What is a territorial tax system? In a country with territorial tax system, only income that is earned in that particular country is taxed. Here is an example: if you live and work in one country, you will only have to pay taxes there; if you live in one country, but have a business (and make money) in some other country, the country where you live won’t tax income earned in a foreign country. In that case, you can be taxed by the country where your business is located. Not many countries have territorial tax systems. France and Hong Kong are some of the examples.
The Hong Kong Inland Revenue Ordinance only imposes tax on income you earn there, in Hong Kong. Both non-residents and residents are taxed. The problem with this type of tax system is that a person can avoid taxes by simply moving his/her income to a foreign country. That is why most countries use hybrid tax systems.
Most countries tax the worldwide income of their residents, and also tax the income of foreign nationals, if they earn their income in the country. The United Kingdom and the United States are good examples.
In many countries, there are different kinds of exclusions from taxes. Spain, Netherlands and Cyprus have special regimes for holding companies.
Hybrid Systems
Some countries combine residency, exclusionary and territorial tax systems. There are no any specific patterns to these systems.
U.S. Tax Treaties
People who earn income outside the country can be excluded from taxes. This is regulated by tax treaties with other countries. Tax exclusions will also depend on several factors, such as how much money one makes outside the U.S., and for how long he/she has been working abroad.
Learn more about taxes for expats.
