Personal Income Tax
Hungary | Tax Authority confirms: taxes paid through joint tax returns in the U.S. cannot be credited to Hungarian personal income tax
Summary
With the termination of the double taxation agreement between the United States and Hungary (DTT) starting January 1, 2024, there are key updates for the foreign tax credit. The Hungarian tax authority has confirmed (in a non-public ruling provided to us) that taxes paid under a joint tax return in the U.S. cannot be credited against Hungarian personal income tax liabilities.
The detail
Due to the termination of the DTT, income earned from U.S. sources by Hungarian residents may be subject to tax in both countries resulting in double taxation.
To address the challenge of double taxation, the Hungarian PIT legislation offers a tax credit for foreign taxes paid on the foreign-sourced income. Specifically, the legislation allows for a credit of up to 90% of the foreign taxes paid on U.S. sourced income within the consolidated tax base (e.g. employment income) against the Hungarian tax liability on the same income. This credit is capped at the amount of Hungarian tax due on the that foreign-sourced income.
In addition to the credit for income within the consolidated tax base, the Hungarian PIT legislation also provides for a tax credit for foreign-sourced incomes taxed separately (e.g. dividends, interests). However, there is a minimum tax requirement for Hungarian tax purposes, which mandates that Hungarian tax on the separately taxed income must be at least 5% after applying the foreign tax credit.
The Hungarian PIT legislation requires individuals to file their tax returns individually. In contrast, the U.S. tax system permits married couples to file joint tax returns. The Hungarian Tax Authority confirmed that for Hungarian tax purposes, only taxes paid through an individual U.S. tax return can be credited against Hungarian taxes. This means that if a couple files a joint tax return in the U.S., the foreign taxes paid cannot be credited against Hungarian taxes.
Hungarian residents should keep in mind that if they file a joint tax return in the U.S., their foreign-sourced income will be taxed at a flat 15% PIT rate in Hungary regardless of the amount of tax paid in the U.S. likely resulting in double taxation.
Contact us
For a deeper discussion on the above, please reach out to your Vialto Partners point of contact, or alternatively:
Dénes Megyesi
Director
Zafira Csomor
Senior Consultant