India and France have agreed to update their three-decade-old tax treaty, a move that will lower the tax French companies pay on dividends from their Indian units while giving New Delhi broader powers to tax capital gains made by French investors, according to government documents reviewed by Reuters.
Lower Dividend Tax for French Companies
Under the revised treaty, French companies that own more than 10% in an Indian firm will see their dividend tax cut from 10% to 5%.
This will benefit large French multinationals with significant India operations, including Capgemini, Accor, Sanofi, Pernod Ricard, Danone, and L’Oréal.
However, dividend tax for smaller French shareholders—those holding under 10% stakes—will rise from 10% to 15%.
Several French companies have received large dividends from their Indian units in recent years. Capgemini’s Indian arm, for example, declared a dividend of about $500 million in 2023–24.
India to Gain Wider Taxing Powers
A major change in the new treaty is the removal of the rule that restricted India from taxing share sales by French investors unless they held more than 10% of a company.
Now, India will have full rights to tax capital gains on all equity sales by French investors, regardless of their stake size.
This is significant because French portfolio investors currently own about $21 billion worth of Indian shares, one-third higher than the year before. More than 40 French companies hold minority stakes under 10%, which were previously not taxed.
Changes in Service Taxation
France has secured relief on the tax India imposes on fees for technical or professional services.
Going forward, India will tax such services only when French companies transfer technical know-how, reducing the burden on firms providing routine services such as cybersecurity, research, market studies, or design consultancy.
End of “Most Favored Nation” Clause
The two governments also agreed to remove the Most Favored Nation (MFN) clause, which previously gave France certain tax advantages if India offered better terms to other OECD countries.
A 2023 Supreme Court ruling in India created uncertainty over when and how MFN benefits could apply, alarming French companies that feared additional tax costs. Removing the clause is intended to end ongoing disputes and prevent future litigation.
Treaty Nearing Final Approval
Officials from both sides have already agreed on the terms. The treaty is now awaiting approval from the Indian cabinet, and is expected to be signed in the coming weeks.
The update reflects strengthening economic ties between the two nations. Bilateral trade stood at $15 billion last year, and France has become an important investor in India’s technology, pharmaceuticals, hospitality, and energy sectors.
