U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

1 

99–112 

" ! SENATE 

111TH CONGRESS

2d Session 

TREATY DOC. 

2010

111–7 

TAX CONVENTION WITH HUNGARY 

MESSAGE 

FROM

THE PRESIDENT OF THE UNITED STATES 

TRANSMITTING

CONVENTION BETWEEN THE GOVERNMENT OF THE UNITED 

STATES OF AMERICA AND THE GOVERNMENT OF THE REPUBLIC 

OF HUNGARY FOR THE AVOIDANCE OF DOUBLE TAXATION AND 

THE PREVENTION OF FISCAL EVASION WITH RESPECT TO 

TAXES ON INCOME, SIGNED ON FEBRUARY 4, 2010, AT BUDAPEST (THE ‘‘PROPOSED CONVENTION’’) AND A RELATED AGREEMENT EFFECTED BY AN EXCHANGE OF NOTES ON FEBRUARY 

4, 2010 

NOVEMBER 15, 2010.—Treaty was read the first time, and together with 

the accompanying papers, referred to the Committee on Foreign Relations and ordered to be printed for the use of the Senate 


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(III)

LETTER OF TRANSMITTAL 

THE WHITE HOUSE, 

November 15, 2010. 

To the Senate of the United States: 

I transmit herewith, for the advice and consent of the Senate to 

its ratification, the Convention between the Government of the 

United States of America and the Government of the Republic of 

Hungary for the Avoidance of Double Taxation and the Prevention 

of Fiscal Evasion with Respect to Taxes on Income, signed on February 4, 2010, at Budapest (the ‘‘proposed Convention’’) and a related agreement effected by an exchange of notes on February 4, 

2010. I also transmit for the information of the Senate the report 

of the Department of State, which includes an Overview of the proposed Convention and related agreement. 

The proposed Convention and related agreement were negotiated 

to bring U.S.-Hungary tax treaty relations into closer conformity 

with current U.S. tax treaty policies. For example, the proposed 

Convention contains comprehensive provisions designed to address 

‘‘treaty shopping,’’ which is the inappropriate use of a tax treaty by 

residents of a third country. The existing Convention with Hungary, signed in 1979, does not contain treaty shopping protections 

and, as a result, has been abused by third-country investors in recent years. For this reason, concluding the proposed Convention 

has been a top priority for the Department of the Treasury’s tax 

treaty program. 

I recommend that the Senate give early and favorable consideration to the proposed Convention and related agreement and give 

its advice and consent to their ratification. 

BARACK OBAMA. 


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(V)

LETTER OF SUBMITTAL 

DEPARTMENT OF STATE, Washington, September 17, 2010. 

The PRESIDENT, 

The White House. 

THE PRESIDENT: I have the honor to submit to you, with a view 

to their transmission to the Senate for advice and consent to ratification, the Convention between the Government of the United 

States of America and the Government of the Republic of Hungary 

for the Avoidance of Double Taxation and the Prevention of Fiscal 

Evasion with Respect to Taxes on Income, signed on February 4, 

2010, at Budapest together with a related agreement effected by 

exchange of notes on February 4, 2010. The proposed Convention 

and related agreement were negotiated to bring U.S.-Hungary tax 

treaty relations into closer conformity with current U.S. tax treaty 

policies. For example, the proposed Convention contains comprehensive provisions designed to address ‘‘treaty shopping,’’ which 

is the inappropriate use of a tax treaty by residents of a third country. The existing Convention with Hungary signed in 1979 (Convention between the Government of the United States of America 

and the Government of the Hungarian People’s Republic for the 

Avoidance of Double Taxation and the Prevention of Fiscal Evasion 

with Respect to Taxes on Income, signed at Washington, February 

12, 1979) does not contain treaty shopping protections and, as a result, has been abused by third-country investors in recent years. 

For this reason, concluding the proposed new Convention has been 

a top priority for the Department of the Treasury’s tax treaty program. An overview of key provisions of the proposed Convention 

and related agreement are enclosed with this report. 

The proposed Convention is self-executing. I recommend that the 

proposed Convention and related agreement be transmitted to the 

Senate for its advice and consent to ratification. The Department 

of the Treasury and the Department of State cooperated in the negotiation of the proposed Convention and related agreement, and 

the Department of the Treasury joins the Department of State in 

recommending that the proposed Convention and related agreement be transmitted to the Senate as soon as possible for its advice 

and consent to ratification. 

Respectfully submitted, 

HILLARY RODHAM CLINTON. 

Enclosures: As stated. 


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VI

OVERVIEW

The proposed income tax Convention with Hungary signed on 

February 4, 2010 and the related agreement effected by exchange 

of notes on the same day were negotiated to bring U.S.-Hungary 

tax treaty relations into closer conformity with current U.S. tax 

treaty policy. There are, as with all bilateral tax treaties, some 

variations from these norms. In the proposed Convention and related agreement, these differences reflect particular aspects of 

Hungarian law and treaty policy, the interaction of U.S. and Hungarian law, and U.S.-Hungarian economic relations. 

Anti-abuse provisions 

The proposed Convention and the related agreement contain 

comprehensive ‘‘Limitation on Benefits’’ provisions designed to address ‘‘treaty shopping,’’ which is the inappropriate use of a tax 

treaty by residents of a third country. The existing Convention (the 

Convention between the Government of the United States of America and the Government of the Hungarian People’s Republic for the 

Avoidance of Double Taxation and the Prevention of Fiscal Evasion 

with Respect to Taxes on Income, signed at Washington, February 

12, 1979), does not contain treaty shopping protections, and, as a 

result, has been abused by third-country investors in recent years. 

