The five principles
Personal income tax systems sort into five broad models. Most countries use one cleanly. A handful run hybrids, and we note those on the relevant page rather than force them into a box they do not fit.
Citizenship-Based
Your passport determines your tax bill, regardless of where you live. Used by exactly two countries.
Residency-Based
Where you actually live and spend your time determines what you owe. The default for roughly 190 countries.
Territorial
Only income earned inside the country's borders is taxed. Foreign-source income is outside the net entirely.
Non-Dom & Remittance
A hybrid: worldwide income exists on paper, but foreign income is only taxed if it is brought into the country, or exempted by domicile status.
Zero-Tax Jurisdictions
No personal income tax at all, on anyone, from any source. A short and specific list.
How the five compare
The honest short version of each system, side by side.
| System | What triggers tax | Foreign income | Example countries |
|---|---|---|---|
| Citizenship-based | Holding the passport | Taxed regardless of residence | United States, Eritrea |
| Residency-based | Physical presence, permanent home, or center of vital interests | Taxed once you are resident | UK, Germany, Canada, Australia, most of the world |
| Territorial | Where the income is generated | Exempt if genuinely foreign-source | Paraguay, Panama, Costa Rica, Georgia, Hong Kong |
| Non-dom / remittance | Residency plus domicile status | Exempt if kept offshore, or under a time-limited window | Malta, Cyprus, Ireland, UK (new arrivals) |
| Zero-tax | Nothing. There is no personal income tax to trigger | Not applicable | UAE, Monaco, Cayman Islands, Bahamas |
None of these systems tell you what your home country still expects from you. A Paraguayan 0% rate on foreign income does not cancel a US citizen's IRS return, and a UAE residence visa does not, by itself, end tax residency anywhere else. The system explains what your new base charges you. Exiting your old one is a separate question, covered in the compliance and structuring pages of this hub.
Personal versus corporate: one distinction that cuts across all five
Every page in this cluster is written from the individual's chair, because that is where most Plan B decisions start. But the five systems above apply differently, sometimes very differently, once a company is added to the picture.
Personal tax
Follows the individual: salary, dividends received personally, capital gains, pensions. Determined by where the person is resident, domiciled, or holds citizenship.
Corporate tax
Follows the entity: where it is incorporated, and increasingly, where it is actually managed and controlled. A founder can be personally tax resident in a 0% territorial country while the company they own still owes tax elsewhere, if a high-tax country's Controlled Foreign Company (CFC) rules reach through the entity and attribute its profits back to the individual owner.
This gap, between where a person lives and where their company is deemed to live, is where most structuring work actually happens. It gets its own treatment on the compliance and structuring page of this hub.
Territorial taxation, explained
What it actually means
Territorial taxation asks one question: where was this income generated? If the answer is inside the country, it is taxed, usually at competitive local rates. If the answer is outside, it is not taxed at all, regardless of where the recipient lives, banks, or holds citizenship.
The determination turns on genuine source, not on where you happen to be sitting when the money arrives. A consulting fee from a foreign client, paid while you are physically in the territorial country, is still foreign-source. A fee from a local client, paid while you are traveling abroad, is still local-source. Properly documenting the foreign origin of income, contracts, invoices, and the location where the work was actually delivered, is what makes the exemption hold up under review.
Territorial systems are not static. Malaysia and Thailand have both tightened their rules in recent years, and Singapore and Hong Kong now attach economic-substance conditions to some exemptions. A territorial system is a real tax outcome, not a permanent guarantee, which is why LGP favors jurisdictions with a long, stable history of the principle, like Paraguay's, over newer or narrower versions.
Territorial jurisdictions compared
Paraguay
0% foreign · 8–10% localParaguay's territorial principle has been in place in various forms since 1991 and was codified under Law 6380/2019. Foreign-source personal income, consulting fees, foreign dividends, foreign rental income, foreign pensions, sits entirely outside the tax base. Local-source personal income (IRP) is taxed on a progressive 8 to 10% scale, capital income at a flat 8%, and corporate profits (IRE) at a flat 10%, with a simplified 3% option on gross revenue for smaller businesses. There is no wealth tax, no inheritance tax, no exit tax, and no Controlled Foreign Company regime, meaning a foreign company owned by a Paraguayan tax resident is not automatically taxed in Paraguay just because they own it. Paraguay also has no strict day-count requirement for maintaining residency, which suits clients who travel for work or family.
