In February 2026, India's Central Board of Direct Taxes announced that France and India have signed a new protocol to update their 1992 income and capital tax treaty. This is a significant development for businesses and investors operating between the two countries. The changes touch several important areas from how companies are taxed on dividends and capital gains to how the two governments share tax information. Here is a clear breakdown of what is changing and why it matters.
One of the first changes in the protocol is the expansion of what counts as a "permanent establishment" (PE). In simple terms, a PE is a fixed place of business that makes a foreign company subject to tax in another country.
The protocol introduces the concept of a service PE. This means that if a company provides services in India (or France) for a certain period of time, it could be considered to have a taxable presence there even without a physical office. The exact number of days that would trigger this is not yet confirmed, but this change is important for companies that send employees or contractors abroad to provide services.
The current treaty uses a single withholding tax (WHT) rate of 10% on dividends paid from one country to a resident of the other. The new protocol replaces this with a two-tier system:
5% if the recipient holds at least 10% of the capital of the paying company
15% in all other cases
This means smaller shareholders, those holding less than 10%, will now face a higher tax rate on dividends. For French investors with minority stakes in Indian companies, this is a meaningful change that could affect investment decisions.
Under the current treaty, royalties, fees for technical services (FTS), and payments for the use of equipment are subject to a maximum WHT rate of 10%. The protocol does not change this rate, but it does update the definition of FTS.
The new definition aligns with the one used in the India-US tax treaty. Under that definition, fees for technical services are payments made for services that either support the use of technology or intellectual property already covered by the agreement, or that actually transfer technical knowledge, skills, or processes to the recipient. This narrower and more precise definition could affect whether certain payments qualify as FTS at all, which has direct tax consequences for both payers and recipients.
This is one of the most significant changes in the protocol. Under the current treaty, India can only tax capital gains from the sale of shares in an Indian company if the seller holds at least 10% of that company's shares.
The protocol removes this 10% threshold entirely. Going forward, India will have the right to tax capital gains from the sale of shares in an Indian company regardless of the size of the shareholding. This gives India much broader taxing rights and could affect French investors who hold smaller stakes in Indian businesses. It also has potential implications for indirect transfers, for example, when shares of a foreign holding company are sold, but the value comes mainly from Indian assets.
The 1992 protocol included a Most Favoured Nation (MFN) clause. In practice, this meant that if India agreed to lower tax rates with another OECD country, those same lower rates would also apply under the France-India treaty automatically.
The new protocol deletes this clause. This is a notable shift. It means the tax treatment between France and India will now depend solely on what was agreed directly between the two countries. Benefits negotiated with Germany or the United States, for example, will no longer automatically flow through to the France-India treaty.
The protocol also brings the treaty in line with the OECD/G20 Base Erosion and Profit Shifting (BEPS) framework, which both France and India have already signed up to. This includes provisions such as the principal purpose test, which allows tax authorities to deny treaty benefits if one of the main reasons for a transaction was to obtain those benefits. The goal is to prevent treaty shopping and other forms of tax avoidance.
The protocol will come into effect only after both France and India complete their internal ratification processes. In India, it must be officially published in the government gazette before it takes legal effect.
For businesses and investors with cross-border interests between France and India, now is a good time to review existing structures and assess how these changes might affect tax positions going forward.
Thinking about how these changes affect your investments? We're offering a free initial consultation to help you navigate the new rules.
