What is “Taxation Basis”?
Taxation basis in simple words means – which portion of your income is the country going to tax.
The two most common you will hear about are worldwide income taxation and territorial taxation. There are few other forms of taxation basis that are not so common, including zero tax and remittance or blends of these.
Worldwide taxation basis means that all of your worldwide income will be taxed.
The common misbelief is that the USA is the only country in the world that still taxes worldwide income. This is untrue. Most countries have worldwide taxation, however, a lot of countries have what’s called a participation exemption or rules under which they don’t tax income distributed as dividends from foreign subsidiaries.
The next option is territorial taxation. In this case, they only tax the local source income. As we mentioned in our video on “what is source income” what constitutes local source income is a little tricky.
Rules vary from country to country, but unlike what many think it’s NOT based on where your customers are. In other words, usually, a territorial taxation nation will still tax you even if your customers aren’t located in the country if your operations are taking place in the country.
Territorial taxation can be very good for you if used well but certainly isn’t a “pay no taxes” or even remotely similar to zero tax ticket.
Some countries have remittance–based taxation.
This means that you will only pay taxes on income that you bring back into the country.
For example, in Thailand, if you make income abroad in a foreign country and don’t claim the dividends and bring them back into the country for a year you will not have to pay taxes on them.
Note that Thailand has worldwide taxation on resident companies, it’s simply territorial remittance based for individuals.
Malta, Gibraltar, and Singapore have some sort of remittance–based taxation in certain cases. So as long as you don’t bring your money into the country you will not have to pay taxes.
There are lots of rules and lots of exemptions for foreign income depending on the company type, income type, etc. This is why it’s important to dig into the rules of each country you’re doing business in.
It’s important to note that territorial taxation doesn’t mean zero tax. This is a common misconception. It could mean zero tax in certain cases if structured properly. It’s very important to understand all these rules, otherwise, you could get into an issue.
We help clients legally reduce their tax through international tax planning, as well as help with company formations, bank account openings, residency, citizenship, and payment processing. Have a question you want answered? Book a consultation now!