Personal income tax

Tax residence

The first step in determining tax liabilities is to establish tax residence. In the absence of the double tax treaty, it may occur that both countries consider an individual as a tax resident, i.e. his/her worldwide income - including the employment income, income from investments, and all other types of income - is taxable in both countries. These double taxation situations were resolved by the treaty by determining in which country the individual is considered to be a tax resident and which country has the primary right to tax certain types of income of the individual.

In the absence of the treaty, under Hungarian regulations, Hungarian citizens will be considered Hungarian tax residents regardless of their US ties (i.e. place of residence, place of work) (with the exception of those who are also citizens of another country and do not have a permanent address or temporary place of residence registered in Hungary): Despite these individuals presence in the US during the entire calendar year, their worldwide income will be subject to Hungarian tax. The Hungarian tax liability of US tax residents is limited: it only extends to income derived from Hungary. In these cases, the right to credit the tax paid abroad will also be limited.

Income derived from employment and real estate rentals

Under the treaty, Hungary applies the ‘exemption method’, i.e. income subject to U.S. tax liability (apart from the exceptional case of application of the withholding tax) is exempted from Hungarian tax payment liability, and only data supply/ reporting obligations arise toward the Hungarian tax authority on the U.S. source income exempted from Hungarian taxation.

In Hungary, the income derived from employment and from renting real estate are included in the consolidated tax base. These types of income will remain included in the tax base in Hungary even after the termination of the treaty. Up to 90% of taxes paid in the US – but not more than the total amount of the Hungarian tax liability will be deductible from the Hungarian tax liability. This is equally applicable to the employment income and real estate income of Hungarian tax residents, as well as to the income of US tax residents derived from Hungary (i.e. related to work performed or real estate located in Hungary).

Regarding the effective tax liability, during the term of the treaty the effective tax liability in Hungary will be equal to the US tax liability. However, following the termination of the treaty, it will be aligned to the higher of the Hungarian or US effective tax rate.

Interest income, dividend and income from capital gain

Under the treaty interest income, dividend and income from capital gain are taxable in the country of residence, with the possibility of deducting withholding tax on dividends. Thus, the US source interest income and income derived from the capital gains of Hungarian tax resident individuals are taxable only in Hungary, while the US withholding tax on dividend can be deducted from the Hungarian tax liability.

After the termination of the treaty, the deduction of the tax paid in the US on income derived by Hungarian tax resident individuals in the US from interest, dividend and capital gain cannot be used to reduce the Hungarian tax liability below 5%. As a result, a US tax obligation of 30% can only be taken into account up to 10%, i.e. the effective tax liability will be an overall 35% (taking into account the 30% tax paid in the US and the 5% tax liability arising in Hungary). The Hungarian tax liability on the above types of income derived by US tax resident individuals from Hungary (e.g. interest paid by a Hungarian bank, dividend paid by a Hungarian company) will be 15%. Any rights of deduction or exemption in the US will be defined by US domestic regulations.

Although the current treaty between the US and Hungary will remain applicable for approximately one more year, those with US interests should prepare for the changes taking place in January 2024. Our colleagues would be pleased to assist companies and individuals affected by these changes. We are able to provide support in reviewing incomes and contracts and determining any future additional tax liabilities. Should you have any questions regarding the above, please feel free to contact us.