For this reason, replacing the existing Convention with a Convention containing comprehensive ‘‘Limitation on Benefits’’ provisions 

has been a top tax treaty priority for the Treasury Department. 

The new ‘‘Limitation on Benefits’’ provisions include a provision 

granting so-called ‘‘derivative benefits’’ similar to the provision included in all recent U.S. tax treaties with countries that are members of the European Union. The new ‘‘Limitation on Benefits’’ provisions also contain a special rule of so-called ‘‘headquarters companies’’ that is identical to what the Treasury Department has agreed 

to with a number of other tax treaty partners. 

The proposed Convention incorporates updated rules that provide 

that a former citizen or long-term resident of the United States 

may, for the period of ten years following the loss of such status, 

be taxed in accordance with the laws of the United States. The proposed convention also coordinates the U.S. and Hungarian tax 

rules to address the ‘‘mark-to-market’’ provision enacted by the 

United States in 2007 that apply to individuals who relinquish U.S. 

citizenship to terminate long-term residency. 

Taxation of investment income 

The withholding rates on investment income in the proposed 

Convention are the same as or lower than those in the existing 

Convention. The proposed Convention provides for reduced sourcecountry taxation of dividends distributed by a company resident in 

one Contracting State to a resident of the other Contracting State. 

The proposed Convention generally allows for taxation at source of 

five percent on direct dividends (i.e., where a 10-percent ownership 

threshold is met) and 15 percent on all other dividends. Additionally, the proposed Convention provides for an exemption from withholding tax on certain cross-border dividend payments to pension 

funds. 


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VII

The proposed Convention updates the treatment of dividends 

paid by U.S. Regulated Investment Companies (RICs) and Real Estate Investment Trusts (REITs) to prevent the use of structures designed to inappropriately avoid U.S. tax. 

Consistent with the existing Convention, the proposed Convention generally eliminates source-country withholding taxes on 

cross-border interest and royalty payments. However, consistent 

with existing U.S. tax treaty policy, source-country tax may be imposed on certain contingent interest and payments from a U.S. real 

estate mortgage investment conduit. 

The taxation of capital gains under the proposed Convention generally follows the format of the current U.S. Model Income Tax 

Convention. Gains derived from the sale of real property and from 

real property interests may be taxed by the State in which the 

property is located. Likewise, gains from the sale of personal property forming part of a permanent establishment situated in a Contracting State may be taxed in that State. All other gains, including gains from the alienation of ships, boats, aircraft and containers used in international traffic and gains from the sale of 

stock in a corporation, are taxable only in the State of residence 

of the seller. 

Taxation of business income 

The proposed Convention and related agreement, like several recent treaties, provide that the OECD Transfer Pricing Guidelines 

apply by analogy in determining the amount of business profits of 

a resident of the other country. The source country’s right to tax 

such profits is generally limited to cases in which the profits are 

attributable to a permanent establishment located in that country. 

The proposed Convention generally defines a ‘‘permanent establishment’’ in a way that grants rights to tax business profits that are 

consistent with those found in the current U.S. Model income tax 

treaty. 

The proposed Convention preserves the U.S. right to impose its 

branch profits tax on U.S. branches of Hungarian corporations. The 

proposed Convention also accommodates a provision of U.S. domestic law that attributes to a permanent establishment income that 

is earned during the life of the permanent establishment, but is deferred, and not received until after the permanent establishment no 

longer exists. 

Taxation of personal services income 

The proposed Convention would change the rules currently applied pursuant to the existing Convention regarding the taxation of 

independent personal services. Under the proposed Convention, an 

enterprise performing services in the other country will become 

taxable in the other country only if the enterprise has a fixed place 

of business. 

The rules for the taxation of income from employment under the 

proposed Convention are generally similar to those under the current U.S. Model Income Tax Convention. The general rule is that 

employment income may be taxed in the State where the employment is exercised unless three conditions constituting a safe harbor 

are satisfied. 


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VIII

Pensions 

The proposed Convention preserves the existing Convention’s 

rules that allow for exclusive residence-country taxation of pensions, and consistent with current U.S. tax treaty policy, provides 

for exclusive source-country taxation of social security payments. 

Exchange of information 

The proposed Convention provides for the full exchange of information between the competent authorities to facilitate the administration of each country’s tax laws. It generally follows the current 

U.S. Model Income Tax Convention and the Organization for Economic Cooperation and Development standards for exchange of tax 

information. Accordingly, the proposed Convention allows the 

United States to obtain information (including from financial institutions) from Hungary whether or not Hungary needs the information for its own tax purposes. 

Entry into force 

The proposed Convention would enter into force on the date of 

an exchange of instruments of ratification. It would have effect, 

with respect to taxes withheld at source, for amounts paid or credited on or after the first day of the second month next following the 

date of entry into force of the proposed Convention, and with respect to other taxes, for taxable years beginning on or after the 

first day of January next following the date of entry into force of 

the proposed Convention. The related agreement effected by exchange of notes would enter into force on the date of entry into 

force of the proposed Convention. 

Effect on the existing convention 

The existing Convention would, with respect to any tax, cease to 

have effect as of the date on which this proposed Convention has 

effect with respect to such tax. However, where any person would 

be entitled to greater benefits under the existing Convention, the 

existing Convention, at the election of the person, would continue 

to have effect in its entirety with respect to such person until either the date of entry into force of the proposed Convention or December 31, 2010, whichever is later. Additionally, individuals who 

benefit from the Articles on Students and Trainees and on Teachers under the existing Convention would continue to be entitled to 

such benefits as if the existing Convention remained in force. 


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