India and France Overhaul Decades-Old Tax Treaty: Dividend Cuts, Capital Gains Expansion, and the End of MFN Privilege

India and France have signed an Amending Protocol to their bilateral Double Taxation Avoidance Convention (DTAC), overhauling a three-decade-old agreement originally signed in 1992. The revised framework cuts dividend levies for large French investors, expands India’s power to tax capital gains on share sales, and eliminates the contentious Most-Favoured-Nation (MFN) clause. The changes represent the most significant restructuring of bilateral tax arrangements between the two countries since the original treaty was concluded.

The Amending Protocol was signed in New Delhi by Ravi Agrawal, Chairperson of India’s Central Board of Direct Taxes (CBDT), and Thierry Mathou, the French Ambassador to India, on the sidelines of French President Emmanuel Macron’s state visit to India between February 17 and 19, 2026.

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A Partnership Elevated: Macron’s Visit to India

The tax treaty amendment did not arrive in isolation. During Macron’s fourth official visit to India, the two countries elevated their relationship to a “Special Global Strategic Partnership”, building on the Horizon 2047 Roadmap adopted in 2023 and the longstanding defence and strategic ties that have defined the bilateral relationship since the Strategic Partnership was launched in 1998.

Macron and Indian Prime Minister Narendra Modi jointly inaugurated the 2026 India-France Year of Innovation in Mumbai on February 17 and participated in the Artificial Intelligence Impact Summit 2026 in New Delhi. Over the course of the visit, the two countries announced 21 agreements spanning defence, technology, innovation, taxation, and education.

Defence cooperation featured prominently. India and France announced intensified co-design and co-production of advanced defence platforms across air, naval, and land systems. Bharat Electronics (BEL) and France’s Safran signed an MoU for the joint manufacture of HAMMER air-to-surface missiles in India, and both sides inaugurated India’s first private helicopter final assembly line, combining the capabilities of TATA Advanced Systems and Airbus.

In a joint statement on February 17, Modi and Macron welcomed the tax treaty amendment, saying it would “secure economic activity for French and Indian businesses and pave the way for greater investments and collaborations between the two countries”.

A New Two-Tier Dividend Tax Structure

The most immediately consequential change for French corporations with Indian operations is the restructuring of dividend withholding taxes. The previous flat rate of 10% has been replaced with a two-tier system. French companies holding at least a 10% stake in an Indian company will now pay a 5% withholding tax on dividends — a reduction of half the previous burden. Conversely, minority French shareholders holding less than 10% in an Indian company will see their dividend tax rate rise from 10% to 15%.

This tiered approach is deliberately structured to favour strategic, long-term investors over passive or short-term portfolio holdings. By reducing the tax burden for significant shareholders while raising it for minority holders, the amended treaty creates a clear incentive for deeper, more committed investment from French corporations.

The changes are expected to benefit major French companies with large Indian footprints, including pharmaceutical giant Sanofi, technology services leader Capgemini, luxury consumer goods firm L’Oreal, hospitality conglomerate Accor, spirits maker Pernod Ricard, and food company Danone — all of which have significantly expanded their presence in India in recent years.

As of January 2026, France-based foreign portfolio investors held shares worth approximately $21 billion in Indian companies, according to Indian share depository data. Bilateral trade between the two countries stood at around $15.21 billion in FY25, while French cumulative FDI into India reached an estimated $11.75 billion between April 2000 and March 2025.

India’s Expanded Capital Gains Authority

In exchange for the concession on dividend taxes for significant shareholders, India has secured a major expansion of its rights to tax capital gains. Under the revised treaty, India will be able to tax capital gains arising from the sale of shares by French investors, regardless of the size of the shareholding.

Previously, India’s taxing rights on capital gains were limited to cases where a French entity held more than 10% in an Indian company. The removal of this ownership threshold is a significant shift in the balance of taxing rights. Going forward, any gain made by a French investor on the sale of shares in an Indian company — even a very small portfolio holding — will be taxable in India.

Tax experts have noted that this change could have a substantial impact on French portfolio investors, who collectively hold billions in Indian equities. The move aligns with a broader trend in India’s international tax policy, mirroring similar expansions India has pursued in its treaties with Mauritius and Singapore in recent years.

Abheet Sachdeva, Partner for M&A Tax at Nangia Global, said the protocol “serves the twin objectives of resolving treaty-benefit ambiguities and achieving equitable distribution of taxing rights.” He added that the deletion of the MFN clause combined with the capital gains expansion would “protect Indian revenue” while also providing clarity for French FDI.

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The End of the Most-Favoured-Nation Clause

The removal of the MFN clause is arguably the most legally significant feature of the revised treaty, and it has been a long time coming. The MFN clause previously allowed France — and other OECD member countries with similar treaty provisions — to claim lower tax rates from India if New Delhi later granted more favourable terms to another OECD member in a separate bilateral treaty.

