Worldwide and Territorial Tax System
A big factor to that will determine your overall taxation, hence your international tax strategy, is if your jurisdiction of tax residency taxes you individually or your company on its worldwide or territorial system. These differences are known as tax system, where a country has a Worldwide Tax System, and the other has a Territorial Tax System.
Generally, one of the features that make a tax haven a “tax haven” is that they have a territorial tax system, meaning that they only tax companies formed there on their income generated from sourced within their jurisdiction. There are other factors that make a tax haven a tax haven, besides having a territorial tax system, but we will discuss that below in the tax havens subchapter.
Worldwide Tax System
A country with a worldwide tax system will tax its tax resident individuals and tax resident companies on the income generated therein, and the income generated in another territory. For example, You (personally or your Company) are a tax resident in Country A. Since country A has a Worldwide Tax System, you will pay taxes (or Country A will try to tax you) on profits generated in Country A, and in Countries from B to Z, even if the income was generated through a company formed in another country with no relation to or presence in Country A, except in those jurisdictions that Country A has a Tax Treaty with.
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In these types of countries, it is a little bit more difficult to avoid taxes as, for example, if you are a U.S. citizen, you have lived in Thailand for several years, and are employed in and work from Thailand, you will be required to still pay income on your wages received in Thailand (after a certain threshold is met). I am not trying to say that there are not tax planning strategies to reduce your tax base, but you get the idea.
Territorial Tax System:
Generally, jurisdictions with a Territorial Tax System only levy tax on those profits generated in that jurisdiction. Each jurisdiction has its rule to determine if a profit has been generated therein. Just as an example, and in general, if the services or products are not provided within the territory of incorporation, the services income will not be taxed, even if the services are provided through a company incorporated there.
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In the case of citizens, they will not pay tax on income generated abroad or from foreign sources.
Mixed or Hybrid Tax System:
Some countries have a mixed tax system, where for example natural persons are not taxed on their worldwide income but companies are, which is the case of Nicaragua, for example.