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India-France Tax Treaty Shake-up Hits P-Notes
23 Feb
Summary
- Proposed treaty changes may end French investors' equity tax advantage.
- P-notes could become less attractive, prompting shift to other nations.
- Revised treaty might increase capital gains and dividend taxes for some.
India's proposed revisions to its tax treaty with France are poised to significantly alter the landscape for participatory note (P-note) trading. Previously, French investors benefited from a notable tax advantage when selling Indian equities, a perk that contributed to the popularity of P-notes issued by French banks.
As of February 23, 2026, the anticipated changes would empower India to tax capital gains from equity sales by French investors, thereby diminishing the attractiveness of P-notes. This potential tax liability on French entities and P-note holders could lead investors to seek alternative jurisdictions, such as the Netherlands or Belgium, which continue to offer capital gains tax protection for sub-10% holdings.
While P-notes have seen a decline in their share of FPI investments, they remain a useful instrument for many foreign investors. The proposed amendments also suggest adjustments to dividend taxation, potentially halving withholding tax for French companies with over 10% stakes but increasing it for those with less than 10%.
Experts note that these treaty modifications might be a response to legal interpretations of the most favoured nation (MFN) clause. Any restructuring by FPIs to access treaty benefits will need to adhere to commercial rationale and substance requirements, especially in light of recent court rulings on tax avoidance.
