World Taxation Systems

Understanding how different countries approach taxation is essential for international entrepreneurs. The two main systems are worldwide taxation and territorial taxation.

Worldwide Taxation

Countries with worldwide taxation tax their residents on all income, regardless of where it's earned.

How It Works

• You become a tax resident (usually by spending 183+ days)
• You must report all income—local and foreign
• You owe taxes on your worldwide income
• Tax treaties may provide relief for double taxation

Countries with Worldwide Taxation

• United States (also taxes citizens regardless of residency)
• United Kingdom
• Germany
• Australia
• Canada
• Japan
• France
• Most developed countries

Double Taxation Relief

Most worldwide-taxation countries have:

• Tax treaties with other countries
• Foreign tax credits — credit for taxes paid abroad
• Exemption methods — some income excluded

Example: If you're a UK tax resident earning income in Germany, you may get credit for German taxes paid when calculating your UK tax bill.

Territorial Taxation

Countries with territorial taxation only tax income earned within their borders. Foreign income is typically tax-free.

How It Works

• Become a tax resident
• Only local-source income is taxed
• Foreign income (earned outside the country) is not taxed
• Still must report income for compliance purposes (varies by country)

Countries with Territorial Taxation

• Panama
• Paraguay
• Costa Rica
• Hong Kong
• Singapore (mostly territorial)
• Malaysia
• Georgia
• Philippines (for some income types)

Why Territorial Taxation Matters for US LLCs

If you: 1. Own a US LLC 2. Live in a territorial taxation country 3. Earn income from non-local sources (e.g., US or international clients)

Your LLC income may be tax-free in your country of residence (assuming it's not considered local-source income).

You'd still need to comply with US requirements (Form 5472), but you wouldn't owe income tax in your residence country on that foreign income.

Citizenship-Based Taxation

The United States is unique in taxing based on citizenship, not just residency.

US Citizens

• Taxed on worldwide income regardless of where they live
• Must file US tax returns even if living abroad for decades
• Can use FEIE (Foreign Earned Income Exclusion) and Foreign Tax Credit
• Only way to escape: renounce citizenship (has tax consequences)

Eritrea

The only other country with citizenship-based taxation (2% tax on foreign income).

Hybrid Systems

Some countries use hybrid approaches:

Remittance-Based Taxation

• UK (Non-Dom status): Foreign income only taxed if remitted to the UK
• Ireland: Similar remittance basis available
• Malta: Remittance basis for non-doms

Duration-Based

• Thailand: First 180 days in a year exempt from tax on foreign income (recently changed)
• Portugal (NHR): 10-year program with favorable treatment of foreign income

Choosing the Right System

System	Best For
Worldwide (with deductions)	Those who want stability and full integration
Territorial	Remote workers with foreign clients
Remittance-based	High earners who can leave money offshore
Zero tax	High-net-worth individuals with complex needs

For US LLC Owners

If you're a non-US person owning a US LLC:

1. US taxes: Your LLC is likely tax-transparent; you owe US tax only on US-source income
2. Home country taxes: Depends on your country's system
3. Territorial residence: Foreign-source income (including US LLC income from non-US clients) may be tax-free

This is why many digital nomads combine:

• US LLC (for credibility, banking, payment processing)
• Territorial taxation residency (Panama, Paraguay, Georgia)

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This guide is for educational purposes only. Tax laws are complex and change frequently—consult a qualified professional for advice specific to your situation.