This mechanism became deeply contentious in recent years. The Supreme Court of India issued a landmark ruling on October 19, 2023, in the case of Assessing Officer v. Nestle SA, involving the MFN clauses in India’s tax treaties with France, the Netherlands, and Switzerland. The Court ruled against the automatic applicability of such clauses, holding that a separate notification under Section 90(1) of the Income Tax Act is mandatory before MFN benefits can be triggered.

The Court further clarified that for the MFN clause to apply, the third country granting the more favourable treatment must have been an OECD member at the time of signing its tax treaty with India — not merely at some later date when it joined the OECD. This interpretation had the effect of narrowing the range of treaties that could trigger MFN benefits, creating significant uncertainty for French entities that had previously relied on the clause to access lower tax rates.

The confusion generated by this ruling was not unique to France. Switzerland suspended the application of its MFN clause in its tax treaty with India with effect from January 1, 2025. By formally deleting the clause from the France-India treaty, both governments have chosen to eliminate ambiguity entirely and provide legal certainty for taxpayers and administrators alike.

The CBDT confirmed that the amendment “brings to rest all issues” relating to the MFN clause and aligns the bilateral framework with India’s current treaty policy and international tax standards. For French entities that had been claiming reduced rates based on the MFN clause, the removal means those rates are no longer available — though double taxation protections remain in place.

Technical Services, Permanent Establishment, and Information Exchange

The Amending Protocol makes several additional changes beyond dividends and capital gains. For fees for technical services (FTS), the 10% tax rate remains unchanged, but the definition has been narrowed and aligned with the more precise wording used in the India-US Double Taxation Avoidance Agreement. This move aims to bring greater consistency and clarity to how cross-border service payments are classified and taxed.

The revised treaty also introduces a new Service Permanent Establishment (PE) provision. Under this clause, French firms providing services in India beyond agreed thresholds — whether for related or unrelated parties — will trigger a taxable presence in India. This will require French multinationals to carefully track the duration of employee service activities in India to avoid creating an unintended PE and attracting source-country taxation on attributable profits.

Additionally, the protocol updates provisions on Exchange of Information between tax authorities and introduces a new Article on Assistance in Collection of Taxes, consistent with current international standards. These provisions will enhance bilateral cooperation on tax compliance and make it harder for entities to exploit gaps in information-sharing between the two jurisdictions.

Implications for Businesses and Investors

For French multinationals with significant Indian operations — particularly those holding stakes above the 10% threshold — the revised treaty offers a meaningful financial benefit. Companies like Capgemini, which operates one of its largest global delivery bases from India, and Sanofi, which has extensive pharmaceutical manufacturing and R&D operations in the country, stand to save substantially on dividend remittances to their French parent companies.

For minority French portfolio investors, however, the picture is more complex. The increase in dividend tax from 10% to 15% for holdings below the 10% threshold could deter passive investments and prompt a reassessment of portfolio strategies. The expanded capital gains provisions add an additional layer of cost to trading in Indian equities for French investors at all levels of ownership.

Global consultancy KPMG said the revised treaty “realigns the bilateral trade framework with India’s current treaty policy” and international tax standards, and “underscores India’s efforts to safeguard its tax base and promote a stable investment environment.” Meanwhile, the CBDT stated that the protocol is “likely to bring greater tax certainty across all industries” and facilitate greater economic relationships between the two countries in all sectors.

France ranks as the 11th largest source of foreign direct investment into India, according to the Department for Promotion of Industry and Internal Trade (DPIIT), with FDI inflows of approximately $859.24 million in 2024. The revised treaty is intended to reinforce that investment relationship by providing greater legal certainty and a clearer framework for cross-border transactions.

Next Steps: Ratification and Entry into Force

The Amending Protocol will not take immediate effect. Both India and France must complete their respective internal legal and parliamentary processes before the changes become operative. Until ratification is complete, the existing provisions of the 1992 treaty remain in force.

Investors and tax practitioners are being advised to review their cross-border structures and equity-based compensation arrangements in light of the forthcoming changes. The new capital gains provisions in particular may require French entities to reassess the tax cost of potential future share disposals in India. Tax professionals recommend reviewing documentation, gross-up policies, and reporting requirements carefully before the protocol enters into force.

The revised India-France DTAC represents a significant step in the ongoing global realignment of international tax frameworks, reflecting both countries’ commitments to enhanced transparency, equitable distribution of taxing rights, and a more predictable environment for cross-border investment — goals that are closely aligned with the broader standards being advanced by the OECD and the Base Erosion and Profit Shifting (BEPS) framework.

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By: Montel Kamau

Serrari Financial Analyst

25th February, 2026