CMS Indus Law

Mr. Lokesh Shah, Tax Partner, CMS INDUSLAW & Ms. Agnès de l’Estoile Campi, Co-head, CMS Tax Practice, France, Ms. Namrata Rawat, Tax Associate - India, CMS INDUSLAW

India-France relationship: Strategic Tax Realignment

The French premier, Emmanuel Macron’s recent visit to India elevated the nations’ bilateral relationship with France to a Special Global Strategic Partnership.1 This visit was accompanied by a joint launch of the 2026 India-France Year of Innovation aimed at promoting high-impact partnerships in areas such as artificial intelligence, digital and cyber space, energy transition, economy and people exchanges. With the bilateral trade reaching €17 billion in 2024 and more than 700 French companies supporting over 450,000 jobs in India,2 the two countries signed an Amending Protocol3 to the bilateral tax treaty on 18 February 2026 to further boost the economic ties and provide greater certainty to cross-border investments. The Amending Protocol has been published in French4 and the following are some of the noteworthy changes for French companies investing in India.

One of the key commercial linchpins of investment in India is repatriating dividend back to the home country in a tax efficient manner. Current India-France tax treaty taxes such dividend in the hands of the French shareholder at the rate of 10% on the gross amount. In a significant move, the Amending Protocol reduces the tax rate on dividend income to 5% where the shareholder holds at least 10% in the capital of company paying dividend. Such shareholding must be held for a continuous period of 365 days (including the payment day). In other cases, the rate of tax is increased to 15%. For long-term shareholder with more than 10% shareholding, this halves the tax liability on dividend income.

India’s industrial base is deepening through programs like semiconductor fabs, EV manufacturing, and defence indigenisation. However, with France’s immense strengths in technical and engineering capabilities in aerospace, nuclear energy, rail, etc., India will continue to import technical and engineering capabilities from France. To minimise tax outgo on such technical services, the Amending Protocol now proposes to narrow the definition of technical services that can be taxed at source such that payment for such services will be taxable in India only if the service will “make available” technical knowledge / skills. The amendment will align the tax for payment of technical services similar to India’s tax treaties with USA, Singapore, Netherlands, to name a few.

Permanent establishment (“PE”) is crucial concept in international tax which determines whether a foreign company creates a taxable presence in the other country. Current India-France tax treaty recognises three categories of PE: Fixed Place PE, Agency PE and Construction PE. The Amending Protocol proposes to introduce another category of PE: Service PE. In other words, if a French company sends its employees or other personnel in India to provide services for a period totalling more than 183 days in any 12-month period, such presence will create a taxable presence for the French company in India, by way of a Service PE. Profits attributable to such Service PE will be taxable in India at the applicable corporate tax rate. Interestingly, the threshold period is reduced to mere 60 days where services are provided to a related enterprise. French companies undertaking onsite work in India will need to carefully evaluate this amendment.

The Amending Protocol further seeks to withdraw the capital gains tax benefit that were generally available to minority / portfolio investors investing in India from France. Under the existing treaty, only French companies owning more than 10% of the share capital of an Indian company were subject to capital gains tax in India, effectively exempting investors, such as foreign portfolio investors, holding smaller stakes. The Amending Protocol seeks to eliminate this advantage by aligning the tax treatment with the underlying principle that India adopted across most of its tax treaties - to tax capital gains from sale of shares as taxable in India, regardless of the extent of the shareholding.

Lastly, the Amending Protocol proposes to remove the Most-Favoured-Nation (MFN) clause, which was subject to protracted litigation with Indian tax authorities. Along-side, the Amending Protocol introduces global standards on assistance in collection of taxes and enables tax authorities of both countries to share information harmoniously to increase transparency and enforcement.

The Amending Protocol is yet to be ratified and notified by both the governments. While the amendments may introduce a short-term risk of reduced portfolio investments in India from French investors, it does encourage long-term capital with reduced tax rate on dividend income, and narrower clause to tax payment for technical services. French businesses will need to adapt to these changes, strengthen their structures and compliance frameworks, to avail the benefits of this growing partnership.

Once effective, these amendments are expected to strengthen the India–France economic relationship, particularly in the context of ongoing geopolitical uncertainty.

Source:

1. India-France Joint Statement, Ministry of External Affairs, Government of India (17 February 2026) https://www.mea.gov.in/bilateral-documents.htm?dtl/40783/India__France_Joint_Statement_February_17_2026.
2. India France Economic Report 2026, IFCCI, https://www.calameo.com/read/00460114940b28f15a7df.
3. Press Information Bureau, Ministry of Finance, ‘India and France sign Amending Protocol to update Double Taxation Avoidance Convention (DTAC)’ (23 February 2026, 05:02 PM) https://www.pib.gov.in/PressReleasePage.aspx?PRID=2231751&reg=3&lang=1.
4. Direction générale des Finances publiques, Avenant à la convention avec l'Inde signé le 18/02/2026 - Non entré en vigueur, https://www.impots.gouv.fr/sites/default/files/media/10_conventions/inde/avenant-convention-inde-18-02-2026.pdf.