Panama
0% foreign · up to 25% localPanama's territorial exemption is unconditional: if the income is foreign-source, it is exempt, with no remittance timing rule and no requirement that it be taxed abroad first. Local-source income is taxed on a progressive scale up to 25%, though this rarely touches online businesses or foreign investment income. Residency is commonly established through the Friendly Nations Visa.
Costa Rica
0% foreignCosta Rica runs a similar unconditional exemption on foreign-source income, commonly paired with the Rentista visa for clients living on remote income or a pension.
Georgia
1% small-business regimeGeorgia layers its territorial approach with two specific regimes: a 1% turnover tax for small business owners on revenue up to roughly USD 185,000, and a 0% Virtual Zone regime for qualifying IT companies on foreign-source income. It is one of the more accessible territorial setups, with straightforward visa-free access for many nationalities.
Hong Kong & Singapore
Territorial with substance testsBoth apply the territorial principle but with real conditions attached. Hong Kong requires the profit-generating activity to have genuinely occurred outside its borders, an office serving foreign clients from inside Hong Kong can still generate Hong Kong-source income. Singapore taxes foreign-source income if it is remitted, but grants substantial exemptions for foreign dividends, branch profits, and service income that meet specific conditions, including that the income was already taxed abroad. Both remain premier hubs for operating businesses and holding capital, provided the economic-substance requirements are properly met.
Malaysia
Territorial, individually favorableMalaysia tightened its corporate territorial rules in 2022, but for individual tax residents, foreign-sourced income generally remains exempt, making it one of the more favorable remaining territorial systems for individuals specifically, if not for holding companies.
What this means for a Plan B
Territorial taxation is the cleanest system for a client whose income is genuinely foreign, consulting fees, remote work, foreign investment portfolios, foreign pensions. It rewards structure and documentation rather than aggressive planning, which is exactly why Paraguay's version, simple, long-standing, and free of CFC rules, sits at the center of LGP's Southern Cone framework. It is worth repeating: a 0% territorial outcome locally does not automatically end your obligations elsewhere, particularly if you are a US citizen. See citizenship-based taxation for that separate question.
Paraguay: territorial tax
How Paraguay's territorial system works
Paraguay's territorial tax principle has applied in various forms since 1991 and was codified under Law 6380/2019. The rule is simple: if income is generated outside Paraguay, it is not part of the Paraguayan tax base, full stop. There is no remittance timing requirement and no condition that the income was already taxed abroad. A Paraguayan tax resident earning consulting fees from European clients, rental income from a US property, or dividends from a foreign holding company owes nothing to Paraguay on any of it.
What counts as foreign-source is a genuine test, not a formality. It turns on where the income-generating activity actually occurred, not on where the recipient happened to be sitting when it was paid. Contracts, invoices, and delivery location all support the foreign-source determination if it is ever reviewed.
Personal and corporate tax rates in Paraguay
| Income type | Rate |
|---|---|
| Foreign-source personal income | 0% |
| Local-source personal income (IRP) | 8–10%, progressive |
| Capital income (local) | 8% flat |
| Corporate profits (IRE) | 10% flat |
| Simplified regime for small business (gross revenue) | 3% |
| Wealth tax | None |
| Inheritance tax | None |
| Exit tax | None |
Paraguay also has no Controlled Foreign Company (CFC) regime, meaning a foreign company owned by a Paraguayan tax resident is not automatically taxed in Paraguay simply because they own it. This is a meaningful structural advantage compared to most territorial jurisdictions, many of which have introduced CFC rules in recent years.
Who benefits most from this system
Paraguay's territorial system suits clients whose income is genuinely foreign: remote consultants, online business owners, holders of foreign investment portfolios, and retirees living on foreign pensions. It is less relevant for anyone building a business that will generate Paraguay-source revenue, since that income is taxed locally like anywhere else.
Paraguay also does not impose a strict day-count requirement to maintain tax residency once established, which suits clients who travel frequently for work or family reasons and cannot commit to spending a fixed number of days in one place each year.
Panama: territorial tax
How Panama's territorial system works
Panama taxes only Panama-source income. If income is foreign-source, it is exempt from Panamanian tax regardless of whether it is remitted into Panama, spent abroad, or kept offshore indefinitely. This unconditional structure is simpler than systems like Singapore's, which attach remittance and substance conditions to similar exemptions.
