Hungary: Termination of the double tax treaty between the United States of America and Hungary

On 8 January 2023, the six-month grace period lapsed from the notification of the United Sates to Hungary regarding the termination of its double tax treaty (treaty). Since the United States did not withdraw its notification, the termination is considered to be final.

Background

8 July 2022 saw the United States Department of the Treasury notify Hungary regarding its termination of the double tax treaty between the United States of America and Hungary, which had been in force since 1979.

Based on the official statements of the US Government, the explanation for the termi[1]nation of the treaty was the veto of Hungary on the introduction of global minimum tax, which defines a uniform 15% (effective) tax rate for multinational companies of the participating member states. Hungary ultimately agreed to introduce global minimum tax, however, the United States did not withdraw the termination of the treaty.

The effects of the termination

Hungarian companies with investments in the US

Based on the treaty, the taxation of income of Hungarian companies from the United States was quite favourable, the withholding tax (WHT) was 0% for interest and royalty payments, and it was 5% or 15% in the case of dividend payments. With the termina[1]tion of the treaty, the WHT payable in the United States will increase to 30%. Neverthe[1]less, 90% of the tax paid in the US can be credited against the corporate income tax payable on such income in Hungary.

Another favourable factor of the treaty was that the income of permanent establishments of Hungarian companies in the United Sates was exempt from Hungarian corporate income taxation. Without a treaty in place, this exemption would no longer exist Hence, the income of such permanent establishments would be taxable in Hungary with the possibility to credit 90% of the tax paid in the US.

US companies with investments in Hungary

In most cases, the termination of the treaty would not result in a significantly higher tax burden for US companies with investments in Hungary, as Hungary does not impose WHT on payments between companies (including dividend, interest as well as royalty). Although there would be some exceptions: when US companies sell their direct shares in their Hungarian subsidiary which is considered as a company holding real estate. If the US company generates profit from this transaction, then 9% Hungarian corporate income tax is payable after the old treaty is no longer in effect.

Effective date of the termination

The termination is effective on 8 January 2023. Nonetheless, with respect to taxes withheld at source, the treaty shall cease to have an impact on 1 January 2024. Regard[1]ing other taxes, the treaty shall cease to have effect with respect to taxable periods beginning on or after 1 January 2024.

Theoretically, it would be possible for the two countries to conclude a new double tax treaty (or to reinstate the previous one), but as there is currently no negotiation about a new treaty, it is highly unlikely that it would happen until the end of the year.

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