Hungarian-American Tax Treaty Coming to an End

The provisions of the US-Hungarian tax treaty on the avoidance of double taxation can still be applied to tax assessments until December 31, 2023. There are no changes in the tax treatment of income earned until the end of this year, the National Tax and Customs Administration (NAV) announced on its website. However, big changes are coming to the taxation system next year.

The tax authority has revealed that the United States of America notified Hungary on July 8 last year that it would unilaterally terminate its double taxation treaty with Hungary with effect from January 8, 2023. For income paid or credited on or after January 1, 2024 in the case of tax, and for other taxes, the provisions of the treaty will cease to apply to tax periods beginning on or after January 1, 2024, according to NAV.

For personal income tax, this means that from January 1, 2024, income from abroad will be taxable under the laws of both countries, with income from the United States being treated as income from a non-treaty country, it was explained. For corporate tax purposes, income from transactions between the US and Hungarian parties will also be treated as arising in a non-treaty country, meaning that US withholding income such as dividends and interest will be subject to tax at the rate of its own domestic rules, the tax authority noted.

Hungarian news site Index reported that as long as the treaty is in force, if a Hungarian investor buys US stock and receives dividends, 15 percent US withholding tax will have to be paid on the dividend income and will not be subject to any further Hungarian personal income tax. However, after the treaty expires, Hungarian investors will be subject to a 30 percent tax and an additional five percent Hungarian personal income tax, so the amount of total tax burden will be 35 percent.

It is no coincidence that the United States has withdrawn from the tax treaty in the wake of the controversy over the 15 percent global minimum tax that would be imposed on large multinational corporations.

The United States is using every means at its disposal to push for the introduction of the minimum tax around the world, and the European Union seems to be a partner in this. Officially, all member states had to agree to the provision before it could be introduced in the EU, but Hungary vetoed it.

The Hungarian government justified the veto by arguing that the introduction of a global minimum tax without fairness would significantly undermine the competitiveness of the economy. Hungary has one of the lowest corporate tax rates in the world, at nine percent, and the government does not want to change this, as one of the secrets of economic success is low tax rates, which is why it is worthwhile for foreign companies to come here.

In the light of the Hungarian veto, there was also talk in the EU of deciding to introduce the tax through a different procedure, which would not require the agreement of all member states. In the end, this was not necessary, as Hungary eventually withdrew its veto last December after receiving an exemption. The Council of the European Union agreed to include the Hungarian business tax in the global minimum tax, so that the minimum tax could be applied in Hungary without the need to raise taxes.

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