US terminates double tax-treaty with Hungary

On 8 July 2022, the U.S. Treasury Department announced the termination of the double-tax treaty with Hungary. The treaty, which scores of US investors called very beneficial, was concluded in 1979 and the termination will take effect from January 2024. The announcement came shortly after Hungary’s veto against the global minimum tax.

The absence of the treaty could potentially lead to increased tax burdens and administrative difficulties for both US and Hungarian taxpayers.

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

Private individual US investors will no more benefit from a reduced 5% withholding tax on dividends but will be subject to the general 15% Hungarian personal income tax. On the termination of the treaty, a Hungarian 15% personal income tax will have to be paid on interest and royalties paid from Hungary.

The dividends paid from Hungary to US corporate investors remain tax free as long as there is no withholding tax in Hungary under domestic rules, and the same applies to interest and royalties. Should the Hungarian government introduce withholding taxes on these types of income in the future, however, 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 fall under Hungarian corporate taxation for the capital gains realised on the sale of these shares.

Nevertheless, the termination of the double-tax treaty will affect US investors in Hungary less than Hungarian investors in the US due to high withholding taxes in the US.

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. Other international tax agreements only offer a few of the provisions for the exchange of information between parties.

Overall, the termination of the double-tax treaty will mean that US-Hungarian relations in tax matters will fall to the level that Hungary has with less developed parts of the world. In the last decade, Hungary has worked to build a wide treaty network that makes international investments more efficient. The termination of the treaty with the US (as Hungary’s second largest investor) could significantly weaken Hungary’s position in the international tax arena and undermine bilateral economic relations.

For more information on taxation in Hungary, contact your regular CMS advisor or local CMS experts.

The article was co-authored by Diána Galambosi.