All 5 tax systems simply explained!
There are 5 tax systems worldwide. Here is a brief overview of all the tax systems you will find in various countries.
- Taxes by citizenship
- Residence taxation
- Territorial taxation
- The Non Dom system
- Without direct taxes
We will now try to explain to you as simply as possible how these tax systems work:
Taxes by citizenship
Linking taxes to citizenship is probably the meanest way to bind people to a tax system. We find this taxation, for example, with citizens of the USA and Eritrea. These citizens are taxed in their home country, regardless of where they live and work. Citizenship alone binds these people to the tax system of their country of birth or origin.
Which countries tax by citizenship:
- USA (Also residence taxation! Non-residents and residents have the same taxation --> limited exemption for foreign income)
- Hungary (unless there are tax agreements with other countries!) Otherwise 15% + 18.5% compulsory contributions!
- Myanmar
- Eritrea (territorial for foreigners / taxation according to citizenship for nationals!)
Residency taxation of worldwide income
Residency taxation on worldwide income is particularly prevalent in industrialized countries. In these nations, there are foreign tax laws that make it considerably more difficult or even impossible for a company to operate abroad on a tax-privileged basis.
Around 130 countries apply the residence tax. Germany is one of them! Residency taxation would not be really bad if it were not for the foreign tax laws with the CFC rules.
If you live in a country with foreign tax laws such as Germany, you must pay tax in Germany on all profits or income earned abroad. This also includes trade tax and corporation tax.
Residency taxation without foreign tax laws and add-back rules (CFC rules)
That also exists! Of all 130 countries with residency taxation, there are around 85 countries that have no foreign tax laws. This means that you can run your tax-free company abroad, such as a Canadian LLP or US LLC, but do not have to pay domestic corporation tax on your company abroad.
This means that you are only taxed on domestic and foreign income. You can still save taxes by choosing a country that only charges between 10% and 15% tax, for example.
Here you definitely need to look for countries that do not apply foreign tax laws.
Countries without CFC rules are e.g. Belgium, Bulgaria, Chile, Ecuador, Gibraltar, Hong Kong, Ireland, Colombia, Croatia, Luxembourg, Malaysia, Malta, Mauritius, Poland, Philippines, Romania, Saudi Arabia, Switzerland, Singapore, Slovakia, Thailand, Czech Republic, Ukraine, Vietnam, Cyprus and many more.
Please note: Some of these countries are subject to residence taxation but without foreign tax laws! This means that there is no corporation tax here, but foreign income must still be taxed on residence.
A few important special tax/country cases
- Thailand --> Residency taxation: Global income must be taxed from a stay of 180 days, unless the profits are only brought into the country in the new tax year. ATTENTION: Change since 2024 (see non-dom system!)
- Australia --> Residency taxation --> Exception: Temporary residence (visa subcategories 400, 482) e.g. work and travel visa = domestic salaries are taxable but NO worldwide profits!
- Japan --> Residency tax for citizens and permanent residents. Tax exemption only for "non-permanent residents"! --> This is a person who has not lived in Japan for more than 5 years in the last 10 years! However, you are considered a permanent resident upon arrival in Japan unless you can prove (through employment contracts or other documents) that you will not stay longer than 1 year.
- Spain --> Residency tax up to 47% (exception: Backham Law --> valid for up to 6 years --> Secures 24% tax rate up to 600,000 euros for domestic income, as you are treated as a NON-resident for tax purposes. This applies to employees who have received a job offer in Spain --> No tax rate for work income outside Spain up to $120,000! --> Capital gains, real estate, interest outside Spain are also tax free!)
- Portugal --> Residency tax (exception: non-HABITUAL resident! NHR status - valid for 10 years, applies from 183 days stay - secures 20% domestic tax rate - for employees or self-employed (entrepreneurs) - complete tax exemption on worldwide income - since 2020 pensioners have to pay 10% tax on their pension). Attention: Since 2024 Portugal no longer issues a new NHR status!
Territorial taxation
Around 40 countries offer this type of taxation. Here, only domestic income is taxed and not foreign income! This means that foreign income is completely tax-free!
Too good to be true, right? But it really does exist! Panama, for example, is a country that does not levy taxes on foreign income. Likewise, your foreign company will not be subject to trade tax or corporation tax here.
