India-France Double Taxation Avoidance Agreement (DTAA) Amendment, 2026

Q1. What is Double Taxation Avoidance Agreement (DTAA)?

1. A Double Taxation Avoidance Agreement (DTAA) is an agreement between two countries to avoid taxing the same income twice.
2. Problem of Double Taxation: For example: If a resident of India earns income in the United States, the US taxes it as the source country while India taxes it again as the resident country. Thus, the same income gets taxed twice.
3. Purpose of DTAA: DTAA is signed between countries to ensure the income is taxed only once, or a specific sharing arrangement of tax is decided between the countries.
4. This prevents double tax burden on individuals and companies.

Q2. What is Treaty Shopping and why is it considered problematic?

1. Different countries have different tax rates. For example: Some countries have high tax rates (30-40%). Some countries have very low tax rates or zero tax, which are often called tax havens.
2. Sometimes companies misuse tax treaties through a practice called Treaty Shopping.
3. Treaty shopping occurs when a company earns profits in one country, but artificially shifts the profits to another country with lower taxes.
4. Example: A company earns profits in India, where tax rates are higher. But it shows those profits in a country like Mauritius, where taxes are lower. This is done only to obtain tax benefits, even though real business activity is not conducted there.
5. Problem: Such practices reduce tax revenue for the country where income is actually generated. Ideally, tax should be paid in the country where the income is generated.

Q3. What is the Principal Purpose Test (PPT) and Base Erosion and Profit Shifting (BEPS)?

1. Principal Purpose Test (PPT): It examines the main purpose of a transaction or arrangement. It checks whether the main objective was genuine business activity, or whether the main purpose was only to save taxes. If it is found that the primary purpose was tax avoidance, action can be taken against the entity.
2. Base Erosion and Profit Shifting (BEPS): The concept was introduced globally to address tax avoidance. It refers to a situation where companies shift profits from high-tax countries to low-tax countries. This reduces the taxable income (tax base) in the high-tax country. Thus, companies artificially reduce tax liabilities which BEPS aims to prevent.
3. In 2017, the Multi-Lateral Instrument (MLI) was introduced under the BEPS framework. If countries ratify the MLI, their bilateral tax treaties are automatically modified in line with BEPS provisions to prevent treaty abuse such as profit shifting and treaty shopping.

Q4. What is the background of the India-France DTAA and the MFN issue?

1. India and France signed the India-France Double Taxation Avoidance Agreement in 1992.
2. The agreement also included the Most Favoured Nation Clause (MFN).
3. MFN Concept: MFN can be understood as a “best friend discount.” If India gives a lower tax rate to another country in a later treaty, then France can claim same lower rate under MFN clause.
4. Issue: Later, India signed tax treaties with other countries and gave lower tax rates. France argued that because it has MFN status, the same reduced tax rate should automatically apply to France as well. This led to repeated disputes and litigation involving French companies in India.
5. Supreme Court Judgement (2023): In the Nestlé case, the Supreme Court of India held that MFN benefits are not automatic. MFN will apply only if the Government of India issues a specific notification for that country.

Q5. What are the 6 major changes introduced in the India-France DTAA Amendments 2026?

2026 Development: In 2026, India and France signed an amendment protocol to the DTAA. It will become effective after ratification by the parliaments of both countries.

1. Capital Gain Tax:

1. Most Favoured Nation Clause (MFN):

1. Dividend Tax:

1. Fee on Technical Service (FTS) and Permanent Establishment (PE)
   1. Fees for Technical Services (FTS) refers to payments for managerial, technical, or consultancy services provided by a company from one country to another.
   2. Permanent Establishment (PE) refers to a physical or business presence of a foreign company in another country, such as an office, through which it earns income.
   3. Meaning of “Make Available”: If France provides a service to India, the technical knowledge or skill should remain with India. India should be able to use that knowledge independently in the future, without needing to call France again for the same service.

1. BEPS and MLI:
   1. The concepts have now been explicitly incorporated into the India-France DTAA
   2. These provisions aim to prevent tax avoidance practices such as profit shifting and treaty shopping.
   3. Business arrangements between India and France should be based on genuine economic activity, not primarily for saving taxes.
2. The amendment provides for seamless and continuous exchange of information between India and France.

Q6. What are the overall benefits of the 2026 amendment to the India-France DTAA?

1. Increase in Source-Based Taxation: The country where the income is generated (source country) will have stronger taxing rights.
2. Prevention of Profit Shifting: With the explicit inclusion of Base Erosion and Profit Shifting (BEPS) provisions, companies will find it difficult to shift profits to tax havens just to reduce tax liability.
3. Reduction in Tax Uncertainty: Earlier, the Most Favoured Nation Clause (MFN) created confusion and uncertainty in tax interpretation. After its removal, greater clarity and certainty in taxation rules will emerge.
4. Increase in Investment and Technology Transfer: Clearer taxation rules and stronger permanent establishment provisions may encourage greater investment between India and France. This may also lead to higher technology transfer and economic cooperation.
5. Reduction in Litigation: With clearer treaty provisions and removal of MFN-related disputes, tax-related litigation between companies and governments is likely to decrease.