The provisions of the treaty on avoiding double taxation between the United States of America and Hungary (US-Hungary tax treaty) have not been applicable between the two countries since 1 January 2024. Since the date for submitting tax returns for the first tax year affected by the cancellation, 20 May 2025, is soon coming up, we are providing a summary of who may be affected and the administrative and payment obligations they may incur in absence of the agreement.
How can the cancellation of the US-Hungary tax treaty impact Hungarian tax residence?
While the treaty was in force, its tax residency rules received primacy over the Hungarian rules. However, in its absence, Hungarian citizenship (or, in case of dual US-Hungarian citizenship, a registered Hungarian address) results in Hungarian tax residency, meaning all of a given individual’s incomes are taxable in Hungary, regardless of where the work was actually carried out.
At the same time, the cancellation of the US-Hungary tax treaty also leads to a substantial change in the rules for offsetting foreign taxes. While income earned from an employment relationship taxed abroad was previously tax-exempt, starting from 2024 a maximum of 90% of tax paid abroad can be included in the Hungarian tax liability up to the Hungarian tax rate (15%) in case of Hungarian tax residency and employment in the US.
Offsetting US taxes in Hungary
A number of details have to be taken into account when offsetting US taxes, including the fact that only private persons with tax residency in Hungary are due the right to offset and only if the income is considered as having originated abroad based on the income generation rules of the Personal Income Tax Act. For example, it is worth mentioning that the income earned as an executive or member of the supervisory board of a Hungarian company is not eligible for offsetting in Hungary; in this case, the US offsetting rules have to be considered. In case of income from employment, only the taxes on income received for work performed in the United States may be taken into consideration (i.e. not taxes on income received for work in Hungary or any other country).
It is also important to note that regardless of whether the tax offsetting can be applied and its amount, private individuals are required to submit tax returns in Hungary or supplement the draft return prepared by the tax authority.
What about capital gains from the US in the absence of the US-Hungary tax treaty?
In absence of the treaty, dividends derived from the US will be subjected to a 30% withholding tax in the USA. However, private individuals with Hungarian tax residency can only take 10% of that amount into account when preparing their Hungarian tax returns, as Hungarian rules stipulate that offsetting cannot lead to the Hungarian tax liability dropping below 5%. As a result, the effective tax burden is 35%, with an obligation to file a Hungarian tax return.
After the cancellation of the treaty, special rules apply, for example, to determining and filing tax returns for income from capital withdrawals from American companies and the sale of property in the US. The same circumspection must also be displayed vice versa. A private individual with tax residence in the US who received income taxable in Hungary cannot offset the tax paid abroad. In their case, the US rules on tax offsetting will be applicable.
Andersen’s services concerning the termination of the US-Hungary tax treaty
In summary, private individuals with interests, employment relationships, or investments in both countries may want to consider reviewing the issues of tax residency and the arising comprehensive or limited tax liability.
The experts at Andersen Hungary are happy to help in working out effective solutions to the practical questions the above may lead to, including cooperating with any American partners that may be affected.