Introductory Note
This article is based on a presentation delivered at the STEP Hungary Conference held on 20 March 2026 in Budapest, Hungary, a professional forum for private wealth, taxation, and cross-border structuring. I participated in the event both as a speaker and as a moderator. The presentation focused on U.S. tax residency and its implications for cross-border wealth structures, particularly in the absence of the U.S.–Hungary tax treaty. The following text presents an adapted and expanded version of the presentation in a more accessible article format.
Our panel focused on tax risks related to relocation and cross-border wealth structures, with contributions from Ksenia Shvalova, István Illés, and myself:
- Ksenia Shvalova TEP is a Relationship Manager at M/HQ in Dubai, specializing in international client advisory and cross-border structuring.
- István Illés is a Board Member and Partner at APELSO Trust in Hungary, with extensive experience in trust structures and private wealth planning.
Introduction
The termination of the tax treaty between the United States and Hungary, effective as of 2024, represents a significant shift in the legal and tax environment governing cross-border activities between the two jurisdictions. For decades, the treaty provided a stable and predictable framework for individuals and families with economic ties to both countries. It played a crucial role in reducing withholding taxes, mitigating double taxation, and offering clear rules for determining tax residence. In this context, internationally mobile individuals were able to structure investments and long-term wealth planning arrangements, including trusts and asset management structures with a relatively high degree of certainty. The absence of the treaty, however, fundamentally alters this landscape.
Increased Reliance on Domestic Tax Rules
Following the treaty’s termination, cross-border tax matters must now be assessed primarily under U.S. domestic tax law. These rules are often more complex and, in many cases, less favorable for non-U.S. investors. One of the most immediate consequences is the reintroduction of full statutory withholding taxes.
In the absence of treaty protection, Hungarian investors may be subject to a 30% withholding tax on U.S.-source income, including dividends, interest, and royalties.
This development directly affects investment returns and may necessitate a reassessment of international portfolio structures. Furthermore, the elimination of treaty-based coordination increases the likelihood of double taxation, as the mechanisms previously available to align the U.S. and Hungarian tax systems are no longer applicable.
The Growing Importance of U.S. Tax Residency
A critical aspect of the post-treaty environment is the heightened significance of U.S. tax residency. Under U.S. law, tax residency may arise through either the Green Card Test or the Substantial Presence Test, even in the absence of permanent relocation. Once an individual becomes a U.S. tax resident, U.S. taxation generally extends to worldwide income, foreign assets, and pre-existing wealth structures. This has far-reaching implications, particularly in relation to trust arrangements and cross-border asset holding structures.
Implications for Trust Structures
Trusts established for European wealth planning purposes may be subject to significantly different treatment under U.S. tax law.
If a U.S. tax resident becomes involved as a settlor, beneficiary, or controlling person, complex classification and reporting issues may arise.
In particular, such structures may be classified as foreign trusts under U.S. law, triggering extensive compliance obligations and potentially unfavorable tax consequences. The lack of treaty coordination further complicates the analysis, as there is no longer a harmonized framework to mitigate conflicting tax treatments.
Practical Case Study
To illustrate these issues, consider the case of a Hungarian entrepreneur who has established a Hungarian trust for long-term wealth planning and succession purposes. The trust holds a diversified portfolio, including EU investments, U.S. securities, and foreign financial accounts. Historically, the structure functioned without significant complications: both the settlor and trustee are Hungarian residents, and the beneficiaries are based in Europe.
However, the situation changes when the entrepreneur increases his physical presence in the United States due to business activities. Over a three-year period, he spends 130 days in the current year, 120 days in the preceding year, and 90 days two years earlier. Under the Substantial Presence Test, all days spent in the current year are counted in full, while one-third of the days from the preceding year and one-sixth of the days from the second preceding year are considered. Accordingly, the calculation is as follows:
- 130 days (current year)
- 40 days (one-third of 120 days)
- 15 days (one-sixth of 90 days) = 185 days
As this exceeds the 183-day threshold, the individual qualifies as a U.S. tax resident under U.S. domestic law.
It should also be noted that U.S. tax residency may arise independently through the acquisition of a Green Card, regardless of the number of days spent in the United States.
Tax and Reporting Consequences
Once U.S. tax residency is established, several immediate consequences follow:
- The Hungarian trust may be classified as a foreign trust under U.S. law, subjecting it to complex taxation and reporting requirements.
- If the individual has signature authority over foreign financial accounts, FBAR (FinCEN Form 114) reporting obligations may arise where the aggregate value exceeds USD 10,000.
- Additional reporting requirements may include: Form 8938 (FATCA reporting of specified foreign financial assets), Form 3520 and 3520-A (foreign trust reporting), Form 5471 (foreign corporations), Form 8865 (foreign partnerships).
Where the trust qualifies as a grantor trust, the settlor may be subject to U.S. taxation on the trust’s income, regardless of whether distributions are made.
Moreover, the presence of non-U.S. investment funds within the portfolio may trigger the application of the PFIC (Passive Foreign Investment Company) regime. This regime is associated with extensive reporting obligations and may result in punitive taxation compared to standard capital gains treatment.
Conclusion
The termination of the U.S.–Hungary tax treaty significantly increases the complexity of cross-border wealth planning. In the absence of treaty-based coordination, taxpayers must navigate overlapping and potentially conflicting domestic rules. As a result, pre-immigration planning and the early review of existing wealth structures have become essential. Proper structuring and timely compliance can mitigate risks, but the margin for error has narrowed considerably in the post-treaty environment.
The information provided in this article is for informational purposes only and does not constitute tax or legal advice.