The Double Taxation Avoidance Agreement (DTAA) is an agreement between two countries that aims to eliminate the double taxation of income earned by individuals or entities in both countries. The DTAA provides a mechanism for foreign investors to avoid being taxed twice on the same income. It allows foreign investors to claim tax relief in their home country for the tax paid in India. The DTAA also helps to prevent tax evasion and promote transparency in tax matters.
The DTAA came into force on 1 August 1994. It has been revised several times since then. The DTAA ensures that taxpayers who are residents of one country but earn income from the other country are not taxed twice on the same income. The agreement covers taxes on income and wealth and applies to residents of both countries.
Scope of India France DTAA
Foreign investors in India can be categorized into different groups based on their investment objectives, the nature of their investment, and the regulatory requirements they need to comply with. Here are some of the categories of foreign investors in India:
The DTAA provides clarity on the tax treatment of residents and non-residents in both countries. It ensures that individuals and businesses are not taxed twice on the same income.
The agreement provides guidelines for the taxation of business profits earned by companies in either country. It ensures that companies are taxed fairly based on their activities in each country.
- Dividends, Interest and Royalties
The DTAA provides rules for the taxation of dividends, interest, and royalties received by residents of either country. It ensures that these payments are taxed at a reasonable rate and not subject to double taxation.
The agreement provides for the taxation of capital gains arising from the sale of assets, such as shares, real estate, and other investments. It ensures that residents are taxed fairly and not subject to double taxation.
The agreement provides for the exchange of information between the tax authorities of both countries to prevent tax evasion and ensure compliance with tax laws.
Permanent Establishment
As per
Article 5 of India-France DTAA, a Permanent Establishment means a fixed place of business through which an enterprise of one country carries on its business activities in the other country. It includes the following:
(i) A place of management.
(ii) A branch.
(iii) An office.
(iv) A factory.
(v) A workshop.
(vi) A mine, an oil or gas well, a quarry, or any other place of extraction of natural resources.
(vii) A warehouse in relation to a person providing storage facilities for others.
(viii) A premise used as a sales outlet.
(ix) An installation or structure used for the exploration of natural resources provided that the activities continue
for more than 183 days.(x) A building site or construction, installation or assembly project constitutes a permanent establishment only if it
lasts for more than six months.(xi) An enterprise of France shall not be deemed to have a permanent establishment in India merely because it carries on business in India through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise, they will not be considered an agent of an independent status within the meaning of this paragraph if it is shown that the transactions between the agent and the enterprise were not made under at arm's length conditions.
(xii) Person other than an agent of an independent status to whom paragraph (xi) above applies, acting in India on behalf of an enterprise of France as shall be deemed to be a permanent establishment of that enterprise in India if (& vice versa):
(a) They have and habitually exercise in India an authority to conclude contracts on behalf of the enterprise, unless their activities are limited the below mentioned activities that don’t constitute PE in India, or
(b) They have no such authority, but habitually maintain in India a stock of goods or merchandise from which they regularly deliver goods or merchandise on behalf of the enterprise.
| Note: However, the mere presence of a company's goods or merchandise in the other country does not, by itself, constitute a Permanent Establishment (PE). |
The DTAA also considers certain activities as not constituting a PE, such as:
A. The use of facilities solely for the purpose of storage or display of goods or merchandise belonging to the enterprise.
B. The maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage or display.
C. The maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise.
D. The maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or of collecting information, for the enterprise.
E. The maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information, for scientific research, or for other activities which have a preparatory or auxiliary character, for the enterprise.
F. The maintenance of a fixed place of business solely for any combination of activities mentioned in sub-paragraphs (a) to (e), provided that the overall activity of the fixed place of business resulting from this combination is of preparatory or auxiliary character.
In case an enterprise has a Permanent Establishment in both India and France, the business profits will be taxed in both countries, but the DTAA provides relief from double taxation by allowing the taxpayer to claim a credit for the taxes paid in one country against the taxes payable in the other country.
