Double Taxation Avoidance Convention (DTAC)
Why in news?
In February 2026, India and France signed an Amending Protocol to update their 1992 Double Taxation Avoidance Convention (DTAC).
Key Amendments in the 2026 Protocol
- Capital Gains Taxation:
Full taxing rights on capital gains from the sale of shares are now granted to the country where the company is resident.
- Dividend Taxation:
The earlier flat 10% withholding tax has been replaced with a split rate:
- 5% for shareholders holding at least 10% of the capital.
- 15% for all other shareholders.
- Removal of MFN Clause:
The “Most-Favoured-Nation” clause has been deleted to simplify treaty application and reduce disputes.
- Permanent Establishment (PE):
Expanded to include Service PE, strengthening India’s taxing rights on foreign service providers.
- Fees for Technical Services (FTS):
Definition aligned with the India–US DTAA, ensuring consistency with international standards.
- Other Refinements:
Adjustments to exemptions on interest income for certain French entities, while royalties taxation remains unchanged.
Importance
| Area |
Impact |
| Capital Gains |
Prevents treaty shopping, ensures source-based taxation |
| Dividends |
More equitable taxation, encourages long-term investors |
| MFN Clause Removal |
Reduces litigation and ambiguity |
| Service PE |
Expands India’s tax base for cross-border services |
| FTS Alignment |
Harmonizes with global practices |
Key Features of DTAC
- Avoids Double Taxation: Ensures that income earned in one country is not taxed again in the taxpayer’s home country.
- Taxing Rights Allocation: Defines which country has the right to tax specific types of income (e.g., dividends, royalties, capital gains).
- Promotes Investment: By reducing tax uncertainty, DTAC encourages foreign direct investment and smoother economic cooperation.
- Information Exchange: Provides mechanisms for tax authorities to share information, reducing tax evasion
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