Last updated on 21 February 2023.
Early July, the U.S. canceled the double taxation treaty between Hungary and the U.S. Unless a new treaty is signed over the next year or so, natural persons and entities that have income from both the U.S. and Hungary will face a significant tax increase starting from January 2024.
Double taxation treaty with the U.S.
Double taxation treaties in general aim at discouraging tax avoidance by making international taxation fairer and more straightforward for taxpayers. The treaty between Hungary and the U.S. has been in force since 1979, and it regulated the definition of tax residency – this way the taxes to be paid on various types of income generated both in Hungary and the U.S.
The treaty has been more beneficial to Hungary than to the U.S., since the U.S. imposes significant withholding taxes on most income generated there when it leaves the country, and the treaty removed this requirement. Without the double taxation treaty, serious tax increases are expected starting from 2024.
Benefits and prospects for natural persons
The most obvious winners of the 1979 double taxation treaty are Hungarian natural persons who have income from the U.S., since they are not required to pay the 15-30% withholding tax when their income leaves the country. At the same time, U.S. natural persons currently pay taxes only in the U.S. after Hungarian income other than salaries, while from 2024 they will also be required to pay an income tax in Hungary.
|Type of taxpayer||Type of income||Current regulation||From 2024|
|Hungarian natural person||Dividend after U.S. shares or interest from U.S. bonds||15% withholding tax in the U.S.||30% withholding tax paid in the U.S. + 5% personal income tax in Hungary|
|Hungarian natural person||Salary while working in the U.S., either in normal employment or in secondment; Rent from real estate located in the U.S.||Taxed in the U.S. only||Taxed in the U.S. + 15% income tax in Hungary (90% of the U.S. tax can be deducted)*|
|U.S. natural person||Short term gainful activity in Hungary (less than 183 days within the fiscal year spent in Hungary)||Taxed in the U.S. only||Taxed in the U.S. + 15% income tax in Hungary (90% of the U.S. tax can be deducted)*|
|U.S. natural person||Interest from Hungarian bonds||Taxed in the U.S. only||Taxed in the U.S. + 15% income tax in Hungary|
*The deductible amount is either 90% of the U.S. tax or the 15% of the taxable income if at least that amount is paid as tax in the U.S., the smaller amount of the two is deductible from the tax payable in Hungary.
Moreover, currently if someone has income from the U.S., they are required to pay taxes in Hungary only if their sole citizenship is Hungarian or if they are double citizens with a Hungarian permanent address. Without the double taxation treaty, double citizens will be required to pay taxes in Hungary after their U.S. income only if they have a permanent address in Hungary.
UPDATE (21 February 2023): According to analysts, the greatest blow to Hungarian investors managing U.S. shares is not even the 30% withholding tax on top of the 5% Hungarian personal income tax, but the fact that income from that will not be considered coming from regulated market transactions. As a result, when calculating the tax base, each transaction will be handled separately, and losses from some cannot be calculated against gains from others. This practically renders trade impossible to Hungarian tax residents.
Benefits and prospects for companies
Hungary does not normally impose withholding taxes, and it will probably not start doing so in the near future, because that would risk losing other foreign investment. At the same time, corporate tax is only 9%, which makes Hungary a very attractive destination for starting a business, whether it is a standalone startup or a subsidiary of a foreign corporation. This way U.S. investors active in Hungary remain quite safe.
In the meanwhile, Hungarian income from U.S. capital and service provision will be subject to a 30% withholding tax starting from 2024 unless the place of service provision is outside the U.S. (which is in fact the case for several service providers). This is a significant change, because currently the U.S. tax on such income is between 5-15%, depending on ownership shares, while neither royalties nor interests are taxed at all.
The only positive effect is that part of the taxes paid in the U.S. will be deductible from the Hungarian corporate tax. However, since the deductible amount cannot be greater than the average tax in Hungary, in fact only 9% of the tax paid in the U.S. can be deducted in Hungary.
U.S. companies with property and other premises in Hungary
If a U.S. company or its Hungarian subsidiary has real estate assets in Hungary, no separate tax is to be paid when those assets are sold. Without the double taxation treaty, the U.S. company may become subject to Hungarian corporate tax.
If a U.S. company has active premises in Hungary, they become Hungarian tax residents after 24 months. Without the treaty, this will happen already after 3 months. At the same time, if a U.S. company provides services in Hungary (e.g. they send an employee to Hungary to work on a local project), it does not necessarily constitute a permanent establishment (so they do not have to pay taxes after the income from providing services). Without the treaty, 183 days of presence in Hungary can make them tax residents.
Helpers Hungary accounting
The Helpers Finance Team provides accounting and payroll services to small and medium-sized Hungarian companies, with a special expertise in working with foreign owners. At the same time, we keep tabs on the developments of international taxation so that we can offer up-to-date tax advisory to our clients. Watch this space to stay on the top of relevant news!
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Now you can read our February 2023 followup here.
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