How PM Orbán’s tax treaty plans could benefit Hungarian expats in the U.S.
Prime Minister Viktor Orbán’s recent proposal may offer relief for Hungarians living and working in the U.S., particularly those with dividend and bond investments. The announcement aired Sunday night on Hungary’s TV2 Tények and included plans to renegotiate the U.S.-Hungary double taxation treaty as part of a broader economic agreement with the United States.
Hungary’s Finance Minister, Mihály Varga, noted that a Trump victory in the 2024 U.S. presidential election could open doors for reestablishing the double taxation treaty. Initially signed in 1979, this arrangement allowed U.S.-based Hungarians to avoid paying taxes in both countries. Since its termination, Hungarian citizens working in the U.S. have faced increased tax obligations. The last date for the treaty’s application was 31 December 2023, with the new tax rules coming into effect as of 1 January 2024.
New tax treaty between Hungary and the US?
As we wrote yesterday, PM Orbán revealed his intention to renew the double taxation agreement between Hungary and the U.S., which the U.S. government unilaterally terminated in mid-2022. According to Orbán, renegotiating this treaty could benefit Hungarians abroad by potentially reducing their tax burdens. The Hungarian prime minister also emphasised his hope for cooperation on “several significant economic issues” with former U.S. President Donald Trump, should he return to office.
Orbán commented,
“There are a few things that the current U.S. administration mishandled, such as not renewing the double taxation treaty with Hungary once it expired. This needs to be addressed.”
However, he cautioned against viewing any potential cooperation with the U.S. as a “saviour” relationship, suggesting instead that Hungary should view the U.S. as an “ally” in shared economic interests.
Who will benefit if the tax treaty is renewed?
- Dividend Investors: Hungarian investors in U.S. stocks currently pay a withholding tax of 30% in the U.S., along with an additional 5% Hungarian income tax.
- Bond Investors: Hungarians earning interest on U.S.-based bonds face a combined 35% tax burden (30% U.S. withholding tax plus 5% Hungarian tax). For purchases made after 1 July 2023, there is also a 13% social contribution tax applied to interest income.
- Hungarians Earning Salaries in the U.S.: Regardless of tax residency, Hungarians working in the U.S. are subject to U.S. taxes and must also pay Hungarian personal income tax. They can offset their Hungarian tax liability by up to 90% of what they paid in the U.S., provided that their U.S. tax rate exceeds 17%. If it falls below that threshold, they are required to pay the difference in Hungary. Managing these tax requirements has proven challenging, as taxpayers must complete and file their Hungarian returns manually.
What’s next?
As Orbán’s administration pursues potential economic agreements with the U.S., Hungarian expats in America remain hopeful for an updated tax treaty. A renewed agreement could bring financial relief and streamline tax obligations, particularly for those navigating complex U.S.-Hungary tax rules.
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Now for some context:
The old 1979 Treaty (which was terminated by the US) did not have a limitation on benefits (LOB) treaty shopping clause, which by itself would be a reason to terminate. An LOB clause prevents multinational corporations from strategically directing business to a jurisdiction with the intention to take advantage of lower withholding tax rates provided by a tax treaty (i.e. prone to abuse – call it “tax planning” if you will).
The termination actually came about after our Politicians tried to prevent the 15 percent Global Minimum Tax scheme for multinational corporations from moving forward… As one of eight out of 140 OECD Member countries (please remember – Hungary always knows best!). By then, the US Treasury had enough and pulled the emergency brake.
The “new” Treaty, negotiated in 2010, which included an LOB provision, was never ratified due to the efforts of Senator Rand Paul, a staunch Kentucky Republican. So blaming the current US Administration sort of misses the mark.
Very interesting detail, thank you Norbert. It was apparent even at the time to the casual observer that there was more to this than meets the eye and the US was not acting on a whim. From Hungary’s perspective, anything that increases their tax take due to their gaping budget deficit while also serving to reduce the desirability of living abroad for Hungarian nationals is considered desirable. For Hungary, EU freedom of movement is akin to West Berlin in 1960, a release valve that dissatisfied Hungarians can use to escape, hence setting the country up for an EU exit in the future partly in order to plug this hole.