What the Hungary Tax Treaty Termination Means for Advisors

In the past, under the terms of the tax treaty, people with ties to both countries paid taxes on capital gains in the country where they lived.

Now, Hungarians who live in the United States and earn capital gains may see their effective tax rate on capital gains increase to a total of 35%, from 30%, according to a Deloitte analysis.

The Hungary treaty had a different annuity provision than the standard U.S. tax treaty, which put annuity income in an “all other income” category rather than in a paragraph of its own, and it’s possible that that treatment could lead to complications now that the treaty is being terminated.

3.  Tax fights aimed at tax evaders and money launderers could affect ordinary clients.

The termination of the tax treaty with Hungary could hit some clients who do their best to pay their taxes according to the rules.

The Biden administration let a new treaty with Hungary negotiated in 2010 stay unratified and let the 1979 treaty end partly because of concerns that Hungary was using a low corporate tax rate and the tax treaty to give corporations a way to use operations in Hungary to cut their taxes, according to analysis posted by PayrollOrg, a payroll industry group.

The end of the treaty may now affect Hungarian clients who went to college in the United States, ended up living here and have relatively simple, modest finances.

Similarly, an earlier, broader tax fight, over a U.S. Foreign Account Tax Compliance Act requirement that financial institutions send the IRS reports about accounts held by U.S. citizens, has had a huge impact on many low-income, low-tax Americans living outside the United States.

U.S. students who study in Europe, for example, often have trouble finding bank accounts near their universities because the institutions are reluctant to get involved with sending reports to a tax agency on another continent for the sake of students with low-fee, low-balance accounts.

4. Tax treaties are of keen interest to any clients who want to run away to an exotic beach when they retire or who want to bring their parents here.

Northwestern Mutual, for example, talks about the importance of understanding the relevant tax treaties in a client-oriented guide to retiring outside the United States.

Even U.S. clients who want to retire in Canada will run up the problem that Canada already treats U.S. retirement tax accounts much differently than the IRS does. even though Canada and the United States have a well-established tax treaty.

Clients who retire in jurisdictions with no tax treaties or fragile treaties could face even more cross-border retirement tax headaches.

Credit: BrunoWeltmann/Adobe Stock