A territorial tax country taxes its residents only on income that comes from inside its borders. Income from abroad, such as dividends from a foreign company, interest from a foreign bank or rent from a property in another country, is generally outside the tax. Panama, Costa Rica, Paraguay, Bolivia, Hong Kong and Georgia (for individuals) are among the clearest examples in 2026.
Most of the world works the other way. Countries such as the UK, Germany, Canada and Australia tax residents on worldwide income, and the United States taxes its citizens wherever they live. Between those poles sit hybrids: countries that exempt foreign income only for a period, only for some types of income, or only until it is brought into the country.
This guide lists the territorial tax countries, explains how territorial taxation works in practice, and covers the sourcing rules and limits that decide what is actually taxed.
Key takeaways
- Territorial countries tax local income at normal rates; they only exclude income that comes from abroad.
- Clear examples in 2026 include Panama, Costa Rica, Paraguay, Bolivia, Honduras, Nicaragua, Guatemala, El Salvador, Hong Kong, Macau and Georgia for individuals.
- Hybrids such as Uruguay, Malaysia, Singapore, Thailand and the Philippines exempt some foreign income but not all, or only for some people.
- Income from work is usually sourced where the work is physically done, which matters for remote workers.
- Becoming resident in a territorial country does not by itself end tax residence in a previous country.
How territorial taxation works
Every income tax system answers two questions: who is taxed, and on what. Residence-based worldwide systems tax residents on income from every source, then give a credit for foreign tax to avoid double taxation. Territorial systems tax anyone, resident or not, on local-source income, and leave foreign-source income alone.
There are four broad models:
| Model | What residents are taxed on | Examples |
|---|---|---|
| Worldwide | All income, wherever it arises | UK, Germany, Canada, Australia, Brazil |
| Citizenship-based | All income of citizens, wherever they live | United States |
| Territorial | Local-source income only | Panama, Costa Rica, Paraguay, Hong Kong |
| Remittance basis | Local income plus foreign income brought into the country | Thailand; Japan for newer foreign residents |
Many countries mix these models. A worldwide system may offer a temporary exemption to newcomers. A territorial system may tax one specific type of foreign income. The labels are a starting point, not the full answer. For the US model, see our explainer on citizenship-based taxation.
The territorial tax countries list
The table covers countries that tax individuals mainly on local-source income as of October 2026. Rates and details come from national law as summarized by PwC's Worldwide Tax Summaries.
| Country | Region | Foreign income of resident individuals | Main caveat |
|---|---|---|---|
| Panama | Central America | Not taxed | Substance rules for foreign passive income of multinational group companies |
| Costa Rica | Central America | Generally not taxed if unrelated to the local economy | Local capital gains taxed at 15% |
| Honduras | Central America | Not taxed (territorial concept of income) | Local income taxed up to 25% |
| Nicaragua | Central America | Not taxed | Local income taxed up to 30% |
| Guatemala | Central America | Not taxed | Taxes services rendered in Guatemala |
| El Salvador | Central America | Not taxed | Local income taxed up to 30% |
| Paraguay | South America | Not taxed | Some foreign work for Paraguayan taxpayers counts as local |
| Bolivia | South America | Not taxed | Flat 13% on local income |
| Hong Kong | East Asia | Not taxed | Foreign income received by multinational group companies can be taxed |
| Macau | East Asia | Not taxed under professional tax | Tax on Macau employment up to 12% |
| Taiwan | East Asia | Outside regular income tax | Basic income tax can add large foreign income back |
| Georgia | Caucasus | Not taxed for individuals | Flat 20% on local income; 1% small business regime |
A few notes on the less obvious entries:
- Bolivia states the principle plainly: no Bolivian taxes are imposed on foreign-source income earned by individuals, according to PwC's Bolivia summary.
- Honduras describes its tax system as based on a territorial concept of income, according to PwC's Honduras summary.
- Georgia exempts residents from tax on income that does not have a Georgian source, according to PwC's Georgia summary. Local income is taxed at a flat 20%, and individual entrepreneurs with turnover under GEL 500,000 can pay 1% under small business status.
- Taiwan applies its regular tax to Taiwan-source income. The basic income tax adds foreign income for residents whose foreign income reaches TWD 1 million and whose basic income exceeds TWD 7.5 million, according to PwC's Taiwan summary.
Regional detail for the Latin American entries is in our guide to low-tax countries in Latin America, and the Asian entries are covered in our guide to low-tax countries in Asia.
Hybrids and near-territorial systems
Several countries are often described as territorial but have important exceptions.
- Uruguay taxes local income and, since 2011, foreign capital income such as dividends and interest at 12%. From 2026, gains on those foreign assets are taxed too. New residents can opt out of that tax for eleven years if they qualify. See our guide to the Uruguay tax holiday for new residents.
