
On July 8, the US Treasury sent Hungary a notice
of its intention to terminate the 1979 US-Hungary income tax treaty.
The notice starts the clock on a six-month advance notice period.
Assuming that the notice is not revoked within that period, the 1979
treaty will generally cease to have effect as of 2024. With respect to
withholding taxes in particular, the 1979 treaty will cease to have
effect as of January 1, 2024, which will generally result in a
30 percent US withholding tax on US-source payments. In respect of other
taxes, the 1979 treaty will cease to have effect with respect to tax
periods beginning on or after January 1, 2024.
The 1979 treaty is notable as one of the few remaining US income tax
treaties without a limitation-on-benefits (LOB) article, and one of an
even smaller number of LOB-free US income tax treaties that provide for
0 percent withholding tax on interest payments. These features, in
combination with Hungary’s own advantageous tax rules, historically made
Hungary an attractive jurisdiction for financing structures, including
(especially before 2008) in connection with Canada-to-US inbound
financings.
A new US-Hungary income tax treaty was negotiated and signed in 2010.
Among other significant changes, the 2010 treaty included a
comprehensive LOB article, including a “triangular” provision. However,
the 2010 treaty was in limbo for a long time—one of the instruments that
Senator Rand Paul blocked from ratification votes, citing privacy
concerns with the information exchange provisions. Although the
protocols managed to get ratified in 2019 through the support of Senator
Mitch McConnell, the US Treasury raised concerns that certain treaties
(those with Hungary, Poland, and Chile) may override the base erosion
anti-abuse tax provision enacted as part of the Tax Cuts and Jobs Act of
2017, thus further delaying the coming into force of the 2010 treaty.
The US Treasury’s move to terminate the 1979 treaty appears to be
primarily prompted by Hungary’s continuing opposition to the European
Union’s adoption of a 15 percent global minimum tax pursuant to the OECD
pillar 2 initiative, which the Biden administration champions. The
Treasury Department stated that the benefits of the treaty “are no
longer reciprocal,” given the lowering of the Hungary corporate tax rate
from 19 percent, in 2010, to its current 9 percent rate; a Treasury
official was quoted as saying that Hungary’s refusal to implement the
global minimum tax “could exacerbate Hungary’s status as a
treaty-shopping jurisdiction, further disadvantaging the United States.”
It has been said that such concerns apply equally to the 2010 treaty.
Hungary, on the other hand, has refused to adopt the global minimum tax
on the basis of concerns about its adverse impact on the European
Union’s competitiveness and on jobs in Hungary.
It remains to be seen whether the US threat to terminate the 1979 treaty
will cause a shift in Hungary’s position in the short term or whether
possible political wins by the US Republican Party (which appears to
share Hungary’s concerns about pillar 2) in this year’s mid-term
elections and beyond may cause a reversal of the US termination of the
1979 treaty. In light of this uncertainty, Canadian multinationals with
US inbound financing structures that involve Hungary should carefully
consider the implications for such structures of the announced
termination of the 1979 treaty.
Michael Kandev and Jennifer Lee
Davies Ward Phillips & Vineberg LLP, Montreal and New York
International Tax Highlights
Volume 1, Number 2, August 2022
©2022, Canadian Tax Foundation and IFA Canada
© International Fiscal Association (Canadian Branch) 2021. All rights reserved.