What is a double taxation treaty?

What is double taxation?

Double taxation is simply when you pay taxes twice after the same income. For our international clients, it mostly covers cases when as a result of individual tax regulations, two (or more) countries have the right to tax the same income. This mostly happens when someone has income from multiple countries, or when someone’s tax residency is ambiguous.

Most types of income are taxed where they are generated, but a lot depends on the type of income, the countries involved, and on tax residency.

Tax residency

Normally, you are a tax resident where you live. The same place is where you work, generate income, and pay taxes. If you travel a lot or have investments (and this way generate income) in various countries, the question arises where you should pay taxes.

Tax residency is determined based on the following factors, in this order:

• permanent home
• center of vital interests
• habitual abode
• nationality
• mutual agreement between the relevant countries

Even if tax residency can be clearly determined, there might be overlaps between countries, meaning that still both of them have a right to levy a tax on the same income, e.g. when one of them applies withholding tax or source tax to the income of its nationals and/or tax residents. This is when double taxation treaties come into play.

Avoiding double taxation

Countries in general agree that paying taxes twice after the same income would not be fair towards their subjects. Since tax regulations are so different around the world, this cannot really be solved by one blanket agreement everyone can join. Instead, countries can enter into bilateral agreements that help them sort out what to do in specific cases.

Hungary has such double taxation treaties in place with almost 100 countries (you can see the current list here). Notably, the double taxation treaty with the U.S.A. was canceled as of January 2024, and it has not been replaced since, increasing the costs of everyone who has income from both the U.S. and Hungary, regardless of whether they are U.S. or Hungarian citizens.

Accounting and tax advisory with Helpers Finance

Here at Helpers Finance our mission is to support foreign business owners and managing directors operating small and medium-sized companies in Hungary. We offer a wide range of services from accounting through payroll administration to HR compliance, including tax advisory, which is especially important for those who travel a lot while having income from various countries around the world.

Tell us more about your plans, and we will be happy to find you the most cost-effective solutions.

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