The Hungary-U.S. double tax treaty will be terminated from 2024
The United States gave Notice of Termination to Hungary in relation to the U.S-Hungary double tax treaty.
On 8 July 2022, The Government of the United States took an unusual measure by sending a formal notification to Hungary with the intention to terminate the effective double tax treaty between the two countries starting from 1 January 2024. The official reasoning of the U.S. relates to Hungary’s approach to the global minimum tax, namely, the Government of Hungary have blocked the implementation of the 15% global minimum tax agreed by nearly 140 countries, and the U.S. among them, with the aim of retaining the 9% corporate income tax rate currently applicable in Hungary.
The termination of the said tax treaty would most likely have adverse impacts on the economic relationship between Hungary and the U.S in general, which is clearly an unfavorable outcome considering that the United States is one of the main foreign investor in Hungary. In the absence of a tax treaty, interests, dividends or royalties paid by U.S. enterprises to Hungarian companies would be subject to 30-30% withholding tax (WHT) in the U.S., whereas under the prevailing tax treaty, such interests and royalties are exempt from WHT and only 5/15% WHT can be levied on dividends by the U.S. If there is no effective tax treaty between Hungary and the U.S, WHT payable in the U.S could only be credited against the 90% of the Hungarian corporate income tax (CIT) payable. Since the headline Hungarian CIT rate is significantly lower than that of the U.S., only a small part of the tax paid in the U.S could be credited against the Hungarian CIT liabilities. Furthermore, private individuals’ income falling into the scope of the current tax treaty will also have to consider the change and its impacts on the taxation of their income streams. Additionally, it cannot be excluded that Hungary, once the tax treaty is terminated, may unilaterally introduce WHT on certain payments made to the U.S which is again a potential exposure to be considered from a foreign direct investment perspective.
With regard to the timing of the U.S. notification on the termination of the tax treaty, the establishment of its arguments and reasoning as well as the possible changes in the position of the Hungarian Government on global minimum tax, it cannot be excluded that the parties involved may end up finding a solution that is less harmful than the termination of the tax treaty, such as the partial termination of the current tax treaty or the implementation of the new tax treaty which has been pending and waiting for U.S ratification since 2010. Nevertheless, we recommend that private individuals as well as companies affected in their dealings with the existence of the tax treaty between Hungary and the U.S review and closely monitor developments in this topic.
In case of questions or comments on the above or should you require assistance, we are at your disposal.
Vadkerti Krisztián, Managing Director, Tax Partner
Székely Gábor, Tax Manager
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