Local-source income, meaning income generated from work, business activity, or investments actually inside Panama, is taxed on a progressive scale. For most of LGP's clients, whose income comes from foreign clients, foreign employers, or foreign investment portfolios, this local scale rarely applies.
Personal tax rates in Panama
| Income type | Rate |
|---|---|
| Foreign-source income | 0% |
| Local-source income, up to USD 11,000 | 0% |
| Local-source income, USD 11,000–50,000 | 15% |
| Local-source income above USD 50,000 | 25% |
Establishing residency: the Friendly Nations Visa
Most LGP clients access Panama tax residency through the Friendly Nations Visa, available to citizens of a specific list of countries with which Panama maintains "friendly" diplomatic and economic relations. It is one of the more accessible residency routes into a fully territorial system, and it is commonly paired with a Panamanian bank account and a local economic tie such as employment, incorporation, or property ownership.
Costa Rica: territorial tax
How the exemption works
Costa Rica taxes only Costa Rica-source income. Foreign-source income, remote consulting fees, foreign pensions, foreign investment income, is exempt outright, with no remittance condition and no requirement it was taxed abroad first. Local-source income is taxed on its own progressive scale, which applies to salary, local business activity, and Costa Rica-based investments.
Establishing residency: the Rentista visa
The Rentista visa is the most common route for clients living on remote income or a pension rather than local employment. It requires demonstrating a stable, recurring income source, commonly a fixed monthly amount sustained over a set period, rather than a lump-sum investment. This makes it a natural fit for retirees and remote income earners specifically, distinct from Costa Rica's investment-based residency categories.
Not sure how this fits your strategy?
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Georgia: territorial tax and the 1% regime
The two regimes
| Regime | Rate | Who qualifies |
|---|---|---|
| Small Business Status | 1% | Individual entrepreneurs, revenue up to ~USD 185,000/year |
| Virtual Zone | 0% | Qualifying IT companies, foreign-source income only |
Both regimes require registration and ongoing compliance rather than applying automatically. Georgia also offers straightforward visa-free or visa-on-arrival access for many nationalities, making it one of the more accessible territorial-adjacent setups to actually get started in.
Hong Kong: territorial tax
How the exemption works, and where it's stricter than Paraguay or Panama
Hong Kong exempts foreign-source profits, but the test is stricter than a simple foreign-client rule. What matters is where the profit-generating activity actually took place, not just who paid or where the client is based. An office in Hong Kong servicing foreign clients from inside Hong Kong can still generate Hong Kong-source, and therefore taxable, income.
Hong Kong's standard profits tax rate is 16.5% for corporations (8.25% on the first HKD 2 million under the two-tiered regime), applied only to Hong Kong-source profits. There is no capital gains tax and no tax on dividends received.
Singapore: territorial tax
The remittance rule and its exemptions
Singapore's baseline rule taxes foreign-source income once it is remitted into Singapore. In practice, most foreign dividends, branch profits, and specified service income are exempt from this rule under Section 13(8) of the Income Tax Act, provided the income was already subject to tax in a foreign jurisdiction with a headline rate of at least 15%, and the exemption is deemed beneficial to the recipient.
This makes Singapore's system meaningfully more conditional than Paraguay's or Panama's unconditional exemptions; it rewards income that has already been taxed somewhere else at a reasonable rate, rather than exempting foreign income outright.
Malaysia: territorial tax
What changed in 2022, and what didn't
From 2022, Malaysia began taxing foreign-sourced income remitted by resident companies, partnerships, and certain individuals in specific circumstances, narrowing what had previously been a broad territorial exemption. Individual tax residents, however, generally continue to enjoy an exemption on foreign-sourced income, subject to conditions that should be confirmed against current guidance before relying on the position.
This makes Malaysia a meaningfully different proposition depending on whether income flows to an individual directly or through a holding company; the individual position remains comparatively favorable, while the corporate position now requires more careful structuring.
Residency-based taxation: the 183-day rule
What it actually means
Under residency-based taxation, a country taxes its residents on their worldwide income and taxes non-residents only on income sourced within its borders. Become a resident, and everything you earn anywhere becomes reportable. Leave properly, and the obligation ends with you, unlike the citizenship-based system where it never does.
