Territorial vs worldwide taxation: the difference
Worldwide taxation is the default. A resident is taxed on income from every source, at home and abroad, and relief for tax paid elsewhere comes through credits or treaties. It follows residence, so it ends when you stop being resident, except in a country that also taxes by citizenship.
Territorial taxation taxes by source. A resident pays tax on income that arises in the country and nothing on foreign income, whether it stays abroad or comes home. Between them sit remittance systems, which tax foreign income only when it is brought in, and at the far end are countries with no personal income tax at all.
The tax systems a resident can live under
| System | What a resident is taxed on | Foreign income | Examples |
|---|---|---|---|
| Worldwide | Income from every source | Taxed, with credit for foreign tax | Portugal, Spain, Italy, United Kingdom, Cyprus |
| Territorial | Income from local sources only | Not taxed, even if brought in | Georgia, Paraguay, Panama, Hong Kong, Singapore |
| Remittance | Local income, plus foreign income brought in | Taxed only when brought in | Malta, Thailand, Mauritius, Barbados |
| No personal income tax | No tax on personal income | Not taxed | UAE, Monaco, Cayman Islands, The Bahamas |
| Citizenship-based | Citizens on all income, wherever they live | Taxed, with exclusions and credits | United States |
| Hybrid | A mix, by income type, nationality or domicile | Depends on the rule | Ireland, Uruguay, Philippines, Dominican Republic |
Which countries use territorial or worldwide taxation
The Index records each country's system for the person it scores, a self-employed remote worker who has just moved in. Worldwide taxation is still the norm: 24 of the 45 countries use it, against 7 territorial countries.
The 45 Index countries by tax system
| System | Count | Countries |
|---|---|---|
| Worldwide | 24 | Albania, Andorra, Argentina, Armenia, Brazil, Bulgaria, Colombia, Croatia, Cyprus, Czechia, Estonia, Greece, Hungary, Indonesia, Italy, Mexico, Montenegro, Portugal, Puerto Rico, Romania, Serbia, Spain, Switzerland, United Kingdom |
| Territorial | 7 | Costa Rica, Georgia, Hong Kong, Malaysia, Panama, Paraguay, Singapore |
| No personal income tax | 5 | The Bahamas, Cayman Islands, Monaco, St Kitts and Nevis, United Arab Emirates |
| Hybrid | 5 | Antigua and Barbuda, Dominican Republic, Ireland, Philippines, Uruguay |
| Remittance | 4 | Barbados, Malta, Mauritius, Thailand |
Territorial taxation: what goes untaxed and what does not
In most of the territorial tax countries in the Index, a resident's foreign dividends, interest and gains go untaxed: Panama has individuals subtract foreign-source income on their return, Paraguay's income tax reaches only Paraguayan-source income, and Hong Kong does not tax profits arising abroad even when they are brought into Hong Kong.
Work done on the country's soil is still taxed: the source of pay for services is generally where the work is done, not where the client sits, so Georgia, Paraguay, Singapore, Malaysia and Hong Kong all tax remote work done there. Georgia's Tax Code treats services rendered in Georgia as Georgian-source income, and also services a Georgian resident supplies to a client abroad unless a permanent establishment elsewhere performs them, which is why a freelancer resident in Georgia is taxed there on every invoice.
| Foreign dividends, interest and gainsIncome without a Georgian source is exempt | 0% |
|---|---|
| Work done in Georgia, standard ratePersonal income tax on Georgian-source income | 20% |
| Work done in Georgia, small business statusIndividual entrepreneurs in eligible activities, up to GEL 500,000 (about $192,000) a year | 1% of turnover |
| From the month turnover passes GEL 500,000 (about $192,000)Status revoked from the next January after 2 calendar years each above that limit | 3% of turnover to year end |
Small business rates and the loss of status from articles 88 to 90 of the Tax Code of Georgia (article 90(2) for the 3% rate, article 89(2)(a) and 89(3) for the revocation), checked October 12, 2026; the foreign income exemption and the 20% standard rate from the Nomad Tax Index data, checked September 29, 2026.
Costa Rica is the exception. Remote workers on its Law 10008 permit pay no Costa Rican income tax on pay from abroad for up to 2 years and are never treated as habitual residents, which gives Costa Rica a 0% rate in the Index. A bill the government presented in September 2026, file 25.796, would tax residents' foreign dividends, interest, royalties, rents and capital gains while leaving other income territorial, Delfino.cr reported on September 23, 2026; it is not law.
For a remote worker, the territorial countries differ by the rate they charge on work done there.
Source: Nomad Tax Index country data (effective rate at $100,000)
Show the numbers
| Effective rate | |
|---|---|
| Costa Rica | 0% |
| Georgia | 1.2% |
| Singapore | 6.1% |
| Paraguay | 9.6% |
| Hong Kong | 10.2% |
| Malaysia | 19.9% |
| Panama | 29.3% |
Panama's 29.3% assumes remote work done in Panama is Panamanian-source income, a point Panama's rules leave open, while Georgia's 1.18% comes from its small business regime rather than from the territorial system itself.
Foreign clients do not make income foreign
In a territorial country the question is where you sat while you did the work, not where the client is or which account the money lands in. A designer living in Asunción who bills only US clients has Paraguayan-source income, and keeping the fees in a US account changes nothing.
Worldwide taxation: tied to where you live
In the 24 worldwide countries in the Index, a resident is taxed on income from every country until residence ends, and leaving does not end it by itself: digital nomads who never settle anywhere often stay tax resident, and taxed on everything, in the country they left.
