India-Hungary DTAA: Complete Guide to the Double Taxation Avoidance Agreement

Quick answer: The India-Hungary DTAA caps dividends, interest, royalties, and fees for technical services (FTS) all at a flat 10% of the gross amount — well below India's 20% domestic rates. There are no dividend tiers and no bank-tier discount on interest. Interest paid to either government, either country's Central Bank, the Hungarian Exim Bank, the Export-Import Bank of India, or a resident lender on an Exim-Bank-guaranteed loan is fully exempt. Signed 3 November 2003 and in force from 4 March 2005, the treaty sets a nine-month construction PE threshold and has no services PE clause.

Key takeaways:

• Dividends, interest, royalties, and FTS are all capped at a flat 10% — no dividend tier based on shareholding
• Interest paid to either government, either country's Central Bank, or an Exim-Bank-linked lender is exempt from withholding
• Construction PE threshold is nine months; there is no services PE clause
• Capital-gains numbering is shifted: the land-rich share rule sits at Article 13(2), not 13(4)
• Both countries list the treaty as a Covered Tax Agreement under the MLI, but only the Principal Purposes Test applies

Overview of the India-Hungary DTAA

The Double Taxation Avoidance Agreement (DTAA) between India and Hungary prevents the same cross-border income from being taxed in both countries. It is an income-only treaty — the title covers "taxes on income" alone, with no companion capital or wealth-tax article. Article 2(3) lists the covered taxes: Hungary's income tax on individuals, corporation tax, and dividend tax; India's income tax, including surcharge. The treaty runs to 29 articles plus a seven-point Protocol, covering dividends, interest, royalties and fees for technical services, business profits, and capital gains.

The flat 10% ceiling on the four main income categories is the headline number, but the exemption and permanent-establishment rules underneath carry quirks specific to this treaty — a reader used to India's German or Czech treaties should not assume those apply here.

Treaty History and Current Status

The India-Hungary DTAA was signed at New Delhi on 3 November 2003, in Hindi, Hungarian and English, with English prevailing on divergence. It entered into force on 4 March 2005, thirty days after the later of the two governments' notifications under Article 28, notified in India by GSR 197(E) of 31 March 2005. It has effect in India for fiscal years from 1 April 2006, and in Hungary for calendar years from 1 January 2006, replacing an earlier 1986 agreement. Both countries' MLI positions filed with the OECD list this treaty with the same instrument dates — signature 3 November 2003, entry into force 4 March 2005.

India and Hungary have both ratified the OECD's Multilateral Convention (MLI) and each lists the other's treaty as a Covered Tax Agreement: India ratified 25 June 2019 (in force 1 October 2019), Hungary ratified 25 March 2021 (in force 1 July 2021). Only an amended preamble and the Principal Purposes Test actually operate on this treaty, effective for India's withholding taxes from the fiscal year beginning 1 April 2022 — see the anti-abuse section below for what does not change.

The treaty follows a Hybrid model: an OECD-style frame (plain OECD PE list, an OECD-style elimination article, a place-of-effective-management tie-breaker) carrying Indian-model features — a combined royalty/FTS article with no make-available test, a three-limb agency PE clause, an unconditional share-gains rule, a source-state gambling clause, and Protocol glosses on MFN treatment and the erstwhile dividend distribution tax.

Tax Residency and the Tie-Breaker Rule

Article 4(1) defines a resident by domestic-law criteria — domicile, residence, place of management, or place of incorporation — extending to the State itself and any local authority. For dual-resident individuals, Article 4(2) applies the standard cascade: permanent home, then centre of vital interests, then habitual abode, then nationality, then mutual agreement. For companies, Article 4(3) looks to place of effective management, with competent-authority resolution only if that cannot be determined. One quirk: Article 3(1)(j) defines India's fiscal year as beginning 1 April but Hungary's as the calendar year — why the personal-services and employment articles run on a rolling twelve-month basis instead.

Permanent Establishment Rules

Article 5 defines a PE as a fixed place of business. Article 5(2) lists only the plain OECD six items — place of management, branch, office, factory, workshop, and a mine, oil or gas well, quarry or extraction site. Unusually for an Indian treaty, there is no warehouse or sales outlet and no farm or plantation item.

