US-Hungarian double taxation treaty canceled – what to watch out for?

In July 2022, the US canceled its double taxation treaty with Hungary. The agreement remained in force until 31 December 2023, but now it is not applicable anymore. In response, Hungary has introduced some changes to tax regulations to mitigate the impact.

Without the double taxation treaty

Double taxation treaties are normally created in order to prevent people who are tax residents in more than one country paying taxes twice on the same income. They are in place between two countries, so if you have questions about tax residency, you must always include which countries are relevant in your case.

Such a treaty between countries is especially relevant if one or both of the countries imposes severe withholding taxes on money leaving the country. In the case of Hungary and the USA, it is the USA that imposes a 30% withholding tax; Hungary does not apply withholding taxes, and only taxes income received in Hungary.

As discussed in a previous article, the lack of a double taxation treaty between the USA and Hungary was set to have the following effects:

Type of taxpayer	Type of income	With the treaty in force	From 2024
Hungarian natural person	Dividend after US shares or interest from US bonds	15% withholding tax in the US	30% withholding tax paid in the US + 5% personal income tax in Hungary
Hungarian natural person	Salary while working in the US, either in normal employment or in secondment; Rent from real estate located in the US	Taxed in the US only	Taxed in the US + 15% income tax in Hungary (90% of the US tax can be deducted)*
US natural person	Short term gainful activity in Hungary (less than 183 days within the fiscal year spent in Hungary)	Taxed in the US only	Taxed in the US + 15% income tax in Hungary (90% of the US tax can be deducted)*
US natural person	Interest from Hungarian bonds	Taxed in the US only	Taxed in the US + 15% income tax in Hungary

Source: portfolio.hu; Gábor Fajcsák, analyst of RSM Hungary.
*The deductible amount is either 90% of the US tax or the 15% of the taxable income if at least that amount is paid as tax in the US, the smaller amount of the two is deductible from the tax payable in Hungary.

Moreover, while the double taxation treaty was in place, people who received income from the US in Hungary were required to pay taxes in Hungary only if their sole citizenship was Hungarian or if they were double citizens with a Hungarian permanent address. Even without the double taxation treaty, double citizens became required to pay taxes in Hungary after their income from the US if they had a permanent address in Hungary.

Hungarian countermeasures introduced from 2024

While Hungary on its own could not possibly employ measures that would counter all of these effects, new tax regulations have been introduced as of 1 January 2024 in order to mitigate the impact of the cancelation of the double taxation treaty. The most important changes are the following:

• Income from US American shares will still be considered coming from regulated market transactions. As a result, such income may be handled together, and losses from specific transactions may still be calculated against gains from others. (Earlier it was pointed out that losing this option would be a major blow to Hungarian investors managing US shares.)
• Interests and dividends from shares issued in OECD countries are not subject to taxes on “other” income; the taxes relevant to foreign exchange gains apply.
• Tax regulations regarding the income of performing artists and sportspeople are also adjusted, and from now on, taxes will be to be paid in the country of delivery, in line with the custom of double taxation treaties.
• 90% of withholding taxes may be used to offset part of the 15% Hungarian personal income tax. (For companies, the regulations do not change, and while taxes paid in the USA are deductible from the corporate tax, the deductible amount cannot be greater than the average tax in Hungary, which is 9%.)

Unsolved issues

What does not change is that practically taxes on shares from the US increase from 15% to 35% (with the 30% US American withholding tax and the 5% Hungarian personal income tax). This is topped by the social contribution tax, which is also payable on income from interests.

Moreover, US American companies and their Hungarian subsidiaries should now give more thorough consideration to selling their real estate assets, as the income may become subject to Hungarian corporate tax.

On a different note, a US company with active premises in Hungary may become a Hungarian tax resident after 3 months. However, if it only provides services in Hungary, that does not necessarily constitute a permanent establishment, and tax residency occurs only after 6 months (183 days, to be precise).

Tax consultancy from the experts

Whether you are a US tax resident with assets in Hungary, or a Hungarian tax resident with assets from the US, you might need to consult a tax advisor to get a better understanding of what happens to your income, how much are you expected to pay in taxes and where.

Helpers Finance offers accounting and bookkeeping services to small and medium sized companies in Hungary, with a special focus on working with foreign owners. As one of our clients, you can lean on our extensive expertise about international taxation.

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