Several worldwide countries soften the rule for newcomers. The UK exempts foreign income and gains for the first 4 tax years after 10 years abroad under its FIG regime, Italy and Greece offer a fixed lump sum tax in place of tax on foreign income, and other special tax regimes for new residents cut the rate on work for a set number of years.
Cyprus is worldwide on paper, but residents with non-dom status pay no Special Defence Contribution on dividends and interest until they have been resident 17 of the last 20 years, a limit they can now extend by up to 2 periods of 5 years for €250,000 (about $284,000) each, KPMG Cyprus explains.
Some worldwide countries also keep a hold on their own nationals after they leave. Spain keeps taxing Spanish nationals who move their tax residence to a tax haven for the year of the move and the 4 years after it, under article 8.2 of its income tax law.
Citizenship-based taxation: the US case
The US taxes by citizenship as well as residence: citizens and resident aliens are taxed on worldwide income wherever they live, the IRS states. Moving to a territorial or zero-tax country lowers the US bill through the foreign earned income exclusion, up to $132,900 of earned income per person for 2026, according to the IRS, the foreign housing exclusion or deduction, and credits for foreign tax, which a zero-tax country never produces.
That makes the new country's system a secondary question for Americans living abroad: a territorial country leaves their foreign dividends untaxed locally, but the US still taxes them.
Remittance systems: taxed only when brought in
A remittance system sits between territorial and worldwide taxation. Foreign income is taxed only when it reaches the country, so income left abroad stays untaxed there, but it is taxed the moment it comes in. Malta applies the remittance basis to residents who are not domiciled there, Thailand to foreign income its residents earn from 2024, and Mauritius to all residents.
Malaysia is territorial in practice but no longer in law: foreign income received in Malaysia is now taxable, but resident individuals can bring it in tax free until December 31, 2036, subject to conditions, PwC reports.
Hybrid tax systems: 5 countries that mix the rules
These countries do not fit a single label, because they tax by income type, by nationality or by domicile:
- Philippines. Foreigners, resident or not, are taxed only on Philippine-source income, while Filipino citizens living there are taxed on worldwide income; work done in the Philippines is local income either way.
- Uruguay. Work done in Uruguay is taxed at rates up to 36%, foreign dividends and interest at 12%, and from 2026 gains on foreign assets too, under Uruguay's personal income tax law, but newcomers who meet the conditions of Uruguay's newcomer regime can keep foreign capital income out of tax for the year of arrival and 10 more years.
- Dominican Republic. Foreign investment income is untaxed for a newcomer's first 2 tax years, while work done in the Dominican Republic is taxed from the start.
- Ireland. Residents domiciled in Ireland are taxed on worldwide income, and residents who are not domiciled there pay tax on foreign investment income only when they bring it in.
- Antigua and Barbuda. Wages carry no personal income tax, but self-employed residents of Antigua and Barbuda pay the Unincorporated Business Tax of up to 25% on net business income, the Inland Revenue Department states.
Territorial taxation for companies
The same split exists for companies. A worldwide system taxes a company on profits from everywhere; a territorial one taxes only local profits, or exempts dividends a company receives from foreign subsidiaries. In the Index, Hong Kong companies, Panama companies and Seychelles companies are taxed only on profits from local sources, but a company that belongs to a multinational group, such as one sitting beside another company its owner holds abroad, must meet conditions in all 3, mainly local substance, to keep foreign passive income such as dividends and interest untaxed.
Hong Kong has applied a substance or participation test to such income since January 1, 2023 under its foreign-sourced income exemption rules, Panama taxes it at 15% unless the company has qualified staff, premises and decision-making in Panama, and Seychelles has applied an economic substance test to passive income from non-residents since September 16, 2021. None of this binds the owner's own country, which can tax the company's profit under CFC rules.
US corporate tax has a territorial feature of its own: a US corporation that holds at least 10% of a foreign corporation for more than 365 days around the dividend date can deduct the foreign-source portion of most dividends it receives from it, under section 245A of the Internal Revenue Code and the holding period in section 246(c)(5). US individuals get no such deduction.
Which tax system suits you
The right system depends on the kind of income you have and where you do the work:
- Investment income you do not need to spend. A territorial country, a remittance country or one with no income tax leaves it untaxed while it stays abroad.
- Freelance or remote work. Work done in a territorial country is taxed there, so what cuts the tax on fees legally is a country with no income tax, a low local rate on work or a newcomer regime.
- A large foreign income and a move to Europe. A worldwide country with a newcomer regime can beat a territorial one.
- US citizenship. Every system leaves the US claim in place.
Choosing a country by its tax system
Works
You live on foreign dividends and want them untaxed. You become resident in Paraguay with a tax certificate and keep the portfolio abroad; the dividends are outside Paraguayan income tax because the capital is not placed in Paraguay.
Fails
You become resident in Paraguay the same way but keep your home in Madrid and spend 200 days a year there. Spain still treats you as resident under article 9 of its income tax law and taxes the dividends on its worldwide basis, and Paraguay's territorial rule saves you nothing.
Checking a country's tax system before you move
- Find out how it taxes residents: worldwide, territorial, remittance, no income tax, or a mix.
- Find its source rule for services: in most countries, work done there is local income.
- Check how foreign dividends, interest and gains are taxed, and whether that changes after a set number of years.
- Check the residence test and the certificate, since the system helps only once you are resident.
- Check what your old country does when you leave: exit taxes, rules for nationals like Spain's, or citizenship-based tax.
- Compare the effective rate on your real income, not the label.
David's note
I treat a territorial exemption as today's law, not a promise. Malaysia now taxes foreign income received there and exempts resident individuals only until 2036, and Costa Rica has a bill to tax residents' foreign investment income, so before a long move I want a plan that still works if the exemption goes.
