New Delhi, February 23 India and France have amended the double taxation avoidance agreement, which will provide for the taxation of capital gains based on the company's residency and delete the Most-Favored-Nation (MFN) clause, bringing certainty in taxation.
The amending protocol also modifies the taxation of income from dividends by replacing a single rate of 10 per cent tax with a split rate of 5 per cent for those holding at least 10 per cent of capital and 15 per cent tax for all other cases.
It also modifies the definition of 'Fees for Technical Services' by aligning it with the definition in the 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 French 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 also updates the provisions on the exchange of information and introduces a new Article on assistance in the collection of taxes, in accordance with 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 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 also deletes the so-called Most-Favored-Nation (MFN) Clause from the DTAC protocol, thereby resolving all issues related to it, the CBDT added.
The amending protocol also incorporates within the DTAC, the applicable provisions of the BEPS Multilateral Instrument (MLI), which had already become applicable consequent to the signing and ratification of MLI by India and France.
The changes introduced through the amending protocol shall come into effect after 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," the CBDT said.
It will provide greater tax certainty to taxpayers and boost the flow of investment, technology, and personnel between India and France, thereby strengthening the economic relationship between the two countries, the CBDT added.
Nangia Global, Partner - M&A Tax, Abheet Sachdeva said that the amendment serves a dual purpose of addressing ambiguity in the provision of treaty benefits as well as equitable distribution of taxation rights.
According to the current version of the DTAC, dividends emanating from India are subject to 10 per cent TDS, and this tax outflow could be reduced with the application of the MFN clause.
However, the application and availability of MFN benefits have been a subject of debate, with the Indian Supreme Court ruling that for the application of MFN under a tax treaty, a separate specific notification should be issued by the Government of India.
"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 repatriate higher net-India tax profits back to their home country," Sachdeva said.
The protocol also intends to vest the capital gains taxing rights with the source state, irrespective of the shareholding threshold. From the Indian perspective, this secures capital gains tax revenue for the Union treasury, however, this may act as a deterrent for French FPI investors, he added.
