Territorial Tax Systems: Which Countries Don't Tax Foreign Income (2026)

Key points

• In a territorial system, a country taxes only income earned within its borders; foreign-source income is generally exempt.
• Panama, Paraguay, Costa Rica and Georgia (for individuals) are among the clearest examples. Hong Kong, Singapore and Malaysia apply territorial principles with important exceptions.
• The UAE is not territorial: it simply has no personal income tax, and its companies pay 9% on worldwide profits above AED 375,000.
• Anti-abuse rules, OECD pressure and the EU list of non-cooperative jurisdictions have narrowed pure territorial systems.
• U.S. citizens are taxed on worldwide income wherever they live, so moving to a territorial country removes the local tax, not the U.S. one.

What is a territorial tax system?

A territorial tax system taxes only income that arises within the country. Income from abroad, such as foreign salaries, dividends, interest or business profits, is generally exempt, even for residents. It is the alternative to the worldwide system used by most developed countries, and it attracts investors, retirees, entrepreneurs and international companies.

This guide explains how territorial taxation works, which countries use it in 2026, its limits, and what it means for individuals and companies.

Territorial vs worldwide taxation

Under worldwide taxation, residents are taxed on all their income, wherever it arises, and must report foreign income to their tax authority even if it was already taxed abroad (usually with a credit for that foreign tax). Most of Europe, Japan and Brazil use this model. The United States goes further: it taxes its citizens on worldwide income even when they live abroad.

Countries adopt territorial systems to:

• avoid international double taxation;
• encourage domestic companies to invest abroad;
• attract foreign residents and international companies;
• simplify tax administration.

How it works in practice

In a territorial country, individual residents are generally not taxed there on foreign salaries, rents or dividends, and companies are not taxed on profits of foreign branches or subsidiaries. Whether the income is brought into the country can matter: some countries exempt foreign income only while it stays abroad, others exempt it even when remitted.

Most territorial countries also have anti-abuse rules to stop offshore structures used only to avoid tax, such as:

• controlled foreign company (CFC) rules, often lighter than in worldwide systems;
• taxation of certain passive income such as interest, royalties and dividends;
• tax when profits are brought into the country.

Countries with territorial taxation in 2026

Territorial systems differ in the details. The main examples:

Panama

Panama is the classic example: only Panamanian-source income is taxed, and foreign investments, trading and holding activities are exempt. Two caveats: Panama is on the EU list of non-cooperative jurisdictions as of February 2026, and it is preparing economic substance rules for multinational entities under special regimes.

Hong Kong

Hong Kong taxes only profits sourced in Hong Kong. Since 2023, however, its foreign-sourced income exemption (FSIE) regime taxes certain foreign dividends, interest, disposal gains and IP income received in Hong Kong by companies in multinational groups that lack economic substance there. The regime was widened in 2024 to gains on all types of assets.

Malaysia

Malaysia used to be purely territorial, but since 2022 it taxes foreign income received in the country. Resident individuals remain exempt on foreign-sourced income received until the end of 2036, except income received through a Malaysian partnership.

Singapore

Singapore taxes income sourced in Singapore and foreign income received there. Resident individuals are exempt on foreign income they receive, except through a Singapore partnership. Companies are taxed on foreign income remitted to Singapore unless it qualifies for one of the exemptions, such as income already taxed abroad at 15% or more.

Georgia

Georgia is territorial for individuals: residents pay a flat 20% on Georgian-source income, and foreign dividends, interest and gains are exempt. Companies follow an Estonian-style model, paying 15% only when profits are distributed. A 1% tax regime for small businesses makes it popular with freelancers and digital nomads.

United Arab Emirates: no income tax, not territorial

The UAE is often listed as territorial, but it is different: individuals pay no income tax on any income, local or foreign. Companies, since June 2023, pay 9% corporate tax on worldwide profits above AED 375,000, with a 0% rate for qualifying income of free zone companies. Our guide on how to open a company in Dubai explains the company side.

Paraguay

Paraguay taxes only Paraguayan-source income, for individuals and companies. Foreign salaries, dividends, pensions and gains are outside its personal income tax, whose rates range from 8% to 10%.

Uruguay (partly territorial)

Uruguay taxes Uruguayan-source income, with a special regime for new residents: foreign dividends and interest are exempt for the year of arrival plus ten years (eleven in total), or taxed at a permanent reduced rate of 7% instead of 12%. The 2025–2029 budget law raised the investment thresholds for some routes from 2026.

Costa Rica

Costa Rica also taxes only income sourced in the country, and foreign income of individuals is generally exempt. Since 2023 some foreign passive income of companies in multinational groups is taxed unless they have substance in the country.

What it means for individuals

For individuals with income or assets abroad, moving to a territorial country can significantly reduce the local tax on that income. Retirees with foreign pensions, investors, consultants and remote workers benefit most.

Main advantages:

• lower overall tax on foreign income;
• an incentive to international mobility;
• simpler tax filing in the country of residence.

Before moving, consider:

• whether your current country will accept that you have left its tax system (many require formal exit steps and look at where your home and family are);
• the actual residence requirements, such as days of presence or a home, to be treated as resident;
• tax treaties and automatic exchange of information;
• your citizenship, if it carries tax obligations.

Why U.S. citizens are different

The United States taxes its citizens and green card holders on worldwide income regardless of where they live. An American who moves to Panama or Paraguay will usually pay no tax there on foreign income, but still files a U.S. return every year. The foreign earned income exclusion and foreign tax credits can reduce the U.S. tax, but investment income generally remains taxable in the United States, and foreign accounts must be reported on the FBAR and, above certain thresholds, on Form 8938. The only way to leave the U.S. tax system is to renounce citizenship, which has its own tax consequences.

See our guide to FBAR requirements for U.S. citizens.

What it means for companies

For companies, territorial systems give more freedom to organize a group internationally and to hold foreign profits without local tax, which is useful for groups operating in several countries.

Advantages:

• tax efficiency when operating globally;
• relief from double taxation without depending on treaties;
• an incentive to invest abroad and to form international holding companies.

Risks:

• CFC and anti-abuse rules in the countries where the owners live;
• tax on profits brought back into the country, in some systems;
• the global minimum tax of 15% for multinational groups with revenue above €750 million;
• pressure from the OECD and the EU to restrict pure territorial regimes.

Criticism and international pressure

Territorial systems are criticized by international organizations, especially the OECD and the European Union, for:

• making tax evasion and money laundering easier;
• harmful tax competition between countries;
• eroding the tax base of countries with worldwide systems;
• weakening international tax cooperation.

Many jurisdictions have added anti-abuse rules or economic substance requirements in response. The EU keeps a list of non-cooperative jurisdictions, partly based on how foreign income is taxed.

Bottom line

A territorial system can legitimately reduce the tax on foreign income, especially for retirees, investors and entrepreneurs who genuinely move their residence. The rules are becoming more conditional, with substance requirements, remittance rules and international pressure. They also do not change the obligations that come with citizenship, such as those of U.S. citizens.

Our Private Advisory Session compares residence options and their tax effects for your situation.

Sources

• Inland Revenue Department of Hong Kong: Foreign-sourced income exemption
• IRAS: Income received from overseas (Singapore)
• UAE Federal Tax Authority: Corporate Tax
• Council of the EU: EU list of non-cooperative jurisdictions
• IRS: U.S. citizens and resident aliens abroad