The harder question is what actually makes someone a tax resident. Most systems use some combination of:
Day-count
The classic 183-day rule: spend more than half the year in a country and you are generally its tax resident, though the exact threshold and counting method vary by country.
Permanent home
Maintaining an available home in a country can trigger residency even without meeting the day count, particularly in continental European systems.
Center of vital interests
Where your family, main economic activity, and social ties actually sit, used as a tiebreaker when two countries could both claim you.
How major systems apply it
United Kingdom
Up to 45%, new FIG regime for arrivalsThe UK moved to a purely residence-based system on 6 April 2025, ending the centuries-old non-dom regime and its remittance basis entirely. New arrivals who have not been UK tax resident for the prior ten years can claim a four-year exemption on foreign income and gains under the new Foreign Income and Gains (FIG) regime. After that window, and for anyone who does not qualify for it, worldwide income and gains are taxed as they arise, with no shelter for money kept offshore. Inheritance tax has also shifted from a domicile basis to a residence basis, reaching a worldwide estate once someone has been UK resident for 10 years.
Germany
Progressive to roughly 45%Germany taxes residents on worldwide income under "unlimited tax liability," with rates rising progressively and a solidarity surcharge layered on top for higher earners. Residency is triggered by maintaining a home available for use in Germany, or by physical presence, independent of intent. Non-residents are taxed only on German-source income.
Canada, Australia, most of the EU
Progressive, worldwide once residentThese systems follow the same shape: worldwide income once you are a tax resident, local-source income only if you are not, and a day-count or facts-and-circumstances test to determine which applies. Rates and the specific residency tests differ by country, but the underlying principle, live here and owe here on everything, is shared across most of the developed world.
What this means for a Plan B
Residency-based taxation cuts both ways. It is why most of LGP's clients can actually reduce their tax exposure by relocating, since the obligation follows where they live rather than a passport they cannot easily change. It is also why the exit matters as much as the entry: simply spending more time in a low-tax country does not end tax residency in a high-tax one if the old country's own tests, permanent home, family location, economic ties, are not also satisfied. Establishing residency somewhere new and properly breaking it somewhere old are two separate pieces of work.
Citizenship-based taxation: the United States and Eritrea
What it actually means
Under citizenship-based taxation, holding the passport is the trigger, full stop. It does not matter whether you have lived abroad for one year or forty. It does not matter whether you have ever set foot in the country as an adult. If you hold the citizenship, you owe a return on your worldwide income every year, and in the more developed system below, that means every source: salary, freelance income, dividends, rental income, pensions, and capital gains, wherever on earth they were earned.
This is a fundamentally different question from residency-based systems, where moving away and genuinely cutting ties usually ends the obligation. Under citizenship-based taxation, moving away changes nothing. Only giving up the citizenship itself does, and even that carries its own cost, covered below.
The two countries
United States
Worldwide, progressive to 37%US citizens and green card holders owe a US tax return every year, wherever they live, on every dollar of worldwide income. This includes an estimated nine million Americans currently living outside the country. The obligation is paired with extensive reporting: foreign bank accounts, foreign company ownership, and foreign trusts must all be disclosed, and financial institutions worldwide report US account holders back to the IRS under FATCA.
Relief exists but does not eliminate the filing requirement. The Foreign Earned Income Exclusion lets qualifying expats exclude a set amount of foreign earned income each year (roughly USD 130,000 for 2026), and foreign tax credits offset tax already paid abroad. For most Americans living in a normal-to-high-tax country, this reduces the US bill to close to zero. For Americans who relocate to a 0% or territorial jurisdiction, it does not, since there is no foreign tax to credit against.
The only way out is renunciation, which carries its own exit tax for higher-net-worth "covered expatriates," a mark-to-market charge on unrealized worldwide gains as though everything were sold the day citizenship ends. This is a serious, irreversible decision, not a tax-planning checkbox, and it is covered in more depth on the wealth and exit tax page of this hub.
Eritrea
Flat 2% diaspora levyEritrea applies a flat 2% tax on the foreign income of its citizens living abroad, a system far narrower than the US model. There is no equivalent to FATCA-style global reporting infrastructure; enforcement instead runs through Eritrean consulates, which have in practice tied the payment to access to passports and consular services, a collection method the UN Security Council formally condemned. For LGP's client base, Eritrean citizenship is rarely the point of contact. It appears here for completeness, as the only other country that shares this taxing principle with the United States.
