The U.S. Department of the Treasury recently announced that on July 8, 2022, the United States notified Hungary of its termination of 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, in force since 1979 (the “Convention”).
In accordance with the Convention’s provisions on termination, termination will be effective on January 8, 2023. However, as specified in the Convention, with respect to taxes withheld at source (e.g., interest, dividends, etc.), the Convention shall cease to have effect on January 1, 2024. In respect of other taxes, the Convention shall cease to have effect with respect to taxable periods beginning on or after January 1, 2024.
This is significant because this treaty was the last remaining U.S. tax treaty that did not include a Limitation on Benefits (LOB) provision. Hungary has a significant treaty network and a strong participation exemption. Therefore, in the past, Hungary has been a popular holding company location. The lack of an LOB provision enabled multinational corporations to have a tax efficient structure, using a Hungarian holding company, without having to meet the substance requirements mandated by an LOB provision.
A new treaty with Hungary was agreed to in 2010 (to replace the now terminated treaty) but the new treaty (which includes an LOB provision) has not been ratified by the Senate and there is a strong likelihood that it will not be ratified anytime soon.
As such, any multinational utilizing a Hungarian holding company structure would be wise to restructure before January 2024. McGuire Sponsel’s Global Business Services team can assist with tax efficient structure modeling and analysis to determine the best way forward.
If you have any questions about our team or any global business or compliance issue, do not hesitate to reach out.
Jason Rauhe, CPA is a Principal in the firm’s Global Business Services practice and is responsible for assisting clients and adding depth in all areas of the firm’s international tax consulting services including transfer pricing, and the firm’s compliance expertise.
Rauhe previously served as Director of International Tax at a Top 100 CPA Firm, where he was responsible for the firm’s international tax division and major industry alliance networks.