As discussed in our previous tax newsletter, the United States have sent an official notification to Hungary last summer in which the United States made it clear that it unilaterally decided to terminate its effective tax treaty with Hungary on the avoidance of double taxation (hereinafter: Treaty).
Considering that there have been no official developments ever since the notification was received by Hungary approximately a year ago and consequently, the Treaty is expected to be terminated as of 1 January 2024, please find below our summary on how the new setup will impact the relevant companies and private individuals.
In the absence of the Treaty, Hungarian companies will face higher withholding tax (WHT) burden on their income received from the United States, especially regarding interest, dividend or royalties paid by U.S. enterprises to Hungarian companies which payment will be subject to 30% WHT in the United States, whereas under the Treaty, such interest and royalty payments are exempt from WHT and only 5/15% WHT can be levied on dividend payments by the U.S. If there is no effective tax treaty between Hungary and the United States, WHT payable in the United States 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.
In the contrary case where a U.S company receives payments from Hungary, irrespective of the presence of the Treaty and due to a domestic WHT exemption, there will continue to be no WHT levied by Hungary on outbound payments made to U.S enterprises. However, in the absence of the Treaty, in case of capital gain realized by a US company on the alienation of shares in a Hungarian real estate rich entity, it will be subject to CIT in Hungary (which is then likely to be credited against the tax paid in the U.S).
In terms of impacts on Hungarian private individuals investing and/or working in the United States, the termination of the Treaty will result that income from the U.S that should be included in the private individual’s consolidated tax base in Hungary may be subject to 30% WHT in the United States (90% of U.S taxes can be credited against Hungarian personal income tax payables). Furthermore, in the absence of the Treaty, interest payments received from the United States will be considered as ‘other income’ and will therefore not only be subject to Hungarian personal income tax but social contribution tax liability at a rate of 13% as well. Also, the termination of the Treaty may have an adverse impact on income earned by Hungarian private individuals on the U.S financial market, i.e. as of 2024, a transaction will no longer be considered as a controlled capital market transaction if a U.S based service provider (e.g. brokerage firm) is involved in it and hence i) such income will not only be subject to personal income tax in Hungary but social contribution tax as well (capped at 24 times the minimum wage) and ii) the gains and losses of individual transactions will not be offset. Additionally, a Hungarian tax resident individual earning capital income from the U.S may face an increasing U.S WHT liability, as such, instead of the current U.S tax burden of typically 0%/15%, the United States may levy 30% WHT on the payment to Hungary as well as Hungary will levy an additional 5% Hungarian personal income tax on the top of that.
Finally, if the Treaty is terminated, the beneficial WHT rates (0% for interest and royalty and 5% or 15% for dividend) currently available for U.S tax resident private individuals on their income received from Hungary would not be applicable. Instead, on their income, U.S tax resident private individuals will be subject to personal income tax liability in Hungary at a rate of 15%.
In case of questions or comments on the above or should you require assistance, we are at your disposal.