Overall, the definition of Permanent Establishment under the India-France DTAA plays a crucial role in determining the tax liability of foreign enterprises doing business in India or France.
A summary of structure of entities covered in Permanent Establishment is as follows:
| Particulars |
India Definition |
France Definition |
India-France DTAA Definition |
| Brief meaning |
- Any fixed place of business serving the activities of an enterprise.
- Any entity engaged in any activity, relating to the production, storage, supply or distribution.
- Wider definition than Tax treaty. |
- Any fixed place of business serving the activities of an enterprise.
- Entity perform clearly differentiated activities and the management of these is carried out in France.
- Wider definition than Tax treaty. |
- Any fixed place of business through which the business of an enterprise is wholly or partly carried on.
- Narrower definition than respective taxation. |
| Examples |
| Place of Management |
Yes |
Yes |
Yes |
| Branch or office |
Yes |
Yes |
Yes |
| Factory or workshop |
Yes |
Yes |
Yes |
| Fixed place solely for the purpose of purchasing goods or merchandise |
Yes |
Yes |
No |
| Fixed place solely for the purpose of maintenance of a stock of goods |
Yes |
Yes |
No |
| Building site or construction |
Yes (if Duration > 6 Months) |
Yes (if Duration > 12 Months) |
Yes (if Duration > 6 Months) |
Withholding Tax as per Indian Tax Laws
A brief summary of withholding tax rates is as follows:
| Nature of Income |
Indian Income Tax Act |
India-France DTAA* |
| Dividend |
20% |
10% |
| Interest |
20% |
10% |
| Royalty |
20% |
10% |
| Fee for Technical Services |
20% |
10% |
*The rates as per Income Tax Act shall be increased by applicable surcharge (2%/5% - for companies and 10%/15%/25%/37% - for individuals) and cess (4%).
- Taxability of dividend is on gross basis and the amount of tax is deducted by the source country.
- Interest is also taxable on a gross basis and the tax is withheld by the source country.
Benefits and Rates of Tax as per DTAA
Dividends in
Article 11 refer to income from shares or other rights, not being debt-claims participating in profits, as well as income from other corporate rights treated in the same manner as income from shares by the taxation laws of the country of which the company making the distribution is a resident and any other item (other than interest which falls within the provisions of Article 12) treated as a dividend or distribution under that law.
Such dividends earned in India by a resident of France are taxable in India at a rate of
10% of the gross amount of the dividends.
As per
Article 12, the term “Interest” in this Article refers to income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor's profits, and in particular, income from Government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures. Penalty charges for late payment shall not be regarded as interest for the purpose of this article. Such interests earned in India by a resident of France are taxable in India at a rate of
10% of the gross amount of the interest.
The interest income arising in India shall
not be taxable in India (& vice versa) if:
- The interest is derived and beneficially owned by the Government of France, a political subdivision or local authority thereof, or the central bank of France or India any financial institution wholly owned by the Government of France or India; or
- The interest is derived and beneficially owned by a resident of France with respect to debt-claims guaranteed, insured or indirectly financed by the Government of France, a political subdivision or local authority thereof, or the central bank of France or any financial institution wholly owned by the France Government.
| The above rates & taxability are not applicable if such incomes are earned through a Permanent Establishment (PE) situated therein. Then the PE shall be taxed as per rates of Income Tax Act (i.e., 40%). |
Royalty
As per
Article 13 term "royalties" means – payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience.
- Such royalties earned in India by a resident of France are taxable at a rate of 10% of the gross amount of the royalties.
- However, if such services are provided through a permanent establishment (PE), then the PE shall be taxed as per rates of income tax act (i.e., 40%).
Fees for Technical Services
The term fees for technical services means – payments of any kind to any person, other than payments to an employee of the person making the payments and to any individual for independent personal services mentioned in Article 15, in consideration for services of a managerial, technical or consultancy nature.
The fees for technical service earned in India by a resident of France are taxable at a rate of
10% of the gross amount of Fees for Technical services.
If such services are provided through a permanent establishment (PE), then the PE shall be taxed as per rates of income tax act
(i.e., 40%).
