.
• It aligns the treaty with global standards under the BEPS framework.
• It encourages greater investment, technology exchange and professional mobility.