- Dominican Republic taxes local income and residents' foreign investment and financial income, with new residents taxed on that foreign income only after their third year.
- Singapore generally does not tax overseas income received by individuals, with exceptions such as income received through a Singapore partnership.
- Malaysia exempts foreign-sourced income received by resident individuals until December 31, 2036, subject to conditions.
- Philippines taxes resident foreigners only on Philippine-source income, while resident citizens are taxed on worldwide income.
- Thailand taxes foreign income earned from 2024 when residents bring it into the country.
- Japan taxes non-permanent residents, meaning foreign nationals with five years or less in Japan over the past ten, on foreign income only when it is paid in or sent to Japan.
Some European countries offer non-domiciled or remittance-based regimes for new arrivals. These are special regimes within worldwide systems rather than territorial systems.
What counts as local income: the sourcing rules
Territorial taxation turns on one question: where does income come from? Each country sets its own rules, but some patterns are common.
| Type of income | Usual source rule |
|---|---|
| Salary and fees for services | Where the work is physically performed |
| Business profits | Where the business activity takes place |
| Dividends | Where the paying company is resident |
| Interest | Where the borrower is or where the capital is placed |
| Rent and property gains | Where the property is located |
| Pensions | Often where the paying fund or employer is located |
The rule for services is the one that catches remote workers. Many territorial countries define local income to include services rendered in the country. Guatemala taxes pay for services rendered in Guatemala. Costa Rica taxes income from services rendered there. Bolivia treats activities performed in the country as local. A consultant who lives in a territorial country and works for foreign clients from a home office there may therefore have local-source income, depending on how that country reads its own rules.
Companies face their own tests. Hong Kong taxes profits on a territorial basis, but since 2023 certain foreign-sourced dividends, interest, disposal gains and IP income received by multinational group entities are treated as local unless they meet substance and other exceptions, according to PwC's Hong Kong corporate summary. Panama now requires multinational group companies to meet substance requirements to keep a 0% rate on foreign passive income.
Why territorial does not mean tax-free
A territorial system narrows what a country taxes. It does not remove other obligations.
- Local income is taxed. Top rates on local income in territorial countries range from 7% on salaries in Guatemala to 30% in Nicaragua and El Salvador.
- Indirect taxes still apply. VAT, property taxes and fees are unaffected.
- The previous country may still tax. Moving does not end tax residence elsewhere unless the other country's rules say so. The US taxes its citizens wherever they live. Our article on the perpetual traveler idea explains why being tax resident nowhere rarely works.
- Reporting continues. Panama, Costa Rica, Hong Kong and many other jurisdictions exchange financial account information automatically under the Common Reporting Standard. Lawful planning assumes full reporting.
- Rules change. Uruguay, Thailand, Hong Kong and Panama have all narrowed their foreign-income treatment in recent years.
A note on Honduras and Próspera
Honduras is territorial, and it is also home to Próspera, a special economic zone (ZEDE) on the island of Roatán with its own regulatory framework. One option some nomads look at is Honduras tax residency through Próspera's Lump Sum Tax Regime, a flat tax of US$5,000 per year. Residents spend seven days a year inside Próspera, onboarding is remote, and certificates are issued through the official e-Próspera portal. Whether it changes a person's tax position in another country depends on that country's own rules. Our explainer on the Próspera lump sum tax and the Honduras tax residency page have the details.
Frequently asked questions
What is a territorial tax system?
It is a system in which a country taxes residents and non-residents only on income from sources inside the country. Foreign-source income, such as dividends from foreign companies or rent from property abroad, is generally not taxed.
Which countries have territorial taxation?
Clear examples in 2026 include Panama, Costa Rica, Honduras, Nicaragua, Guatemala, El Salvador, Paraguay, Bolivia, Hong Kong and Macau, plus Georgia for individuals. Uruguay, Singapore, Malaysia and the Philippines exempt some foreign income but not all.
Is the United States a territorial tax country?
No. The US taxes citizens and residents on worldwide income, and it taxes citizens even when they live abroad. Since 2018 US corporations can deduct certain dividends from foreign subsidiaries, which is sometimes called a partial territorial system for companies, but it does not apply to individuals.
Does territorial taxation mean no tax on online income?
Not necessarily. Many territorial countries treat services as local income when the work is physically performed in the country. An online business run from a home office in a territorial country may therefore have local-source income there.
Can I be resident in a territorial country and still owe tax at home?
Yes. Each country applies its own residence rules, and a person can be resident in two countries at once. Tax treaties may decide which country has priority, but not all countries have treaties with each other.
Important: This article is general information, not tax, legal or financial advice. Rules change often and depend on your personal circumstances. Speak with a qualified professional in each relevant country before you act.