On July 8, 2022, the Biden Administration announced the termination of the U.S.-Hungary Income Tax Treaty in effect since 1979. Effective Jan. 8, 2023, the treaty termination will impact investments and royalty agreements by Hungarian entities into the United States. The treaty termination will apply to U.S.-sourced dividends, interest and royalties for payments made on or after Jan. 1, 2024.

The termination comes as a result of long-standing pressure from the U.S. Treasury Department for Hungary to adopt The Organisation for Economic Co-operations and Development’s Pillar I 15% minimum tax backed by the European Union. Hungary’s recent reduction of its domestic corporate tax rate to 9% – which is less than half of the current U.S. rate – sealed the treaty’s fate. This reduction has made Hungary more attractive as a tax haven location. This combined with not currently having any minimum withholding tax provisions, results in the treaty being more unilaterally beneficial to Hungary than to the United States.

Implications to Consider

Moore Doeren Mayhew has highlighted four key considerations for U.S. inbound corporations in light of the treaty termination. 

1. Increased Tax Rates: Withholding rates will be increased in these three payment areas. Royalties and interest will increase from 0% to 30%, as will dividends currently set at 5/15%. Although the treaty has been terminated, the higher non-treaty rates will not have an impact until 2024. 
2. Permanent Establishment (PE) Protection: Both U.S. and Hungarian entities will not have PE protection as a result of the treaty termination. That means the level of activity that can be performed in the other country without being subject to taxation has decreased. Additional filing obligations may also ensue as a result of no PE protection. 
3. Double Taxation: The termination of the treaty may also result in double taxation, where corporations are taxed on the same income or profits in both Hungary and the United States. Reliance on the domestic tax laws of both countries will likely need to occur – resulting in complex filing and compliance issues.
4. Investment Decisions: The termination of the treaty may also impact investment decisions for Hungarian businesses considering doing business in the United States. The loss of tax benefits and increased tax liability may make investments on U.S. soil less attractive. Note, increased withholding rates do not impact U.S. investments into Hungary as they do not have minimum withholding tax provisions.

Seek Guidance

In light of these considerations, companies are well-advised to review their cross-border transactions between the two countries to determine if adjustments can, or should, be made as a result of the treaty termination, and additional tax withholding and filing obligations.  

If you would like to discuss the impacts of the treaty on your organization and potential steps that can be taken, please contact our international tax advisors at Moore Doeren Mayhew. 

Contact

Jim Miesowicz