Independent Personal Services
As per
Article 15, the term "professional services” includes independent scientific, literary, artistic, educational or teaching activities, as well as the independent activities of physicians, surgeons, lawyers, engineers, architects, dentists and accountants. Income derived by a resident of France and who earns income from the performance of professional services or other independent activities of a similar character shall be taxable in India only if any of the following conditions is satisfied:
- If they have a fixed base regularly available to them in India for the purpose of performing their activities,
- If their stay in India is for a period or periods amounting to or exceeding in the aggregate 183 days in the relevant fiscal year, or
- If they have such a fixed base or remain in India for the aforesaid period or periods, the income may be taxed in India but only so much of it as is attributable to that fixed base or is derived in India during the aforesaid period or periods.
Dependent Personal Services
As per
Article 16, salaries, wages and other similar remuneration derived by a resident of a France in respect of an employment shall be taxable in India only if the employment is exercised in India and such income shall be taxable at the rates in force. Such salary can be taxed in France only after fulfilment of the following conditions:
- The recipient is present in India for a period or periods not exceeding in the aggregate 183 days in the fiscal year concerned,
- The remuneration is paid by, or on behalf of, an employer who is not a resident of India, and
- The remuneration is not borne by a permanent establishment or a fixed base which the employer has in India.
However, remuneration in respect of an employment exercised aboard a ship or aircraft operated in international traffic by a resident of France may be taxed in France (and vice-versa).
Tax on Capital Gains: Article 14
Gains derived by a resident of France from the alienation of immovable property situated in India may be taxed in India.
Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a France has in India or of movable property pertaining to a fixed base available to a resident of France in India or the purpose of performing independent personal services, including such gains from the alienation of such a permanent establishment, such gains shall be taxable in India.
Gains from the alienation of shares of a company the property of which consists, directly or indirectly, principally of immovable property situated in India will be taxed in India and vice versa.
Gains for the alienation of shares of a company forming part of a participation of at least
10% in a company which is a resident of India will be taxed in India and vice versa.
Comparison with Other Tax Treaties
| Treaty Partner |
Dividends |
Interest |
Royalties |
Fee for Technical Services |
Capital Gain on Shares held in India |
| Canada |
15% / 25% |
15% |
10%/15% |
10%/15% |
Capital gain arises in both India and Canada |
| France |
10% |
10% |
10% |
10% |
Capital gain arises in India if more than 10% shares are held |
| Spain |
15% |
15% |
10%/20% |
20% |
Capital gain arises in India if more than 10% shares are held |
| Australia |
15% |
15% |
10%/15% |
Not Covered under DTAA |
Capital gain arises in India |
| USA |
15% / 25% |
10%/15% |
10%/15% |
Not Covered under DTAA |
Capital gain arises as per Indian/USA Income tax Act |
| Germany |
10% |
10% |
10% |
10% |
Capital gain arises in India |
| Netherlands |
10% |
10% |
10% |
10% |
Capital gain arises in India if more than 25% shares are held |
| Japan |
10% |
10% |
10% |
10% |
Capital gain arises in India |
| United Kingdom |
10% / 15% |
10% / 15% |
10% / 15% |
10% / 15% |
Capital gain arises as per Indian/UK Income Tax Act |
Conclusion
Some issues specific to India-France DTAA are:
- CMA CGM SA France 24: India's Income Tax Appellate Tribunal (ITAT) decided that Income earned by the assessee on account of transportation by ships operated by other enterprises under slot chartering arrangement is covered by Article 9 and is taxable only in the State of residence and accordingly, such income will be exempt from the Income Tax under the Income Tax Act.
- Maruti Udyog LTD. vs. Assistant Director: It was decided that expression ‘fees for technical services’ as appearing in provision of Article 13(4) of DTAA between India and France as well as in Explanation 2 to s. 9(1)(vii) means payment made to any person in consideration of managerial, technical or consultancy services. Since test reports had been used by assesses in India in manufacturing of cars, payment made to “U” company of France were chargeable to tax in India.
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