US: Treasury Notifies Hungary of its Intention to Terminate U.S.-Hungary Tax Treaty.

As published on eisneramper.com, Wednesday 13 July, 2022.

On July 8, it was reported by various news organizations that the U.S. Treasury sent a notice to Hungary of its intention to terminate the U.S.-Hungary Tax Treaty (the “Tax Treaty”). There were several reasons for this, including: (1) the resistance of Hungary to adopt a global minimum tax; and (2) the Tax Treaty is one-sided, gives too many benefits to Hungary and is old. The implication is that the Tax Treaty does not have a limitation on benefits provision.

A new tax treaty with Hungary was agreed to in 2010 (which does contain a limitation on benefits provision); however, it has not been ratified by the U.S. Senate due to objections from Senator Rand Paul (R-KY).

Article 26 of the Tax Treaty provides for a six-month advance notice for termination. After the notice, which occurred in July of 2022, withholding taxes apply to amounts paid or credited on or after the first day of the next January following the expiration of the six-month period. Accordingly, payments made on or after January 1, 2024 will be subject to 30% withholding.

This was a very unusual move by the Treasury and has only been done a few times in the past. After the U.S. sent a notice of termination of the Netherlands Antilles tax treaty in 1987, it partially withdrew its termination. If Hungary agrees to the global minimum tax, it will be interesting to see whether the notice of termination is revoked. The Treasury apparently has the authority to withdraw a notice of termination.

If the Tax Treaty is terminated, this will impact a significant amount of investment in the U.S.

It is not clear whether the Treasury needs to consult with the Senate Foreign Relations Committee to terminate a tax treaty.

The Treasury has not yet released any written statement or press release.

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