In July 2022, the United States of America terminated the agreement with Hungary on the avoidance of double taxation, which has been applicable between the two countries for more than 30 years. The absence of the tax agreement after January 1, 2024 will have serious impact on the activities of individuals and companies, for which it is worth preparing in time.
Affected by the lack of the tax agreement are:
– Hungarian companies that receive income from the United States,
– US companies that have Hungarian subsidiaries with real estate assets,
– US companies with offices in Hungary,
– individuals who have income and investments from the US or Hungary
In the absence of an agreement, there is a significant difference in the tax treatment between the US and Hungary.
Impact on businesses
US withholding tax on US source income:
- Hungary does not apply withholding tax and the 9% corporate income tax rate in Hungary is much lower than the US tax rate. As a result, US investors will be less adversely affected by the lack of a tax treaty since US companies will not be subject to Hungarian withholding tax even in the absence of a tax treaty. On the contrary, the US will impose significant withholding tax on foreign taxpayers, and withholding tax will not only apply to capital income but also to revenues from the provision of services.
- If your Hungarian business provides remote services (eg. IT services) to US clients, the service is performed in Hungary and not in the US, as a result, US withholding taxes will probably not apply to them. However, in the absence of the agreement, some services might still be subject to withholding tax in the US.
- Being still under the treaty the US is entitled to tax Hungarian companies on dividend income, where the tax rate is capped at 5% and 15%, depending on the ratio of shares. The treaty does not allow withholding tax be applied to interest and royalty revenues, as it allocates the right of taxation to the country of residence, i.e. Hungary in the case of Hungarian companies. In the absence of the agreement, however, capital income of Hungarian companies may be subject to 30% withholding tax in the US, which will be a significant change for the worse for Hungarian companies, since until now the profits from from capital income have been only taxed by Hungary and at 9%. (Some compensation for the losses on income tax, Hungary allows part of paid US WHT be offset against Hungarian corporate income tax)
Hungarian corporate income tax on US assets sold in Hungary
- In the lack of an agreement if a US company or its Hungarian subsidiary possesses real estate in Hungary, the US company may become subject to Hungarian corporate income tax when that property is sold. The same situation when the US parent company sells its shares in its Hungarian entity that possesses real estate in Hungary
- In the lack of an agreement if a U.S. company has premises in Hungary, they will qualify as permanent establishment after 3 months instead of the current 24 months (eg. construction site or assembly facility can only be taxed by Hungary if the establishment is active exceeding 24 months). In the absence of the treaty construction work performed by a US company in Hungary will create a taxable permanent establishment in Hungary after 3 months as is provided by the corporate income tax act
- If a US company provides services in Hungary (eg. they send an employee to Hungary to work on a local project) or has an employee living permanently in the country and working for the US company remotely, a permanent establishment will be created in Hungary through the presence of that employee in the country exceeding 183 days in any 12 months period and the US company will be liable for income taxes in Hungary.
Impact on natural persons
Hungarian personal income tax (and social insurance) on US earnings
- In lack of the double taxation treaty the scope of resident individuals will be expanded in Hungary to include those who were previously considered non-residents solely because of the treaty. Thus, from January 2024, not only Hungarian individuals living in Hungary may be subject to income tax payments and reporting on their income from the United States, but also Hungarian citizens who live in the US and do not receive income from Hungary as among other criteria Hungary defines tax residency based on citizenship
- The lack of the treaty will also effect dividend income and income from capital gains received by Hungarian tax residents from US source, and although the tax paid in the US can be offset against the personal income tax liability in Hungary, a minimum of 5% will have to be paid in Hungary anyway. Furthermore, on top of personal income tax social insurance tax will also apply to capital gains from transactions carried out on US capital markets.
Hungarian personal income tax (and social insurance) on Hungarian earnings
- The termination of the treaty will also affect US citizens who are not residents in Hungary according to the Hungarian rules but receive income from Hungary. In their case, all income from Hungary will also be taxable in Hungary. Starting January 2024, their income from Hungary (eg. income from employment, income earned as a manager, income from self-employment, income from renting real estate etc.) will not only be taxed in the US but also in Hungary. (Some compensation for the losses on income tax, Hungary allows part of paid US tax be offset against Hungarian personal income tax)