U.S.-Hungary tax treaty no longer in effect

The double taxation treaty between the U.S. and Hungary has been terminated as of Monday.

The Internal Revenue Service announced last week that the U.S. provided a diplomatic notification, back on July 8, 2022, to the government of the Republic of Hungary of its termination of the United States-Hungary Tax Treaty. 

With respect to taxes withheld at the source, the tax treaty will cease to have effect with respect to amounts paid or credited on or after Jan. 1, 2024. With respect to other taxes, the U.S.-Hungary Tax Treaty ceased to have effect with respect to taxable periods beginning on or after Jan. 1, 2024.

The two countries have had rocky relations in recent years, especially after Prime Minister Viktor Orban’s government came to power in 2010. The treaty has been in effect since 1979 and, like other double taxation treaties, aims to avoid people being taxed twice by both countries for the same income. 

According to a blog post last September by Szilvia Süli of RSM Hungary, Hungary doesn’t impose withholding taxes on income paid to foreign companies, either with or without a treaty, so U.S. companies won’t be adversely affected by the absence of a tax treaty in terms of withholding taxes. However, individuals would be affected, and companies whose employees work in Hungary or who have real estate in Hungary could be affected.

“If a person is resident in both countries under national domestic rules, then as long as the double taxation treaty is in force, the place of residence should be determined based on the treaty,” she wrote. “In the absence of a treaty, both countries are entitled to tax the individual’s worldwide income, and it is up to domestic rules to decide how and to what extent the tax paid abroad is considered.” 

People who reside in Hungary will need to pay and declare taxes on their U.S. source income, and Hungarian citizens who have been living in the U.S. and don’t receive any income from Hungary could be liable to pay taxes in Hungary if they receive dividends or interest income from a U.S. source, she added: “In the absence of a double taxation treaty, if an individual is considered a Hungarian tax resident under the Hungarian Personal Income Tax Act, their Hungarian tax liability also extends to income earned in the United States.”