Construction PE — nine months, no services PE

Article 5(3) sets the construction PE threshold at more than nine months for a building site, construction, installation or assembly project, or connected supervisory activities — between the six-month threshold common in India's other European treaties and the OECD Model's twelve months. There is no services PE clause at all: no 90-day or 183-day test. Cross-border services are instead generally taxed as fees for technical services under Article 12 at 10%, unless a fixed-place or agency permanent establishment otherwise exists. There is also no deemed oil-and-gas PE and no insurance PE clause.

Agency PE — three limbs

Article 5(4) excludes the classic OECD preparatory-or-auxiliary activities. Article 5(5) then creates a dependent-agent PE across three limbs: habitual authority to conclude contracts in the enterprise's name; habitually maintaining a stock for regular delivery on the enterprise's behalf; or habitually securing orders wholly or almost wholly for the enterprise or its controlled group. Article 5(6) denies independent-agent status where an agent's activities are devoted wholly or almost wholly to one enterprise.

Business Profits

Article 7 allocates profits strictly to what a PE actually earns — no force of attraction, and Article 7(4) denies any profit for a PE's mere purchasing activity. Two Protocol glosses matter: on a construction-site PE, machinery delivered from the head office, another PE, or a third person outside the State is excluded from the site's attributed profit; and head-office expenses are deductible under section 60 of the Income-tax Act, 2025 (section 44C of the Income-tax Act, 1961), frozen as that provision read on the 3 November 2003 signing date — this cap enters via the Protocol, not Article 7(3) itself.

Withholding Tax Rates: Dividends, Interest, Royalties and FTS

Dividends — Article 10

Dividends are capped at a flat 10% of the gross amount under Article 10(2) — no shareholding tier, no exempt category. PE-connected dividend income is routed to Article 7 or 14 instead under Article 10(4). The Protocol's historical gloss capped the erstwhile Dividend Distribution Tax at 10% of the gross dividend; DDT was abolished from 1 April 2020, so dividends are now taxed directly in the recipient's hands under the ordinary Article 10(2) cap.

Interest — Article 11

Interest is capped at a flat 10% under Article 11(2), with no bank tier. Article 11(3) exempts interest entirely (0%) where beneficially owned by: (i) the Government, a political sub-division or local authority of the other State; (ii) the Central Bank of the other State; (iii) the Hungarian Exim Bank, or a Hungarian resident on a Hungarian-Exim-Bank-guaranteed loan; (iv) the Export-Import Bank of India, or an Indian resident on an India-Exim-Bank-guaranteed loan; or (v) any other bank or Government financial institution that the two States may mutually agree. Only two named institutions appear in Article 11(3) — the Reserve Bank of India benefits only generically as "the Central Bank," and the German/Czech-style list (RBI, IFCI, IDBI, EXIM Bank, NHB, SIDBI) does not apply here. The resident-lender exemption in limbs (iii)/(iv) is easy to miss: it extends to any ordinary bank whose loan is guaranteed by its own country's Exim Bank, not just the Exim Banks themselves. PE-connected interest is routed to Article 7 under Article 11(5). Article 11(4) excludes late-payment penalty charges from "interest," with no domestic assimilation clause. A further quirk: Article 8(2) treats a shipping/airline enterprise's bank-account interest (excluding term deposits) as shipping profit outside Article 11 — but term-deposit interest of the same enterprise stays inside it.

Royalties and Fees for Technical Services — Article 12

Article 12 combines royalties and FTS into one article with a single 10% cap and no separate FTS article. The royalty definition is the wide, post-2001 Indian-model form, covering satellite, cable and optic-fibre transmission, and industrial, commercial or scientific equipment, with no equipment carve-out. The FTS definition covers "managerial, technical or consultancy services including the provision of services by technical or other personnel," excluding only payments under Articles 14 and 15. There is no "make available" condition as in India's US, UK, Singapore, or Netherlands treaties — managerial services and personnel secondment both fall inside FTS. PE-connected royalty/FTS income is routed to Article 7 or 14 under Article 12(4). For a full rate-by-rate breakdown of India-to-Hungary payments, see our withholding tax guide for India to Hungary.

