The United States of America notified Hungary in July last year that it would terminate its double taxation treaty with Hungary with effect from January 8, 2023, however, as expressed by National Tax and Customs Administration (NAV) the provisions of the convention will apply until 31 December 2023. Consequently, there will be no change in the tax treatment of income accrued up to the end of the year even though the treaty has already expired.
Regarding Hungarian-US business relations, it is not expected to produce direct, short-term economic effects: especially for US companies, it does not bring any immediate changes, since in Hungary there are currently no withholding taxes against which the treaty would need to provide protection, and US companies can offset Hungarian income taxes against their domestic taxes even without the treaty.
The termination of the treaty is clearly less favorable for Hungarian companies, and international companies in Hungary, because the US will impose a 30% withholding tax on payments from the US to Hungary after 1 January 2024. Therefore, this requires a rethinking of business processes for international companies that currently provide services to their US counterparts through their Hungarian subsidiaries (e.g., business service centers). However, this will be relevant in the medium or long term.
The long-term effects arise concerns, as in the longer term, the absence of the treaty may create serious uncertainty among investors, which could lead to further negative effects such as the contraction or absence of investments (even the development of already existing companies, as well as start-ups or scale-ups) or a shift of business service functions to other countries.
The absence of the treaty would lead to an adverse situation for employees of the involved companies. It could mean that additional tax burden is arising from share-based compensation plans in US companies, which, in the case of companies already operating in Hungary, would affect not only senior executives but a wide range of employees. In addition, US citizens working in Hungary will face significant additional administration and potentially additional taxation as their US-source income will also become taxable in Hungary in the absence of treaty protection.
AmCham Hungary has been working to assess the impact of the termination of the Convention and to facilitate dialogue between decision-makers and has expressed the importance of the renewal or the negotiation of a new treaty on several platforms. Our assessment of the effects of its cancellation as well as the benefits of a Treaty of this kind has been sent to the respective ministers and decision-makers. The negotiation of a new treaty, however, could take years.