India-France Tax Treaty Update Favors Long-Term Investors, Expands Capital Gains Rights

India and France have reached an agreement to modernize their bilateral tax treaty, as per reports published on December 15, 2025. The revised framework seeks to rebalance taxing rights while providing greater clarity and certainty for cross-border investors.

India and France have agreed to update their 1994 double taxation treaty, a move that will reduce the tax burden on dividends paid by Indian subsidiaries to their French parent companies. In parallel, India will gain expanded authority to tax capital gains arising from share disposals by French investors and will withdraw France’s “most favored nation” status, which previously enabled it to access certain preferential tax treatments.

Discussions to overhaul the tax treaty have been underway since 2024, with the objective of aligning it more closely with contemporary international standards on tax transparency and certainty.

The revised treaty is likely to have important implications for major French portfolio investors, as well as for multinational groups such as Capgemini, Accor, Sanofi, Pernod Ricard, Danone, and L’Oréal, all of which have been expanding their footprint in the Indian market in recent years.

Dividend taxation: Reduced rates for majority holdings

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A central feature of the India-France renegotiated treaty, originally signed in 1992, is the restructuring of dividend withholding tax. Under the revised terms, French companies that hold a stake of more than 10 percent in any Indian entity will have to pay five percent of dividends they receive, a reduction from the earlier rate of 10 percent. 

However, for minority French shareholdings of under 10 percent in Indian companies, dividend tax will rise from 10 percent to 15 percent. The new treaty rules favor strategic, long-term investors over short-term or passive investments.

Expanded capital gains tax rights for India

In exchange for the dividend tax relief, India has secured broader rights to tax capital gains arising from the sale of shares by French investors. The revised treaty removes the existing ownership threshold that limited India’s taxing rights to cases where French entities held more than 10 percent in an Indian company. Going forward, India will be able to tax capital gains on equity share transfers irrespective of the size of the shareholding.

This development is particularly important given the scale of French investment in India. According to the Department for Promotion of Industry and Internal Trade (DPIIT), France ranked as the 11th largest source of foreign direct investment into India in 2024, with inflows of approximately US$859.24 million.

In parallel, France-based foreign portfolio investors hold an estimated US$21 billion in Indian equities. Against this backdrop, the revised treaty provisions are expected to have a meaningful impact on both portfolio investors and French companies with minority shareholdings in Indian businesses.

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Services taxation: Narrower scope for technical fees

The updated treaty also revises the treatment of fees for technical services. India has agreed to restrict taxation of such fees to cases involving the transfer of technical know-how. As a result, routine technical services such as consultancy, advisory support, cybersecurity services, and market research are expected to fall outside the scope of source-based taxation. This change is likely to benefit French service providers operating in India.

Removal of the Most Favored Nation (MFN) clause

A major driver of the renegotiation was disagreement over the interpretation of the “most favored nation” (MFN) clause. Historically, the clause allowed France to claim more favorable tax treatment if India subsequently entered into treaties with other Organisation for Economic Co-operation and Development (OECD) countries offering lower rates. However, a Supreme Court of India ruling in 2023 clarified that such benefits do not apply automatically, leading to heightened uncertainty for French companies.

To eliminate ambiguity and reduce litigation risk, India and France have agreed to remove the MFN clause from the treaty altogether. Indian authorities view this step as essential to restoring legal clarity and avoiding prolonged tax disputes. Similar concerns prompted Switzerland to suspend the application of the MFN clause in its own tax treaty with India on January 1, 2025.

Dividend taxation under the India-France DTAA

Taxing rights on dividends

Under Article 11 of the India-France Double Taxation Avoidance Agreement (DTAA), dividends paid by a company resident in one country (India or France) to a resident of the other country may be taxed in both jurisdictions:

• In the investor’s country of residence, and
• In the country where the company paying the dividend is resident (source country).

To prevent excessive taxation, the treaty places a cap on the tax that may be levied by the source country.

Withholding tax cap at source

Where the dividend recipient is the beneficial owner, the source country may impose withholding tax, but such tax cannot exceed 10 percent of the gross dividend amount, in accordance with treaty provisions.

Scope of “dividends”

For treaty purposes, dividends are defined broadly and include:

• Income derived from shares, and
• Other forms of corporate income treated as dividends under the tax laws of the source country,
  
  excluding interest income.

Outlook

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The revised India-France treaty is expected to enhance predictability for investors, facilitate greater flows of capital, and support long-term commercial cooperation. The proposed amending protocol is also likely to encourage greater technology transfer and mobility of skilled professionals.

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