Capital Gains — Six Paragraphs, Renumbered

Article 13's numbering differs from the pattern common in most Indian treaties. Immovable-property gains (13(1)) are a shared taxing right per the Protocol. The land-rich share rule sits at Article 13(2), not 13(4) — India's own MLI notification confirms "Article 13(2)" for this treaty — using the word "principally" with no stated percentage or lookback, unchanged by the MLI (Hungary reserved out). PE/fixed-base movable-property gains, including alienation of the PE itself, fall under 13(3). Ships and aircraft gains (13(4)) are taxable only in the enterprise's State of residence, not by place of effective management. Gains on any other shares of a resident company fall under Article 13(5), giving the source State an unconditional right to tax with no minimum shareholding, holding period, or grandfathering date. Residual gains (13(6)) are taxable only in the alienator's residence State.

Other Distinctive Provisions

Article 18 splits pensions across three paragraphs: private pensions are residence-only (18(1)); pensions under Hungary's compulsory pension system paid to an Indian resident are taxable only in Hungary (18(2)); Indian government pensions paid to a Hungarian resident are taxable only in India (18(3)). Article 22(3) carves gambling and lottery winnings out of the otherwise residence-only "other income" rule, letting the source State tax them at its full domestic rate. Article 9(2) contains a corresponding-adjustment paragraph for transfer-pricing disputes; the Indian accountant's report is filed on Form 48 (formerly Form 3CEB) under section 172 of the Income-tax Act, 2025 (section 92E of the Income-tax Act, 1961). Article 26's information-exchange clause is the narrow pre-2005 form — two paragraphs, no obligation to obtain domestically-uninterested information, and no override of bank secrecy.

Elimination of Double Taxation

Hungary applies the exemption method under Article 23(1)(a) — no minimum-participation threshold, no active-business test, unlike Germany's treaty. Hungary switches to an ordinary credit, for income under Articles 10–12 only. India, under Article 23(2), gives an ordinary credit capped at the Indian tax attributable, and Article 23(3) permits exemption with progression. There is no tax-sparing clause anywhere, unlike India's Czech Republic treaty. An Indian resident claiming credit for Hungarian tax paid must file Form 67 by the end of the relevant assessment year.

Anti-Abuse: MLI, GAAR, and the Unnotified MFN Clause

The treaty carries no limitation-of-benefits article — only the beneficial-ownership tests in Articles 10(2), 11(2) and 12(2). Because both countries list the treaty as a Covered Tax Agreement, two MLI provisions apply: an amended preamble and the Principal Purposes Test (MLI Article 7(1)), denying a benefit where obtaining it was a principal purpose of an arrangement, effective for India's withholding from 1 April 2022. Hungary reserved out of MLI Articles 3, 4, 5, 8, 9(1), 10–15 and 17 — so there is no Simplified LOB (India opted in; Hungary did not), no PE-definition or agency-PE change, and no percentage or lookback added to the Article 13(2) land-rich test. Domestic GAAR under section 159(6) of the Income-tax Act, 2025 (section 90(2A) of the Income-tax Act, 1961) remains available regardless.

The Protocol's MFN clause covers Articles 10–12: if India gives an OECD-member third country a lower rate or narrower scope on these income types, that applies here too — but it binds India only, not Hungary. Since all four heads already sit at the 10% floor, the live risk is a scope-based claim importing a make-available FTS limb, not a rate cut. No CBDT notification giving effect to this clause has been identified, and following the Supreme Court's 2023 Nestlé ruling, such a clause needs a separate notification to operate — a rate below 10% or a make-available FTS limb should never be applied to Hungary on this clause's strength alone.

How to Claim Treaty Benefits

A Hungarian resident obtains a certificate of tax residence (illetőségigazolás) from Hungary's National Tax and Customs Administration (NAV) — any NAV directorate may issue it, in Hungarian and English, free of charge, within a six-calendar-day statutory limit and immediately for an in-person application. The non-resident then e-files Form 41 (formerly Form 10F) on the Indian portal, with a self-declaration of beneficial ownership and no Indian PE. The Indian payer applies the treaty rate when it withholds tax, and files Form 145 (formerly Form 15CA) before remitting; Form 146 (formerly Form 15CB) is additionally required only for a taxable remittance above ₹5 lakh made without a lower-deduction certificate. Where the rate is unclear, the non-resident can apply under section 395(1) of the Income-tax Act, 2025 (section 197 of the Income-tax Act, 1961) for a certificate in advance. An Indian resident claiming credit for Hungarian tax files Form 67 by the end of the assessment year.

