The first week of Donald Trump’s presidency has already marked the beginning of efforts to restore Hungary–US relations, which had reached a low point under the Biden administration, particularly during the tenure of former US Ambassador to Hungary David Pressman. Last Thursday, Hungarian Prime Minister Viktor Orbán instructed his ministers of national economy and foreign affairs and trade to prepare an agreement aimed at reinstating the double taxation treaty between Hungary and the United States, which was terminated two years ago.

‘The agreement between the government of Hungary and the government of the United States of America on the avoidance and prevention of double taxation in the field of income taxes’ should be concluded, according to the Hungarian Official Gazette, which publishes the official text of newly issued or amended legislation.

A Direct Shot at Hungarian Competitiveness

In July 2022, Washington unilaterally terminated the international treaty with Hungary—dating back to 1979—on the prevention of double taxation. The treaty officially expired on 8 January 2023, although some of its provisions remained in effect until 31 December 2023. Since 1 January 2024, both countries have been entitled to tax income from the other under their respective domestic laws, with such income now treated as originating from a non-treaty country.

The consequences of the treaty’s termination are severe for private individuals, businesses, and the Hungarian state as well. According to estimates made prior to 1 January 2024, the most significant impact on businesses relates to withholding tax: dividends, interest, and royalties are now subject to a withholding tax of 30 per cent, up from the previous rate of 5 per cent.

‘The consequences of the treaty’s termination are severe for private individuals, businesses, and the Hungarian state as well’

The Hungarian economy will experience the negative effects even in the short term, such as through a direct tax revenue loss of 70 billion to 80 billion HUF due to the reorganization of the investment structure of US companies, a September 2023 analysis of EY Hungary stated. ‘However, the long-term implications are more serious: there could be a significant decline in the economy’s ability to attract capital and retain its labour force.’

A Tool of Political Pressure

The termination of the treaty was one of the measures employed by former US President Joe Biden’s administration to pressure Hungary, which had long vetoed the European Union’s adoption of the global minimum tax. The global minimum tax establishes a 15 per cent minimum corporate tax rate for multinational companies, disadvantaging traditionally low-tax countries.

The Hungarian government argued that implementing such tax would undermine the country’s fiscal sovereignty and create a competitive disadvantage for the European Union, which it deemed unacceptable given the particularly sensitive economic conditions at the time.

‘The Hungarian government argued that implementing such tax would undermine the country’s fiscal sovereignty’

Hungary’s corporate tax rate of 9 per cent was significantly lower than that of its trading partners and was considered a cornerstone of the country’s economic strategy.

As pressure from both the US and the EU increased, the Hungarian government adjusted its strategy and position during negotiations, ultimately achieving its goal of shaping the final agreement on the global minimum tax to minimize its impact on Hungarian competitiveness. On 12 December 2022, Viktor Orbán lifted Hungary’s veto. However, Washington and Budapest did not begin negotiations to restore the double taxation treaty.

New Treaty on the Horizon

That remained the case until 5 November 2024, when Donald Trump made a historic comeback and was re-elected as the 47th President of the United States. In an interview on 10 November, Orbán stated that Hungary and the US would need to sign an agreement to prevent double taxation, as the previous administration ‘failed to renew the one that expired.’ He added that he was also seeking an agreement with Trump ‘on some major economic matters.’ ‘I think we will have the opportunity to do so,’ he said optimistically.

‘I have an agreement with the US President; the golden age of US–Hungarian relations is coming. This will be felt in everyday life, in our pockets, and in our families’ budgets,’ Orbán stated on 17 January, just three days before Trump’s inauguration.

On Thursday, Minister of National Economy Márton Nagy appointed Bence Katona as Ministerial Commissioner for Hungarian–American Investment and Business Relations. In this role, Katona will be tasked with ‘fostering new business relationships between Hungary and the United States, identifying new investment and financing opportunities, and promoting the entry of Hungarian businesses into the US market.’ Additionally, Katona will ‘help to implement planned investments and develop new financing programmes to ensure that the United States is once again one of the three largest investors in Hungary.’

‘The government is working to relax visa rules between the two countries, restore the double taxation agreement, and re-establish direct flights between Budapest and key US cities such as New York and Washington,’ said Márton Nagy.

The restoration of the double taxation agreement is not only a strong signal of improved relations between the new US administration and Hungary but also a critical step for bilateral trade relations. It would, among other benefits, lower the tax burden on Hungarian companies operating in the United States, thereby encouraging bilateral trade and investment.

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