International tax systems and how to prepare for them

Beacon Financial Education aims to help expats organise their personal finances and educate them on retirement plans, personal lifestyle planning and wealth management. 

Congratulations on moving abroad! Whilst you may be enjoying the honeymoon phase of your new stay, you might have to understand complex tax systems in your new country. There are three variations of the tax system which countries use, and certain classifications within those systems affect your tax status. This article highlights all three and addresses the essential classifications within the rules.

System #1 - Territorial-based tax system

The territorial-based tax system only taxes domestic income. Income earned outside of the country’s borders is exempt. This is by far the best tax system for corporations. A variation of this system, which happens to be used by most countries that use territorial-based taxation, is an exemption system. The exemption system exempts 95 percent of foreign income from being taxed.

Mind you, the territorial-based system taxes income earned within the country’s borders regardless of whether the company’s headquarters is located outside of the country’s territory.

See below for a list of countries which use the territorial-based tax system.

System #2 - Residence-based tax system

A residence-based tax system taxes residents on their worldwide income (local and foreign) and non-residents on their local income. The key word in this system is “resident”. Definitions of residency vary from country to country. It’s important to check with your financial advisor to get a break down on what residency means in your country of residence - the fine print can have a massive effect on your tax status.

You can find a list of countries which use a residence-based tax system below.

System #3 - Worldwide-based tax system

The third tax system is the most comprehensive system and is only used by a few countries, including the United States. The worldwide-based tax system taxes residents and non-residents on local and foreign income sources. Be prepared to pay more taxes if you earn local and foreign income. This system is especially contentious for corporations in the United States, as an added tax is included in conducting foreign operations outside of the U.S.

If a company earns 100 USD in a country with a 10 percent tax rate, they must pay an additional 25 USD in tax with a 35 percent corporate U.S. tax rate (10% of $100 = $10, 35% of 100 = $35, $35 - $10 = $25).

Only the United States, Guam, and the Northern Mariana Islands employ a worldwide-based system.

Different rules apply

Based on the three different classifications, different rules apply depending on your country of residence. Furthermore, there are fine details (like residency eligibility) which can have a great effect on the taxes you owe. Talk with your financial advisor to get a better idea of your status.

Countries which use a territorial-based tax system

Angola, Anguilla, Belize, Bermuda, Bhutan, Bolivia, Botswana, British Virgin Islands, Costa Rica, Democratic Republic of the Congo, Djibouti, Georgia, Guatemala, Guinea-Bissau, Hong Kong, Lebanon, Macau, Malawi, Malaysia, Marshall Islands, Micronesia, Namibia, Nicaragua, Palau, Palestinian Authority, Panama, Paraguay, Saint Helena, Ascension and Tristan da Cunha, Seychelles, Singapore, Somaliland, Syria, Tokelau, Tuvalu, Zambia.

Countries which use a residence-based tax system

Abkhazia, Afghanistan, Akrotiri and Dhekelia, Albania, Algeria, American Samoa, Andorra, Argentina, Armenia, Aruba, Australia (including Christmas Island, Cocos Islands, and Norfolk Island), Austria, Azerbaijan, Bangladesh, Barbados, Belarus, Belgium, Benin, Bosnia and Herzegovina, Brazil, Bulgaria, Burkina Faso, Burundi, Cambodia, Cameroon, Cape Verde, Central African Republic, Chad, Chile, China, Colombia, Comoros, Congo, Cook Islands, Croatia, Cuba, Curaçao, Cyprus, Czech Republic, Denmark, Dominica, Dominican Republic, East Timor, Ecuador, Egypt, El Salvador, Equatorial Guinea, Estonia, Ethiopia, Falkland Islands, Faroe Islands, Fiji, Finland (including Åland), France (including overseas departments), French Polynesia, Gabon, Gambia, Germany, Ghana (foreign income of residents is taxed only if it is moved to Ghana), Gibraltar, Greece, Greenland, Grenada, Guernsey, Guinea, Guyana, Haiti, Honduras, Hungary, Iceland, India, Indonesia, Iran, Iraq, Ireland, Isle of Man, Israel, Italy, Ivory Coast, Jamaica, Japan, Jersey, Jordan, Kazakhstan, Kenya, Kiribati, Kosovo Kyrgyzstan, Laos, Latvia, Lesotho, Liberia, Libya, Liechtenstein, Lithuania, Luxembourg, Macedonia, Madagascar, Mali, Malta, Mauritania, Mauritius, Mexico, Moldova, Mongolia, Montenegro, Montserrat, Morocco, Mozambique, Myanmar, Nagorno-Karabakh, Nepal, Netherlands (including the Caribbean Netherlands), New Caledonia, New Zealand, Niger, Nigeria, Niue, Northern Cyprus, Norway, Pakistan, Papua New Guinea, Peru, Portugal, Puerto Rico, Romania, Russia, Rwanda, Saint Lucia, Saint Martin, Saint Pierre, Saint Vincent and the Grenadines, Samoa, San Marino, São Tomé and Príncipe, Senegal, Serbia, Sierra Leone, Sint Maarten, Slovakia, Slovenia, Solomon Islands, South Africa, South Korea, South Ossetia, South Sudan, Spain, Sri Lanka, Sudan, Suriname, Svalbard, Swaziland, Sweden, Switzerland, Taiwan, Tajikistan, Tanzania, Thailand, Togo, Tonga, Transnistria, Trinidad and Tobago, Tunisia, Turkey, Turkmenistan, Uganda, Ukraine United Kingdom, United States Virgin Islands, Uruguay, Uzbekistan, Venezuela, Vietnam, Yemen Zimbabwe.

Beacon Financial Education provides access to a global network of advisors. Whether you are a U.S. citizen or international from another country residing in the Netherlands, or a Dutch national moving to another country, Beacon can help you with finding your way in your new country. For more information, fill in the form below. 

Beacon Financial Education does not provide financial, tax or legal advice. None of this information should be considered financial, tax or legal advice. You should consult your financial, tax or legal advisors for information concerning your own specific tax/legal situation.