Recently, India and France have signed an updated tax treaty, which includes reduced dividend levies for large French investors and removal of the most favoured nation (MFN) clause, which allowed French entities to claim a lower tax rate in India. This development comes during French President Emmanuel Macron’s recent visit to New Delhi, where he attended the AI Impact Summit. The changes could benefit major companies such as Renault, Sanofi and L’Oreal. This treaty will come into effect soon after completing formalities and legal approvals in both countries. The bilateral trade between India and France stood at $15bn last year.
What does the agreement talk about?
India and France signed a Double Taxation Avoidance Convention (DTAC) in 1992. A DTAC is a treaty that ensures that any individual or a company do not pay tax twice in two countries on the same income. For example: An Indian company provides IT services in France and earns ₹1 crore. So, tax paid in France: ₹15 lakh tax payable in India: ₹25 lakh After DTAC is applied, a credit of 15 lakh is allowed in India. Tax payable in India: ₹25L-₹15L = ₹10 lakh. Total tax paid: 25 lakh (instead of 40 lakh)
What is the MFN clause?
The most favoured nation (MFN) clause meant that if India gave better tax benefits to another country in a future treaty, the same benefit can be claimed by France automatically. The clause is now removed, which brings in clarity and ends long-running disputes between the two nations. Now onwards, France cannot claim better terms from India’s deal with other nations. The updated treaty gives full taxing rights on capital gains from share sales to the country where the company is based. This rule determines, which country can tax such income. This treaty underscores India’s efforts to safeguard its tax base and modernise the tax agreement.
