On 15 July 2022, the U.S. Department of the Treasury announced it notified the government of Hungary on 8 July of the upcoming termination of the tax convention between the U.S. and Hungary, effective 8 January 2023. The convention, known as the Convention between the Government of the United States of America and the Government of the Hungarian People's Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion With Respect to Taxes on Income, has been in effect since 1979.
The official end date of the convention will be 8 January 2023. However, as specified in the tax convention, for taxes withheld at source, the tax convention will cease to have effect on 1 January 2024. With respect to other taxes covered by the convention, the convention will also cease to have effect with respect to taxable periods beginning on or after 1 January 2024.
Since the convention went into effect in 1979, the existing and proposed tax structures in both countries have changed. Hungary lowered its corporate tax rate to 9%, making it one of the lowest corporate taxes in the world. Meanwhile, the U.S. has been trying to raise its corporate tax rate and has lobbied other nations to impose a global corporate minimum tax rate, a position rejected by the Hungarian government. Some groups, such as the American Chamber of Commerce in Hungary, have expressed concern about the move and urged the leaders of the two countries to resolve their differences.
Totalization Agreement Remains in Effect
The U.S. has a social security totalization agreement with Hungary that has been in force since 1 September 2016. U.S. totalization agreements eliminate dual social security taxation, which occurs when a worker from one country works in another country and is required to pay social security taxes to both countries on the same earnings. Totalization agreements help fill gaps in benefit protection for workers who have split their careers between the U.S. and another country. The U.S.-Hungary totalization agreement is not affected by the Treasury announcement and remains in force.
Edward Kowalski, Esq., is Manager, Payroll Information Resources, for the American Payroll Association