    [Senate Treaty Document 111-7]
    [From the U.S. Government Publishing Office]

    111th Congress                                              Treaty Doc.
    SENATE
    2d Session                                                 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
                             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.
                              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.

                                    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
    source-country 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.
        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.

    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.