Territorial vs Worldwidetaxation
Territorial/worldwide taxation
Territorial and worldwide taxation — two models: taxing only income earned within the country, or taxing all worldwide income of a resident.
- What it is
- Two models: taxing only local income or all worldwide income
- Territorial
- Tax only on income earned within the country
- Worldwide
- Tax on all of a resident’s income worldwide
- Why it matters
- It determines how your foreign income is taxed
- How to use it
- Take the model into account when choosing residence
In plain words
Territorial versus worldwide taxation are two fundamentally different models of which income of a resident a country taxes. Under a territorial system a country taxes only income earned within its territory (from local sources), and as a rule does not tax a resident’s foreign income. Under a worldwide (global) system a resident pays tax on all their income — both local and earned anywhere in the world.
The difference is huge for people with international income. A resident of a country with a worldwide system (many developed states among them) must declare and pay tax on income from everywhere. A resident of a country with a territorial system (a number of jurisdictions in Asia, Latin America and other regions) pays tax mainly on local income, while foreign income often remains untaxed or is taxed preferentially.
That is why choosing a country of tax residence is one of the key questions of international planning. For a person with substantial foreign income, a territorial system can mean significant savings. But it is important to take all the factors into account: CFC rules, presence requirements, other taxes. We help choose residence with the taxation model and the whole picture in mind, not a single characteristic.
Where the taxation model matters
What matters about the two models
- Local income only
- Foreign income is often not taxed
- Can give savings
- All of a resident’s income
- From everywhere
- In many developed countries
- Foreign income
- International business
- When relocating
- CFC rules
- Presence requirements
- Other taxes
How to take it into account when choosing
- 01Assess the structure of your income
- 02Compare the countries’ models
- 03Take CFC rules and presence into account
- 04Choose residence
- 05An optimal burden
What you need to know
- Two models: territorial and worldwide
- The territorial model taxes only local income
- The worldwide model taxes all of a resident’s income
- The model determines how foreign income is taxed
- A key factor in choosing residence
Common mistakes
- Not taking the model into account when choosing residence
- Assuming foreign income is always untaxed
- Ignoring CFC rules under a territorial system
- Choosing a country on a single characteristic
- Not taking presence requirements into account
What this means for a BRIDGES client
We help choose tax residence with the taxation model in mind: a territorial system can give substantial savings to people with foreign income. At the same time we take the whole picture into account — CFC rules, presence, other taxes — so that the choice genuinely optimises the burden rather than creating hidden obligations.
Frequently asked questions
01 /How does the territorial system differ from the worldwide one?
The territorial system taxes only income earned within the country; the worldwide system taxes all of a resident’s income, including foreign income. The difference is huge for people with international income.
02 /Which countries use the territorial system?
A number of jurisdictions in Asia, Latin America and other regions. There, a resident’s foreign income is often untaxed or taxed preferentially. Many developed countries use the worldwide system.
03 /So foreign income is not taxed?
Under a territorial system, often not, but not always and with caveats. It is important to take into account CFC rules, presence requirements and the particulars of the specific country.
04 /Why does it matter when moving?
Because the model determines how your foreign income will be taxed. For a person with substantial foreign income it can mean significant savings or, conversely, a burden.
05 /Is it enough to choose a territorial country?
No. The model is only one factor. CFC rules, presence requirements, other taxes and the whole picture must be taken into account. We help assess this comprehensively.
06 /How do you choose the optimal residence?
Assess the structure of your income and compare countries by taxation model and other factors. We choose the residence that is optimal given your whole situation.
See also
Read next
This material has undergone editorial review by BRIDGES.
Choosing a country of residence?
We will compare taxation models and the whole picture — so as to choose the residence that is optimal for your income.