The U.S. Treasury Department recently announced that it has provided a notice to Hungary to terminate the tax treaty which has been in effect since 1979.
This was an unusual move by the U.S. and has been done only a few times in the past. Some of the speculation surrounding this termination include:
- Hungary’s resistance to adopting a 15% global minimum tax with other EU member countries.
- Hungary’s corporate income tax rate has been slashed from 50% to 9.9% which is significantly less than 21% U.S. corporate income tax rate. As such, the treaty was perceived to be one-sided.
- Most U.S. tax treaties contain a ‘Limitation on benefits’ (LOB) provisions. LOB provisions ensure that a taxpayer claiming treaty benefits has economic substance in the treaty country and does not have a mere nominal presence. The U.S. Hungary Tax Treaty does not contain a LOB provision.
Without a tax treaty between the U.S. and Hungary, U.S. taxpayers will need to rely solely on U.S. domestic law, primarily the U.S. foreign tax credit, to help mitigate double taxation between the U.S. and Hungary. Amounts of U.S. sourced income paid to Hungarian residents will be subject to U.S. statutory withholding rates, in many cases, 30% rather than a lower treaty-based rate.
If you have any questions or would like to discuss your financial situation, please do not hesitate to reach out to your WG advisor or e-mail us at [email protected].