U.S.-HUN tax deal termination to have significant impact on taxation of individuals

On July 8, 2022, the United States notified Hungary that it would unilaterally terminate the 1979 double taxation treaty between the two countries. The treaty will not actually expire for another year and a half, but it could eventually have a major impact both on companies and private individuals. 

Under the legislation in force in Hungary, there is no withholding tax for U.S. companies, only with one exception: realizing capital gains on the alienation of shares held in a Hungarian real estate holding companies, if a respective double tax treaty allows such taxation. The current treaty between Hungary and the U.S. does not allow capital gains taxation of U.S. companies in Hungary. With the termination of the current treaty and in lack of ratification of a new one, this could change. If a U.S. company owns shares in a Hungarian subsidiary with significant real estate assets, the U.S. shareholder could be subject to Hungarian corporate income tax when alienating its shares in the Hungarian entity. Practically it would mean a 9% Hungarian income tax to be paid by U.S. corporations in Hungary.

The termination of the double tax treaty has a significant impact on the individual’s taxation.

In the lack of a double tax treaty, the U.S. source income of Hungarian tax resident individuals is subject to 15% personal income tax in Hungary. For this purpose, the tax residency status shall be determined on the basis of the Hungarian national rules. This results in an increase in the number of taxpayers. E.g. Hungarian citizens living in the United States, who are currently treated as U.S. tax residents according to the double tax treaty in force, may become taxpayers in Hungary. 

Furthermore, as a result of the termination of the treaty, the cap on the withholding tax rate will cease to exist. 

The amount of tax paid in the United States can be taken into account by the calculation of the Hungarian tax liability. The extent of the tax reduction depends on the type of income. In the case of income creating a part of the consolidated tax base (e.g. income from employment, independent activity, etc.), the Hungarian tax liability can be reduced by 90% of the tax paid in the United States. But by no more than 15% tax calculated on the foreign income. 

In the case of separately taxable income types (e.g. interest, dividend, capital gain), the tax paid in the United States can also be credited, but at least 5% tax must be paid in Hungary. 

The Hungarian source income of U.S. tax residents is subject to Hungarian personal income tax according to the Hungarian national rules.