Worked Example

A Hungarian IT consultancy with no Indian PE invoices an Indian client ₹75,00,000 for technical consultancy. Under Article 12(2), the payer withholds 10% — ₹7,50,000 — and remits ₹67,50,000 net. Without the treaty, the domestic rate under section 207(2) (Table, Sl. No. 2) of the Income-tax Act, 2025 (section 115A of the Income-tax Act, 1961) is 20%, meaning ₹15,00,000 withheld and only ₹60,00,000 net — the treaty saves the consultancy exactly ₹7,50,000, half of the domestic withholding. Separately, if an Indian manufacturer instead borrowed in foreign currency from a Hungarian bank under a credit guaranteed by the Hungarian Exim Bank, Article 11(3)(iii) would exempt the interest from Indian withholding entirely — 0% rather than the treaty's own 10% or the 20% rate on foreign-currency debt interest under section 207(1) (Table, Sl. No. 3) — provided the bank furnishes its TRC, Form 41, and evidence of the guarantee before payment.

Common Mistakes

Assuming a shareholding-based dividend tier exists (there is none — flat 10% regardless of holding size); importing the exempt-institution list from India's German or Czech treaties (RBI, IFCI, IDBI, EXIM Bank, NHB, SIDBI) — only the Hungarian Exim Bank and Export-Import Bank of India are named here; applying a six-month or twelve-month construction-PE clock instead of nine months; assuming a make-available test limits FTS, when none exists; citing Article 13(4) for land-rich share gains, when that paragraph covers ships and aircraft (land-rich is 13(2)); and relying on the Protocol's MFN clause for a sub-10% rate or make-available FTS condition without a notification giving it effect. For DTAA guidance across multiple treaty partners, see our DTAA master guide.

Frequently Asked Questions

What is the India-Hungary DTAA?

The India-Hungary DTAA is a bilateral tax treaty signed on 3 November 2003 and in force from 4 March 2005 that prevents the same income from being taxed twice in India and Hungary. It covers dividends, interest, royalties, fees for technical services, business profits, and capital gains, and replaced an earlier 1986 agreement between the two countries.

What is the withholding tax rate on dividends under the India-Hungary DTAA?

Article 10(2) caps Indian withholding tax on dividends paid to a Hungarian beneficial owner at a flat 10% of the gross amount, regardless of shareholding percentage. There is no 0% or reduced tier for substantial shareholdings — every dividend payment to a beneficial owner in Hungary attracts the same 10% rate, well below India's 20% domestic rate.

How long can a construction project run before it becomes a Permanent Establishment?

Article 5(3) sets the threshold at more than nine months for a building site, construction, installation or assembly project, or supervisory activities connected with it — longer than the six-month threshold in several of India's other European treaties and shorter than the OECD Model's twelve months. The treaty has no separate services PE clause at all.

Is interest paid to a Hungarian bank always exempt from Indian withholding tax?

No. Article 11(2) taxes ordinary bank interest at the standard 10% rate. Full exemption under Article 11(3) applies only to interest owned by the Hungarian Government, the Central Bank of Hungary, the Hungarian Exim Bank, or a Hungarian resident lender whose loan or credit is guaranteed by the Hungarian Exim Bank — an ordinary commercial loan without that guarantee link still attracts 10%.

Does the MLI change how the India-Hungary DTAA is applied?

Yes, but narrowly. India and Hungary both list the other's treaty as a Covered Tax Agreement, so the MLI's Principal Purposes Test applies to deny treaty benefits obtained as a principal purpose of an arrangement, effective for India's withholding taxes from the fiscal year beginning 1 April 2022. Hungary reserved out of MLI Articles 3, 4, 5, 8, 9(1), 10-15 and 17, so the PE definition, capital-gains rules, and tie-breaker test are unchanged.

How are capital gains on shares taxed under the India-Hungary DTAA?

Article 13 numbers its paragraphs differently from most Indian treaties: gains on shares of a company that is principally land-rich fall under Article 13(2), while gains on any other shares of an Indian or Hungarian resident company fall under Article 13(5) and may be taxed without any minimum shareholding or holding-period condition. India taxes such gains at its domestic capital-gains rates.