Territorial Taxation
For Freelancers and Digital Nomads who are working remotely, territorial taxation is a term that will grab your attention. If you are not familiar with this term, it means that you will only be taxed on the income sourced in the country you are residing in, not income you receive from other countries while being based there.
Example
Paul lives in Georgia, which is a territorial taxation country. Georgia does not collect tax on money sourced from outside of Georgia.
The flip side would be the United States, where the source of the money is irrelevant, as long you are a resident ( or even a citizen in the unique situation for Americans) there.
So, great. Paul has his marketing agency or Amazon FBA business set up in a third country and since the money is not earned from Georgian platforms or physically in Georgia, Paul does not have tax obligations in Georgia since it is a territorial tax base country. Well not so fast. We need to consider what source means when referring to territorial taxation.
Source of income
The source does not necessarily mean the money that is coming from another country. Source or better yet, where the labour is performed. So if Paul is working on his business while in Georgia, that income would be considered sourced there. Therefore he would have tax obligations in Georgia.
Unearned income
If you have a company where you receive dividends or a pension from abroad, that would play out differently. Since the income would not be sourced , as dividends or pension does not require labour to receive, you will be able to receive it without any tax obligations. There only exception to this would be for American citizens, who won’t be able to claim the FEIE with unearned income while overseas.
Just moving to a territorial taxation country will not omit your income tax. It is more complicated than that and there is official documentation required to be submitted to respective countries.
Feel free to leave any comments, it will be great to hear from you. If you would like to discuss your situation personally, reach out to us at [email protected].