Other countries that tax according to the territorial principle are: Angola, Anguilla, Belize, Bermuda, Bhutan, Bolivia, Botswana, British Virgin Islands, Costa Rica, Democratic Republic of the Congo, Djibouti, Eswatini, Georgia, Grenada, Guatemala, Guinea-Bissau, Hong Kong, Lebanon, Libya, Macau, Malawi, Malaysia, Marshall Islands, Micronesia, Namibia, Nauru, Nicaragua, Palau, Palestine, Panama, Paraguay, St. Helena, Assumption and Tristan da Cunha, Seychelles, Singapore, Somalia, Syria, Tokelau, Tuvalu, Zambia, Iran, Iraq, Philippines, Saudi Arabia
Here too, it is worth finding out in advance which countries tax territories in order to live tax-free.
Non-dome system
Here we find a mixture of residence and territorial taxation. This system is used in England, for example. It is about where you have your residence and your domicile. You usually have a domicile if you have citizenship of the country and have spent a large part of your life there.
The residence is to be equated with your current place of residence.
If you are a German living in England, you have your residence there but not your domicile (non-domiciled). So you are a non-dom! This means that territorial taxation applies to every foreigner in England, but not to English people in their own country.
This means that if you are not English, you will not be subject to UK foreign tax laws. The only exception to this is that the money you earn is only tax-free until you bring it into the country. The situation in Thailand is similar but better. More on this here!
Known non-dom countries
- Malta (taxation: only if income is brought into the country)
- United Kingdom (taxation: only if income is brought into the country)
- Cyprus (south!) 60+ days in the country = stay/residence (= tax-free dividends, interest and investment income!)
- Ireland (taxation: only if income is brought into the country)
- Thailand (since 2024): No non-dom state, but same taxation from 2024. As long as no money is imported into Thailand, it remains tax-free!
- Malaysia (Kuala Lumpur) Not a non-dom state, but the same taxation since 2022. As long as no money is imported into Malaysia, it remains tax-free!
Without direct taxes / tax-free
In a nutshell, these are countries that do not levy any taxes on income at all. At the top of the list are the United Arab Emirates (*link to Wikipedia). This includes Dubai, among others. There is no income tax here and no corporation tax either.
Addendum to Dubai: Since 2023, companies have to pay 9% corporate tax! There is an allowance of up to approx. 100,000 USD on profits (for private individuals and “free zones” in the UAE turnover allowance of approx. 270,000 USD)
The UAE has a double taxation agreement with Germany, which is a good thing. However, you should also be deregistered in Germany and have no residence in Germany, otherwise you will be taxed according to German law!
Other countries include Qatar and Oman. In these Islamic countries, only the oil sector or banks are usually taxed.
Antigua and Barbuda, Bahamas, Bahrain, Brunei, Cayman Islands, Kuwait, Monaco, Pitcairn Islands, Saint Barthélemy, Saint Kitts and Nevis, Turks and Caicos Islands, United Arab Emirates, Vanuatu, Vatican City (only priests live there!), Wallis and Futuna, Western Sahara, North Korea (who wants to go there?)
Which taxation or tax systems are best for you?
Of course, many people are now crying out for countries that don’t levy any taxes at all in order to be completely tax-free. However, these are all Islamic countries and it is up to each individual to decide whether they can cope with the culture of these countries.
But for the purpose of founding a company abroad, e.g. in Canada or the USA, and living abroad with a minimum of taxes compared to German taxation, one of the aforementioned tax systems is highly recommended.
Especially as a digital nomad, when you have all the freedom in the world, you should consider the topic of taxes so that you don’t have a rude awakening in countries such as Thailand. Find out here how you can live 100% tax-free in Thailand.
Tax list of all countries
Below you will find all countries and their tax systems worldwide. Please note that the list cannot always be kept up to date. For a larger view, click on “show larger view” or on “extended larger view” at the bottom right of the table. It is best to run the larger view on your desktop PC or laptop, as the mobile view is not really clear.
Explanation: This is about taxable income!
-“Domestic income” means that you conduct business in the country in question and generate your income in the country (or on land in the country in question) (e.g. with Airbnb rentals or yoga retreats).
– “Foreign income” means that your money is generated outside the country (e.g. via an LLC/LLP). So if you live in Indonesia, for example, both domestic and foreign income are taxable. If you live in Paraguay, for example, domestic income (e.g. Airbnb rentals) is taxable but foreign income (e.g. sale of digital products or services via your LLC or LLP) is excluded!
