10 Best Countries with a Territorial Tax System

Very thought about eliminating taxes on your foreign-sourced income and what you might do with the money saved?

Non-dom tax regimes, like those offered in Ireland, Cyprus and Malta, provide special schemes allowing qualifying individuals to do just that.

However, other, better options exist for anyone not lucky enough to qualify for these programs or reside in jurisdictions with a residential taxation system – which levies tax on worldwide income.

Countries typically implement one of three tax systems: residential, citizenship, or territorial.

The general rule of thumb for residential systems is you must stay in the country for at least 183 days. In other words, your worldwide income will be taxed if you spend more than 183 days living in any given country. In some cases, simply being a resident of a particular country is sufficient to make you subject to that country’s tax on your worldwide income.

Citizenship-based taxation is the most draconian form of all and is only used by Eritrea and the United States. Citizens of these two countries will never escape the demands of their nation’s taxman. However, those living outside the country have the opportunity to exclude some of their foreign income from the country’s strict taxation.

Fortunately, some nations administer a territorial tax system – one in which countries only tax income earned within their geographical limits.

For example, if you live in Panama, you only have to pay taxes on income earned in Panama, not on income you might earn from a business outside the country.

The importance of being aware of such systems is high – you can keep the citizenship of your country of origin, live in another country and work in a third without having to pay taxes in any of them.

The following are the ten most attractive countries that have adopted territorial tax systems.

1. Costa Rica

Located in Central America, Costa Rica is bordered by Nicaragua and Panama and one of the few countries where you could move to escape high taxation in your home country.

Costa Rica’s pleasant climate, rich biodiversity and interesting culture are only some of the many reasons it is worth considering as your new home. The land of ‘Pura Vida’ (the pure life) has some of the best beaches in Central America and offers affordable real estate investment opportunities. Rent prices, travel, food and other living expenses are comparably cheap.

The people are welcoming and it’s pretty easy to get by, even with little knowledge of Spanish. Costa Rica also offers many leisure options, whether spending a few relaxing hours on the beach, visiting colonial cities or climbing volcanoes and trekking in the rainforest.

2. Gibraltar

Gibraltar is a tiny country on the Iberian peninsula at the mouth of the Mediterranean. Its only border is with Spain to the north and its subtropical climate, with warm summers and mild winters, makes it an appealing place for relocation.

The biggest industries in this tiny country include tourism, financial services and online gaming with thousands of workers from all over Europe crossing the Spanish border to work. Expats shouldn’t have many difficulties adapting since the official language is English, but that’s just one of many reasons why Gibraltar is considered among the most expat-friendly countries in the world.

3. Hong Kong

Hong Kong, located on China’s southern coast, is one of the most densely populated places in the world. Unsurprisingly, Asia is one of the most important financial hubs and cities worldwide. 

Hong Kong is highly developed and known for its modern architecture and extensive transportation system. Its subtropical climate, fascinating history and rich culture only add to the attraction. Establishing your residence there also allows you to conveniently base yourself in the centre of Asia, making travel throughout the region more accessible.

4. Macau

The special administrative region of the People’s Republic of China, Macau, sits on the southern edge of China, across the bay from Hong Kong. 

Known for being a tax haven and a famous offshore financial centre, Macau is also a major tourist destination. Gambling, shows and other entertainment choices attract millions every year.

Macau is a unique spot to consider, as it’s an intriguing mixture of Chinese and Portuguese cultures set in a humid subtropical climate. 

5. Malaysia

Malaysia is one of the wealthiest countries in Asia, but prices are still cheap compared to Europe or the United States.

A mixture of modern and developing cultures makes Malaysia an attractive and impressive place to visit and live. The tropical climate, diverse wildlife and many beautiful beaches, islands and other natural attractions draw many tourists annually.

Malaysia’s rich diversity of life and entertainment means that saving money isn’t the only attractive thing about this country, which can keep even the most demanding of travellers from getting bored.

6. Nicaragua

Nicaragua is a great country to live in and not just because you won’t be taxed on any foreign income you earn while living there.

It’s also one of the most affordable places to live in Central America – it’s not yet as well-known as places like Panama and Costa, so the cost of living is even lower than in those locations. Rent prices are extremely low, as are costs for food, transportation and entertainment.

The country has something to offer everyone: beaches along the Pacific and Atlantic coasts, islands in the Caribbean and lakes, volcanoes and rainforests throughout. The weather is hot but easy to get used to, with the added bonus that the local rainy season is relatively short and mild.

Nicaragua is developing more and more into a sustainable tourism destination, which creates several advantages for the country’s residents and potential investors. Expats mainly choose to live in Granada or Leon, while the capital of Managua is generally considered unsafe for foreigners.

7. Panama

Panama, located in Central America, borders Colombia and Costa Rica and is one of the prosperous countries in the region. Despite its wealth, generated mainly due to economic development, Panama remains one of Latin America’s more affordable locations.

With the Caribbean and Pacific oceans on either side, as well as lush mountains, rainforests and beaches, more international travellers are heading to Panama. A fascinating native culture, interesting history and vibrant urban life are also big attractions.

8. Paraguay

Paraguay – known as the ‘heart of South America’ because of its landlocked location in South America – is another great option for people looking for a place to relocate for tax purposes. 

Paraguay is one of the cheapest countries worldwide and is relatively safe when compared to its neighbours. The country has experienced some of the highest economic growth in South America for many years but almost half of the population still lives in poverty compared to international standards.

It has many cultural and natural attractions to offer and its cuisine is more diverse than that of other Latin American countries.

9. San Marino

San Marino, the third smallest state in the world, is located inside the Italian Peninsula. The country, consisting of the capital San Marino and a handful of small towns, is tiny and claims to be the world’s oldest republic. The country is very safe to travel or live in and tends to be slightly cheaper than surrounding Italy.

The Mediterranean climate makes the country pleasant to live in and its excellent cuisine – similar to Italian – is only one of the many attractions the country has to offer.

10. Singapore

Singapore is one of the main financial and transportation hubs in Asia and another one of the most important cities worldwide.

Home to a very diverse culture, the areas of Chinatown and Little India are especially great places to visit. Admittedly, Singapore’s not as cheap as some of its Asian rivals but it’s still very affordable for expats.

The city-state is known for its good education, health care system and warm temperatures – all of which make the country even more attractive to visitors. It also has an excellent banking system and a very business-friendly government. 

Singapore has a lot to offer. Even though it consists of just one city, it’s home to limitless restaurant and entertainment options and is a great place for onward travelling to other global destinations.

Choose Your Tax System and Second Residence

When choosing a second residence, it is essential to understand how your prospective country of citizenship taxes its citizens to avoid double taxation and take advantage of exemptions.

You should aim to establish secondary residences in countries with simple territorial tax systems that only tax economic activity within the country, allowing for easier maintenance of a second residence without paying tax on global income.

Living the Nomad Capitalist lifestyle requires navigating many different tax systems. Keeping track of investments, residences and other tax issues can be difficult, even for the most experienced international entrepreneurs and investors.

Nomad Capitalist has helped 1,500+ high-net-worth clients worldwide with our holistic strategies for offshore tax planning, dual citizenship, asset protection and global diversification. Let us use our years of real-world experience to help you achieve the same.