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Worldwide taxation vs territorial taxation

In matters of international corporate taxation, understanding not only tax rates but also the principles of taxation is crucial. Depending on the taxation principle enforced in a particular country, income is subject to taxation differently. Worldwide jurisdictions can be divided into the following groups based on their taxation types: those, in which the income of resident companies is subject to taxation at a global level; and the jurisdictions, in which both residents and non-residents are taxed only if their income is derived within the territory or from sources within the state. In the first case, the taxation principle for income is often referred to as "worldwide taxation," while in the second case, it is termed "territorial."

Comprehending how income is taxed is essential when establishing and operating a business abroad. Let's delve further into what worldwide and territorial taxation principles entail and in which countries they are applicable.

Worldwide taxation vs territorial taxation

Posted 15 November 2023

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.

Note:

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:

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Countries with worldwide taxation

There are more countries following worldwide taxation principles than those following territorial principles.

Conclusion

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.

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