A central feature of the revised treaty, originally signed in 1992, is the restructuring of dividend withholding tax. Under the amended provisions, French companies holding more than 10 percent stake in an Indian entity will now be subject to a five percent tax on dividends received.
This marks a reduction from the earlier 10 percent rate.
In contrast, dividend taxation on minority French shareholdings of less than 10 percent in Indian companies has been increased.
Such holdings will now attract a 15 percent withholding tax, up from the previous 10 percent rate.
The revised framework differentiates between substantial and minority investments, with the updated rates applicable to qualifying dividend income under the treaty.
According to official communication, the Amending Protocol is aimed at enhancing tax certainty and strengthening cooperation between India and France. The changes are also intended to align the bilateral tax framework with international standards and improve clarity in the application of treaty provisions.The Protocol will enter into force after the completion of necessary domestic procedures in both countries.
What changes for investors?
The treaty revision assumes significance against the backdrop of France’s role in the participatory notes (P-notes) market and its relatively favourable capital gains tax position under the existing framework.
Participatory notes (P-notes), issued by Sebi-registered foreign portfolio investors (FPIs) and backed by Indian equities, have been used by overseas investors seeking market exposure with limited documentation.
After India amended tax treaties with Mauritius and Singapore in 2017, France became a relatively attractive route, as FPIs holding less than 10% stake in Indian companies were not liable for capital gains tax on equity sales.
With the proposed revisions, India is expected to gain the right to tax such equity transactions by French investors, potentially aligning the France treaty with those of Singapore and Mauritius.
The changes are also seen in the context of the Supreme Court’s ruling in the Nestlé SA case, which clarified that Most Favoured Nation (MFN) benefits cannot be automatically invoked unless specifically notified.
Tax experts say the amendments may prompt investors to reassess structures, though any shift to jurisdictions such as the Netherlands or Belgium would require meeting substance and anti-abuse norms.
