India, France amend DTAC; capital gains to be taxed on basis of residency of company

India and France have amended the double taxation avoidance agreement which will provide for taxation of capital gains on the basis of residency of the company and deleted the Most-Favoured-Nation (MFN) clause bringing in certainty in taxation.

The amending protocol also modifies the taxation of income from dividends by replacing a single rate of 10% of tax with a split rate of 5% for those holding at least 10% of capital and 15% of tax for all other cases.

It also modifies the definition of ‘Fees for Technical Services’ by aligning it with the definition in India U.S. 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 France 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 exchange of information and introduces a new Article on assistance in collection of taxes, as per 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 sale of shares of a company, to the jurisdiction where such company is a resident. It also deletes the so-called Most-Favoured-Nation (MFN) Clause from the protocol to the DTAC, thereby bringing to rest all issues relating to it, the CBDT added.

The amending protocol also incorporates within the DTAC, the applicable provisions of BEPS Multilateral Instrument (MLI), that had already become applicable consequent to the signing and ratification of MLI by India and France.

The changes introduced through the amending protocol shall enter into effect subsequent to 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 the taxpayers and boost flow of investment, technology and personnel between India and France, and thereby strengthen the economic relationship between the two countries, the CBDT added.

Nangia Global, partner- M&A tax, Abheet Sachdeva said the amendment serves a twin-fold purpose of addressing ambiguity in provision of treaty benefits as well as equitable distribution of taxation rights.

As per the current version of the DTAC, dividends emanating from India are subject to 10% TDS, this tax outflow could be reduced with application of MFN clause.

However, application and availability of MFN benefits have been a subject matter of debate, with Indian Supreme Court ruling that for application of MFN under a tax treaty, a separate specific notification should be issued by 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 upstream higher net-India tax profits back to home country,” Mr. Sachdeva said.

The protocol also intends to vest the capital gains taxing rights with the source state, irrespective of the shareholding threshold. From India standpoint, this secures capital gains tax revenue for Union treasury, however, this may act as a deterrent for French FPI investors, he added.