Territorial and worldwide taxation principles
Understanding how and where worldwide and territorial taxation principles apply allows business owners to select the most advantageous jurisdiction for their specific goals. When choosing a country for international business, taxation becomes a key consideration.
Both of these principles involve the concept of a “resident company.” So before delving into the details, it’s essential to define what qualifies a company as a resident.
The criteria for determining residency vary from country to country and are determined in accordance with the legislation of the specific jurisdiction. However, two criteria are generally of the greatest importance:
- Company registration in the jurisdiction’s Companies Register;
- The center of effective management and activities (if the company conducts activities within the jurisdiction and/or its management is carried out from within that jurisdiction).
Under the worldwide taxation principle, a country taxes all income of a resident company earned worldwide, regardless of the source of that income.
Under the territorial taxation principle, only the income of resident and non-resident companies earned within the specific country’s territory is subject to taxation.
What should you do if the country of registration follows the global taxation principle, but the center of effective management and the source of profit are in another country? In such cases to avoid double taxation (in the country of registration and the country where the income was earned), there are Double Taxation Avoidance Agreements.
So, which countries apply territorial and which apply worldwide taxation principles?
Countries with territorial taxation
Some countries following territorial taxation principles include:
Countries with worldwide taxation
There are more countries following worldwide taxation principles than those following territorial principles.
Countries following the territorial taxation principle allow residents and non-residents to pay taxes only within the territory of that country, making them at first look as the most preferable choices for conducting foreign business. However, given the numerous Double Taxation Avoidance Agreements, countries following worldwide taxation principles may also offer favorable conditions for your future company.
If you have questions about company taxation in a specific country, feel free to reach out to us. The experts at GFLO Consultancy are always ready to assist!