Hungarian-American tax treaty to be terminated

Why, what are the consequences, and what to expect in the future?

Hungarian-American tax treaty

Hungary currently has valid treaties with more than 80 countries on avoiding double taxation. In recent years, the number of concluded treaties has steadily grown, but in the middle of July 2022 an American press release was issued: on 8 July the U.S. Department of the Treasury terminated the treaty on avoiding double taxation which was concluded with Hungary in 1979.

What led to the termination of the Hungarian-American tax treaty? 

The official communication says that the Americans found the treaty unfavourable, especially given that the Hungarian government – according to its current position – does not intend to introduce the global minimum tax in Hungary. The global minimum tax defines a uniform, 15% (effective) tax rate for the multinational companies of the participating Member States. The spokesperson of the US Treasury emphasised that the tax burden of companies in Hungary is less than half of that in America: 9% in Hungary, but 21% in America.

How long is the treaty applicable for? 

The Hungarian-American tax treaty sets forth separate provisions governing termination options, and based on these, the treaty will cease to apply for fiscal years starting from 1 January 2024.

What do tax treaties cover in any case? 

Treaties on avoiding double taxation, as their name suggests, resolve situations where a private individual or a company may be subject to double taxation. In such cases, the treaties set out which Member State (in certain cases Member States, and to what extent) may exercise the right to levy taxes, and how they need to ensure that double taxation is ruled out (exemption, credit method).

What is life like without such a treaty? 

Tax treaties regulate the scope of taxpayers, tax types and transactions relatively comprehensively, thereby creating a clear situation with regard to double taxation. This can be important when deciding on an investment, for instance, because this makes planning more predictable and transparent, and can make a country more attractive compared to another where such a treaty is not in force.

However, it is worth knowing that double taxation does not always arise even without a treaty, since regulations ruling out double taxation not only exist at the level of treaties: for instance, in the Hungarian legal system, quasi double taxation situations are partly settled by national rules.

What changes with the end of the Hungarian-American tax treaty? 

Upon the termination of the Hungarian-American tax treaty all international transactions must be re-evaluated, and the tax consequences of transactions examined separately with a review of national law.

Based on the data of the Hungarian Investment Promotion Agency (HIPA), a record amount of operating capital per project flowed into Hungary in 2021, not only from the west, but also from the east, but besides Germany, the USA was still one of the largest investors in Hungary. The statistics clearly show that US companies are still in third place, as regards the creation of new jobs for example, so from an economic perspective, Hungarian-American relations can be considered significant. All in all, the termination of the Hungarian-American tax treaty will surely affect a number of US companies. Many American-based business entities post American employees or employees with American citizenship to Hungary, so for private individuals for instance, the change may mean that income so far generated in Hungary from tax-exempt American sources under the treaty may become taxable after the termination of the treaty. On the American side, the withholding tax rate will probably bring significant change, since currently, the treaty sets strict limitations. Nevertheless, once it is repealed, American rules may prescribe a rate as high as 30%.

Will there be a new treaty with America? 

It is very hard to answer this question, since we are in a rapidly changing economic and political environment right now. What is certain is that it would serve the two countries as well as businesses and employees from the two countries the best if they could arrive in a stable economic environment, and a stabile taxation system is part of that. Yet while looking ahead, we cannot completely disregard the events of the past either. In the 2000s, the governments of Hungary and the USA drew up a completely new treaty, which was voted on by the Hungarian National Assembly in 2010 and was promulgated thereafter. However, since the Americans have not yet ratified it, this new Hungarian-American tax treaty has never taken effect. That said, much can still happen until the beginning of 2024.

If your company has any US interests, you should definitely review and re-evaluate your international transactions and their tax implications. Our experts have significant experience both in double taxation issues affecting companies and in the taxation of foreign employees, American employees posted to Hungary, and they are here to help our clients map out how the termination of the Hungarian-American tax treaty may affect them.

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