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New Hungary-US agreement limits tax benefits

The new Hungary-US convention on the avoidance of double taxation with respect to income tax introduces a limitation on benefits, consultancy PricewaterhouseCoopers said in its latest issue of Tax and Legal Alert.

The new agreement, which after years of negotiations will replace one from 1979, was signed recently in Budapest, and is expected to come into effect on January 1, 2011, following ratification in both countries.

Taxpayers resident in the US or Hungary can only benefit from the convention if the ultimate parent company is resident in the US or Hungary or any other member state of the European Union, and is actively engaged in business in Hungary. Complex tests will be applied to check whether these requirements are met, PricewaterhouseCoopers said in its note.

The highest rate of withholding tax on dividends remains 5% if the beneficial owner has at least 10% participation in the company paying the dividend. In all other cases, the tax rate is 15%. As there is no obligation to pay withholding tax on dividends in Hungary, this provision only applies to payments from the US.

What was modified is that the highest rate of withholding tax on interest is 15%. The previous convention did not allow withholding tax on this type of income.

There will still be no withholding tax payable on royalties, but the convention introduces the definition of a beneficial owner.

For income derived from employment, the limit of 183 days does not apply to one tax year. It must be calculated for a period or periods in any twelve-month period commencing or ending in the tax year concerned.

The previous convention did not include any provisions regarding profits from the alienation of shares or similar interests. However, according to the new convention, the profits that Americans gain from the alienation of shares that derive the greater part of their value directly or indirectly from immovable property situated in Hungary, may be taxable in Hungary.

Regarding income from immovable property, the previous convention did not allow the taxable income to be calculated on a net basis (i.e. by deducting the costs) as in the case of business profits attributable to a permanent establishment. The new convention, however, allows for a choice, which may only be modified later, if the competent tax authority gives its consent.

With regard to the taxation of payments (grants) received by a student, apprentice, or business trainee, a limit of $9,000 per year has been introduced, grants up to this amount are non-taxable, PricewaterhouseCoopers said in its analysis. (MTI – Econews)