On 8 July 2022, the U.S. officially notified Hungary that it was unilaterally terminating the double taxation treaty between the two countries as of 2024. But what does this mean exactly, and what to expect? Find out from us.
Most people are tax residents in only one country, where they live and work. However, there is also a large group of people, especially among expats, who are tax residents in at least two countries. Since tax laws normally do not consider whether or not you have already paid taxes somewhere else on a taxable income, or can even penalize taking dividends to foreign countries, you might end up paying taxes in both countries where you are a tax resident.
Double taxation treaties are signed between countries, and they ensure that you have to pay taxes for the same income only once. You can either pay taxes in only one of the relevant countries, or you pay the lower amount in the country with the lower tax rate, and top it up to the higher tax rate in the other country. The terms of double taxation treaties vary country by country. If you need to get familiar with the double taxation treaty between the countries relevant to you, you must look up that specific treaty, or ask for tax advisory from an expert.
Hungary first signed a double taxation treaty with the United States in 1979. There was an attempt at an update in 2010, but it was never ratified by the U.S. Senate, so the old treaty prevails. In line with that, the 30% withholding tax imposed by the U.S. on most income generated in the U.S. does not apply to Hungarian tax residents.
For example, currently if a Hungarian tax resident person or entity makes an investment in the U.S. and is paid dividends, they pay a 15% tax in the U.S. and none in Hungary. Without the double taxation treaty, they would pay a 30% withholding tax in the U.S. and a 5% income tax in Hungary.
Similarly, a Hungarian company with a U.S. subsidiary is currently paying only a 5% withholding tax on its U.S. dividends. Without the double taxation treaty, the withholding tax on the same dividend would be 30%.
At the same time, Hungary does not apply withholding taxes, and personal income tax paid in Hungary can normally be deducted from taxes paid in the U.S., which would not change even in the absence of a double taxation treaty. However, the mere fact that there is no double taxation treaty between the U.S. and Hungary will still add risks to investment, and may deter investors from setting up their business in Hungary.
Cancelling such a treaty is not implemented overnight. Since the U.S. notified Hungary of its intentions only in July (so in H2) 2022, the treaty will actually remain in force throughout 2022 and 2023, and will be cancelled as of 2024. This leaves plenty of time for the two countries to negotiate a new agreement.
The old agreement has always been more beneficial to Hungary. While it is understandable that the U.S. did not want to continue such a cooperation, the timing is probably due to the recent disagreements around the global minimum tax. The OECD and the EU have spent the last few years devising a plan to make sure international tech giants cannot evade taxes by creating subsidiaries in tax havens. Since corporate tax in Hungary is only 9%, the lowest in the EU, Hungary was at first against the introduction of a general corporate tax at 15%, even though it was supposed to target companies with a yearly revenue above EUR 750 million. Later on, it seemed Hungary would also join the convention, but at the last minute it vetoed implementation.
For now, nothing changes. Until the end of 2023, the double taxation treaty between the United States and Hungary remains in force. Whether or not a new treaty will be signed in the meantime is anyone’s guess. In any case, if you are a tax resident in both countries, it cannot hurt to contact a tax advisor and ask for their expert opinion about your finances.
Helpers Hungary has been in the service of expats living in Hungary for more than 15 years. We are happy to offer our expert assistance in all matters of immigration and business in Hungary.
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