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The US Treasury Department took the rare step on July 8 of providing notice to Hungary that it is terminating the US-Hungary income tax treaty, which has been in operation since 1979. According to a July 8 article in the Wall Street Journal, Treasury explained its action based on long-standing concerns with Hungary’s tax system and the treaty itself, and a lack of satisfactory action by Hungary to remedy these concerns in coordination with other EU member countries that are seeking to implement the OECD Pillar Two global minimum tax proposal. The treaty termination will apply to US-source dividends, interest, and royalties for payments made on or after January 1, 2024. A new US income tax treaty with Hungary was agreed to in 2010 (to replace the 1979 tax treaty), primarily to add a Limitation on Benefits article, the United States’ traditional treaty anti-abuse provision. However, the new 2010 treaty has not been ratified by the US Senate due to objections of Senator Rand Paul (R-KY). In addition, according to a Treasury spokesperson, the new treaty is not supported by the Biden administration given reductions in Hungary’s corporate tax rate since 2010 and the 2017 changes to US tax law.  

Actions to consider: Taxpayers potentially impacted by the termination of the treaty will need to be prepared to take steps before 2024 to alleviate any adverse effects of such termination.