Last week the Hungarian Tax Authority has published a notice about the effects of the cancellation of the U.S.-Hungarian double taxation treaty. This marks an end to hopes that the treaty might be reinstated or a new treaty might be introduced. Starting from January 2024, there will be no treaty to prevent double taxation for US and Hungarian tax residents.
What is the U.S.-Hungarian double taxation treaty about?
The double taxation treaty between the U.S. and Hungary first came into force in 1979. First and foremost, it intended to define tax residency in the U.S. and in Hungary, and encourage compliant tax payment by making it fairer and more straightforward. There was supposed to be an amendment in 2011, but it was never ratified by the U.S. Senate, so the original agreement remained.
This was always an agreement that was more favorable to Hungarian tax residents. This is because the U.S. imposes significant withholding taxes, which is not the case in Hungary. As a result, Hungarian tax residents who have income from the U.S. were spared being taxed twice, while benefits for U.S. tax residents were less obvious.
Since the cancellation of the treaty last summer, there have been no news of any negotiations between the two governments regarding this issue. As a result, everyone concerned should prepare for life without the double taxation treaty as of January 2024. We have already written about the expected effects before; the latest notice published by the Hungarian Tax Authority just confirms their inevitability. You can read the details here.
Changes for U.S. investors in Hungary
The most conspicuous change for U.S. natural persons with income from Hungary will be that they become subjects to the 15% Hungarian personal income tax. Starting from January 2024, income from
- short term gainful activity in Hungary (meaning for less than 183 days in a given fiscal year) will not only be taxed in the U.S., but also in Hungary. However, up to 90% of the U.S. tax can be deducted from the Hungarian tax payable (some conditions apply).
- interests on Hungarian bonds will be subject to the 15% Hungarian personal income tax as well as the U.S. tax
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.
No changes for Hungarian businesses providing services to U.S. clients
Withholding taxes pertain to income generated in the U.S. If your Hungarian business provides services to U.S. clients from a distance (e.g. IT solutions created at your office in Hungary), the place of service performance is not in the U.S. As a result, U.S. withholding taxes do not apply to them.
Hungarian companies owned by U.S. investors face few changes
Hungarian companies continue to be paying corporate tax at 9%, which is the lowest in the EU. Since last year, the Hungarian government agreed to participate in the Global Minimum Tax initiative, also to be implemented starting from 2024, but that affects only corporations with a worldwide yearly income above EUR 750 million. Small and middle-sized companies with a Hungarian registered seat and below that kind of revenue will continue to be taxed at 9% of their profits, without any need to top up their taxes to the otherwise required 15%.
Moreover, most taxes paid in the U.S. will be deductible from the Hungarian corporate tax (up to 90%). Mind you, 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.
Hungarian property and assets of U.S. businesses
At the same time, if a U.S. company or its Hungarian subsidiary has real estate assets in Hungary, the U.S. company may become subject to Hungarian corporate tax when those assets are sold, whereas currently no such tax applies.
If a U.S. company has active premises in Hungary, that will create Hungarian tax residency after 3 months (instead of the current 24 months). Moreover, if a U.S. company provide services in Hungary (e.g. they send one of their employees to Hungary to work on a local project), 183 days of presence will make that a permanent establishment, creating tax residency (in contrast with the current situation, where tax residency does not necessarily apply).
Consult a tax advisor in time
The cancellation of the U.S.-Hungarian double taxation treaty will have the most obvious effects of Hungarian nationals with income from the U.S., but it will also affect U.S. investors active in Hungary. Consult a tax advisor on time to learn about any changes to the taxes you must pay starting from January 2024.
The Helpers Team provides business related services mostly to small and medium-sized companies in Hungary. This includes not only company setup and accountancy, but assistance with various kinds of administrative tasks as well as international tax advisory.
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