India Drops Most Favoured Nation Status in France In Tax Pact

India has removed the Most Favoured Nation (MFN) clause from its tax treaty with France. The updated India-France tax treaty was signed during French President Emmanuel Macron’s recent visit. The move changes dividend tax rules, capital gains taxation and adds global anti-tax avoidance standards. The MFN clause removal ends automatic tax benefits that France could claim from India’s other treaties. This decision aims to reduce disputes and bring clarity in cross-border taxation between India and France.

About the India-France Tax Treaty and MFN Clause?

The India-France tax treaty, officially known as the Double Taxation Avoidance Convention (DTAC), was signed in 1992.

Its goal is to prevent double taxation on the same income.

What the MFN Clause Did,

• If India offered lower tax rates to another country later
• France could automatically demand the same benefit
• It ensured equal treatment without fresh negotiations

Now, with the MFN clause removal, France can only claim benefits clearly written in the India-France tax treaty.

Why India Removed the MFN Clause from the Tax Treaty

The MFN clause removal was done to,

• Reduce long-running tax disputes
• Avoid automatic application of future treaty benefits
• Bring legal clarity in tax matters
• Protect India’s taxation rights

India wants treaty benefits to apply only after clear negotiation and written inclusion. The MFN clause removal makes the India-France tax treaty more precise and less open to interpretation.

Capital Gains Rules After MFN Clause Removal

The updated India-France tax treaty clearly defines capital gains taxation.

New Rule: Capital gains from share sales will be taxed in the country where the company is located.

Example

• If a French investor sells shares of an Indian company, India will now have full rights to tax that gain.
• This removes confusion that existed earlier under the MFN clause framework.

New BEPS Rules Added After MFN Clause Removal

The updated India-France tax treaty now includes global anti-tax avoidance provisions under BEPS (Base Erosion and Profit Shifting).

Key Additions,

• Prevention of profit shifting
• Stronger permanent establishment rules
• Clear definition of fees for technical services
• Better exchange of tax information

The MFN clause removal combined with BEPS provisions strengthens transparency and reduces treaty misuse.

When Will the Updated India-France Tax Treaty Apply?

The revised India-France tax treaty will come into effect after,

• Both India and France complete their internal legal approval processes.
• Only after ratification will the MFN clause removal and new tax rules become operational.

Question

Q. What was the main function of the MFN clause in the India-France tax treaty?

A) Fix capital gains tax permanently
B) Allow automatic benefit of better tax rates given to other countries
C) Remove dividend tax
D) Eliminate double taxation completely