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World’s Four Tax Systems

Taxes are an important part of financial planning. Where there is income, there is taxation. Every individual who manages their finances and has a source of income in a particular country should account for taxes as a part of financial planning. In order to do that, it is important to understand the different tax systems followed across the world and figure out the best tax system in the world that goes with your tax strategy.

For individuals who are looking for second citizenship by investment, taxes on the earnings from those investments is an important factor and should be considered before applying for citizenship. Interested people can then also apply for second citizenship if it is offered by the country that follows their favorable system and manage their taxes accordingly.

Types of tax systems

Broadly there are four types of tax systems in the world followed by different countries.

Citizenship-based Taxation

This is the system followed by countries that tax worldwide income. Under this system, by virtue of being a citizen of a country, every citizen has to pay tax on their global income earned anywhere in the world. This implies that no matter what sources of income the earnings are coming from and no matter how much earnings are spent in a particular country, every citizen has to file income tax every year.

This is not a very popular form of taxation as it leads to double taxation in a lot of cases but it is followed by the U.S. and impacts millions of people, making it a popular one. In some cases, even the non-citizens who meet certain criteria are pulled into the citizenship-based taxation system. While searching for which countries tax worldwide income, it doesn’t take too long. There are only two countries that follow citizenship-based taxation- Eritrea and the U.S.

Residential Taxation

The residential taxation system is a far more simple and popular form of taxation, as it states that you only pay tax in a country if you live in the country, which also means if you are a tax-resident of the country. Every country has its own definition of tax-resident. Most developed countries use residential taxation as it helps them track the worldwide income of residents and still exclude citizens who live abroad.

Territorial Taxation

The territorial taxation system charges the residents of a country only on the income earned by them within the territory of the country. It is one of the most friendly and likeable taxation systems because if a resident does not earn any income within a country, he/she does not need to pay taxes on it. Countries like Singapore, Switzerland, and Hong-Kong follow this system and save a lot of expats taxes that they would have otherwise had to pay on their foreign income.

Zero Taxation

Under this system of taxation, no taxes are levied on the citizens of a country. As surprising as it may sound, it is true. Some countries do not need to depend on taxes for development and progress. Countries like the Bahamas and the Cayman Islands and some other small countries entirely survive on the income they earn from their tourism industry and the citizens enjoy living there tax-free. Countries that follow this system may not charge income-tax but may levy other kinds of taxes.

Best tax system in the world

Among the different tax systems followed in the countries across the world, Zero taxation is considered to be the best tax system in the world. However, it is important for citizens to understand their own taxation system first and then strategically plan other sources of income from different countries to avoid losing money to taxation systems.

It is also important to keep in mind that the countries that follow the zero-taxation system do not have an easy citizenship process. Thus, finding the best tax system in the world is highly dependent on an individual’s needs and preferences. Other factors like international laws for employment and business should also be taken into account.

Taxation and Citizenship

If a person is planning to get citizenship by investment in other countries, it is very important to understand the taxation system of both countries in order to strategically place their revenue sources. If a person is already a resident of a country that follows the citizenship-based taxation system, it is important to make sure they do not pay taxes in other countries where they might be looking for second citizenship.


The zero-tax system is not the solution to tax-woes. If a person is planning to do business globally, or earn a global income, the best way to save tax is to understand the system and plan accordingly. While different tax systems make the world a little more complicated to be in, it also provides an opportunity to strategically plan income and tax in advance and navigate through the process.

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