What this means for a Plan B
If you do not hold US or Eritrean citizenship, this page is background, not a constraint. If you do hold US citizenship, it is the single most important fact governing your Plan B design: a second residency or citizenship changes where you can live and what your new country charges you, but it does not touch your US filing obligation on its own. The two questions, "where should I live" and "what do I still owe the United States," are answered separately, and both need to be answered.
Frequently asked questions
Is Paraguay a tax haven?
No. Paraguay is a territorial tax jurisdiction, not a zero-tax jurisdiction. Local-source income is taxed at normal rates (8 to 10% for individuals, 10% for companies). Only genuinely foreign-source income is exempt.
Do I need to live in Paraguay full time to keep my tax residency?
Paraguay does not impose a strict day-count requirement for maintaining residency once it is established, which is unusual among territorial systems and makes it workable for people who travel often.
Does Paraguay report my foreign accounts to my home country?
Paraguay's international reporting position and any relevant exchange-of-information agreements should be reviewed against your specific home country before relying on this system. This page is general guidance, not a substitute for that review.
How does Paraguay's system compare to Panama's?
Both exempt foreign-source income unconditionally. Paraguay has no CFC regime and lower local corporate tax (10% flat vs. up to 25% progressive in Panama), while Panama's Friendly Nations Visa is a faster residency route for many nationalities. See our Panama page for the full comparison.
Does Panama tax foreign pensions?
No. Foreign pensions are foreign-source income and fall entirely outside Panama's tax base, regardless of how much is remitted into the country.
Is there a minimum stay requirement to keep Panamanian tax residency?
Residency and tax residency are related but separate questions in Panama; the specific day-count and permanence requirements should be confirmed as part of a residency plan, since they can affect both status and any related treaty positions.
How does Panama compare to Paraguay for a holding company?
Panama's local corporate rate runs up to 25% versus Paraguay's flat 10%, and Paraguay has no CFC regime while Panama's position on foreign company attribution should be reviewed case by case. For most clients running the operating business itself outside the territorial country, this distinction matters less than it first appears.
Does Costa Rica tax my foreign pension?
No. Foreign pensions are foreign-source income and fall outside Costa Rica's tax base entirely.
What's the difference between Costa Rica and Panama's territorial systems?
Structurally similar: both exempt foreign-source income unconditionally. Panama's Friendly Nations Visa is available to a broader set of nationalities, while Costa Rica's Rentista route is specifically built around demonstrated recurring income rather than nationality.
Is Georgia a fully territorial tax system?
Georgia's approach is narrower and more specific than Paraguay's or Panama's broad territorial exemptions. It works through two targeted regimes (Small Business Status and Virtual Zone) rather than a blanket foreign-income exemption for all individuals.
Who is the Virtual Zone regime designed for?
IT and software companies generating foreign-source revenue. It is not available to businesses generating Georgia-source income.
Is Hong Kong a good base for a remote consulting business?
It can be, provided the actual work is genuinely delivered from outside Hong Kong or the client relationship and delivery clearly sit offshore. If the work itself happens inside Hong Kong, the income is Hong Kong-source regardless of where the client is based.
Does Hong Kong tax capital gains?
No, Hong Kong does not impose a capital gains tax.
Is Singapore a 0% tax jurisdiction?
No. Singapore has a standard corporate tax rate of 17% and progressive personal income tax up to 24%. Its territorial features apply specifically to qualifying foreign-source income, not as a blanket exemption.
What foreign income qualifies for exemption?
Foreign dividends, branch profits, and specified service income generally qualify if already taxed abroad at a headline rate of at least 15%, subject to the exemption being beneficial to the recipient.
Does Malaysia still exempt foreign income for individuals?
Individual tax residents generally continue to benefit from an exemption on foreign-sourced income, though the specific conditions should be confirmed given the 2022 changes affected companies and certain other cases.
Is Malaysia's system as strong as Paraguay's for a holding company?
No. Since 2022, Malaysia's territorial exemption for companies has narrowed considerably. Paraguay's system, with no CFC rules and a flat 10% corporate rate, is currently the stronger option for a holding structure.
Last reviewed 15 September 2026.
This guide is general information, not legal, tax or immigration advice. Programme terms are set by the relevant government and can change; confirm any figure with the authority, or with us, before acting on it.
