Termination of the US-Hungary double tax treaty – time is growing short for action

Hungary

Fast action is crucial as it becomes clear that Hungary will no longer have a double taxation treaty with the US from 1 January 2024.

The assessment of each taxpayers’ situation with US and Hungary income streams is necessary since the absence of the treaty could potentially lead to increased tax burdens and administrative difficulties for both US and Hungarian taxpayers.

The consequences will be less painful for US investors in Hungary than for Hungarian investors earning income from the US due to high withholding taxes, which the US will apply as soon as the treaty is no longer in place. It is highly advisable to thoroughly examine the nature of income Hungarian companies are realising from the US, especially if there is a chance that they may be classified as dividend, royalty or interest under the applicable US rules. For companies with a US business, it is of key importance to review the operating structure and specific contractual terms in the US-Hungary relations for the purpose of restructuring and rephrasing, if necessary, in order to mitigate US withholding tax exposure.

For US investors in Hungary, taxation of dividends, interest and royalties will change, but the effects will not be the same for corporate and private individual investors.

Private individual US investors will face a uniform 15% Hungarian withholding tax on dividends, interests and royalties paid from Hungary.

Any dividends, interest or royalties paid from Hungary to US corporate investors remain tax-free as long as Hungary maintains its general no withholding tax policy. Should, however, the Hungarian government introduce withholding taxes on these types of income in the future, no reduction will be possible without a double-tax treaty.

In the absence of a double-tax treaty, a US corporate investor that holds shares in a real-estate rich Hungarian company will be subject to Hungarian corporate taxation for any capital gains realised on the sale of such shares.

The lack of provisions on the mutual-agreement mechanism and the end of the exchange of information between the two countries in cross-border situations will likely make the lives of both US and Hungarian investors more burdensome since enforcing their rights could become increasingly difficult.

For more information on taxation in Hungary or on the mitigation options of US withholding tax on any income received from the US, contact your regular CMS advisor or local CMS experts.

The article was co-authored by Diána Galambosi.