Updated
GL-T-04
Glossary · Taxes and residency
Territorial vs Worldwide taxation - Territorial/worldwide taxation
Territorial and worldwide taxation — two models: taxing only income earned within the country, or taxing all worldwide income of a resident.
01 / In 30 seconds
The short answer
- 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
02 / In plain words
What Territorial vs Worldwide taxation means
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.
A case from practice
An entrepreneur whose main income comes from abroad is considering a move. A country with a territorial system could substantially reduce their burden, taxing mainly local income. We compare the models, take CFC rules and presence into account — and choose the residence that is optimal given the whole picture.
Where the taxation model matters
- Choosing a country of tax residence
- Planning a move
- People with foreign income
- International entrepreneurs
- Optimising the tax burden
- Comparing jurisdictions
03 / What it covers
What matters about the two models
Territorial
- Local income only
- Foreign income is often not taxed
- Can give savings
Worldwide
- All of a resident’s income
- From everywhere
- In many developed countries
Who it matters to
- Foreign income
- International business
- When relocating
Also take into account
- CFC rules
- Presence requirements
- Other taxes
04 / How it works
How to take it into account when choosing
Assess the structure of your income
Compare the countries’ models
Take CFC rules and presence into account
Choose residence
An optimal burden
05 / Key facts
What you need to know
01Two models
territorial and worldwide
02
The territorial model taxes only local income
03
The worldwide model taxes all of a resident’s income
04
The model determines how foreign income is taxed
05
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
06 / Expert advice
How to prepare in advance
When choosing tax residence, assess the structure of your income (how much is foreign) and compare the countries’ models: territorial and worldwide. Take into account not only the model but also CFC rules, presence requirements and other taxes. Then the choice of residence genuinely optimises the burden rather than creating unexpected obligations because of one overlooked factor.
What we do for you. 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.
Dmitry NagyTax consultant, international taxation and compliance (ex-Big4)
07 / Questions
Frequently asked questions
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.
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.
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.
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.
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.
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.
INITIAL ASSESSMENT
Tell us what outcome your family needs
We will design a solution for your case, choose the country and the right status, and take the whole process through to the result.
