- 1 An overview over the different tax systems
- 2 1. Citizenship-based taxation
- 3 2. Residential taxation
- 4 3. Territorial taxation
- 5 4. The Non-Dom-System
- 6 5. No direct taxes
An overview over the different tax systems
These are the four primary tax systems in the world today:
⭐️ The citizenship-based taxation
⭐️ The residential taxation
⭐️ The territorial taxation
⭐️ The non-dom-system
⭐️ No direct taxes
There is only one major country in the world that taxes their citizens based on their citizenship, the United States of America.
The residential taxation and the territorial taxation are the most widely used tax systems in the world.
More than 130 countries use a residential tax system. Roughly another 40 countries use the territorial taxation model. This tax system is especially interesting for location independant entrepreneurs.
A few countries have implemented so called non-dom tax systems.
Then there are 23 countries who don’t charge any direct taxes. Generally they tend to have a low quality of life, or make it very difficult to immigrate into.
Additionally it’s important to know if the respective countries have international tax rules (CFC-rules). This will determine if you can use foreign companies without negative consequences in countries with territorial taxation.
1. Citizenship-based taxation
The United States of America.
US citizens have to declare their taxes to the IRS (the US tax authority), no matter where they reside in the world. That’s why US citizens are more likely than citizens of other countries to renounce their citizenship, in order to save taxes.
2. Residential taxation
The residential tax system or residency-based tax system is the most widely used tax system in the world today.
Over 130 countries use this tax system today. Those include almost all major developed countries, including most of the EU, Australia, New Zealand, Japan, and more more.
This is how it works:
As soon as an individual becomes a tax-resident in the country, he automatically becomes liable to pay taxes on his total worldwide income.
Countries with residence-based tax system
Taxation on worldwide income
Determining tax-residency: 183 day rule
Clear requirements to determine whether an individual is a tax-resident in that country or not.
183-day rule (America: substantial presence test)
Example of Germany
3. Territorial taxation
Only locally generated income gets taxed
Good countries for 2nd flag.
Countries with territorial tax system
4. The Non-Dom-System
This tax system is a hybrid between the residence-based and the territorial-based tax systems. It differientiates between “domicile” and “residence”.
What is your domicile?
The domicile is the country you spend most of your life in. It is generally the country your father considered his permanent home. Most of your family may still live there, and you may be planning to return to it in the future.
What is your residence?
Your residence in this constellation is the place where you live.
If an individual has his home in a non-dom country that is not his domicile, then the territorial tax system applies to him. For example, a German that lives in the UK. Every foreigner living in that country like that becomes a non-dom.
Nationals of the respective country aren’t non-doms, since their residence and domicile are one and the same. For them, the residence-based tax system applies.
Additionaly many non-dom-countries have CFC-rules. In many cases they only apply to their own citizens though, not to non-doms.
There are some differences to territorial taxation, like the so-called “remittance base”. The remittance base states, that foreign income is tax-free, until it’s being transfered into the country.
A few interesting countries that use the non-dom-system are:
🇬🇧 The United Kingdom
5. No direct taxes
There are in fact a few countries in the world that still don’t charge their citizens and residents any direct taxes. Direct taxes include income tax, corporate tax and taxes on capital gains.
Most countries in this category do have substantial downsides however. They either have a very low quality of life, are culturally backwards (mostly islamic states) or make it very difficult to imigrate into.
Direct taxes are not the only important criteria when it comes to chosing a country to live in.