Basics of taxation

Table of contents

Types of taxes

Based on the origin

List of countries by their tax system on Wikipedia

Based on the tax rate

List of countries by their headline tax rates on Wikipedia

Based on the type of income

Based on geography

Types of income

For corporations, gross income is also the top line (on the income statement), while net income is the bottom line.

Companies also distinguish revenue and profit which are slightly different:

Tax base

Tax base (taxation basis) is the portion of income that is subject to tax (also, taxable income).

Individuals pay taxes (PIT and socials) on their gross income minus deductions (ex: personal allowance, pension fund contributions, etc.). Socials use your gross income as the tax base, but are sometimes capped (ex: 12 * min or avg monthly wage).

Corporations pay taxes (CIT) on their profits (or sometimes a lower rate on revenues). Profits are then distributed to shareholders as dividends (which are then taxed again at the personal level).

Most freelancers and digital nomads will fall into one of the following:

Employees are usually taxed at the higher rates because of the progressive PIT and mandatory socials. They may claim personal allowances and home-office deductions, but those are limited. However, employees enjoy labor rights, health insurance, EI/severance pay, PTO, etc.

Self-employed can pay less PIT by deducting business expenses from gross income, but they also pay higher socials (both employee and employer side). Contractors don't get any benefits or PTO, and they often need to purchase private health and contractors insurance.

Despite tax integration, corporations are often the most tax-efficient because they can pay a reduced small business CIT rate at the corporate level, and a flat dividend tax at the personal level (typically, lower than PIT). As a director/manager, you can decide how much you pay yourself in salary and thus in PIT and socials.

These terms are commonly confused. Note that they can all be in different countries simultaneously!

Tax residency rules

Each jurisdiction has its own rules for determining tax residency. Some countries apply residency tests (ex: SRT in the UK, substantial presence test in the US, etc.).

Tax residency is a question of fact. Usually, tax authorities publish guidelines on tax residency that you can read online. The fine print can be found in the tax act(s) and case law. Finally, any DTTs that are in place will overwrite local laws.

Individual residency

An individual is taxed based on where they are a tax resident. The following factors are commonly (but not always) taken into account:

For most people leaving western countries, the best course of action is to make a clean break i.e. sever all ties with your home country (sell your home, car, close bank accounts, etc.), and permanently move yourself, your family, and your business to the new country. Alternatively, you could sever all significant ties (like your primary residence) but keep some secondary ties (like your driver's license or private pension fund). If you qualify for treaty relief under a DTT, you could have mixed ties in both countries, but only pay taxes in one based on the tie-breaker rules.

As a non-resident of your home country, if you receive local sourced income, you have to pay a non-resident withholding tax and file a tax return.

Corporate residency

A company is taxed based on where it is a tax resident. Tax authorities consider the place of:

In most cases, the company is taxed where it is managed and controlled regardless of where it's registered. Ex: if you form an offshore company in Belize but continue to live and work from Canada, your company is still a tax resident of Canada and is subject to Canadian taxes.

Most countries apply both registration and management & control. Some only apply one or the other, but may still have CFC and/or hybrid mismatch rules to counteract tax avoidance.

Several important concepts and/or rules apply in determining the tax residency of a company.

Double taxation

Unfortunately, you could be a tax resident of multiple countries. Luckily though, if those countries have a double taxation treaty (DTT), you may still be deemed a tax resident of one country, but not the other, based on the tie-breaker rules (often found in Article IV). The country you would be deemed a tax resident of is typically the one in which you have your:

  1. permanent home or
  2. center of vital interests or
  3. habitual abode or
  4. citizenship

If you satisfy one of these tests, you'd qualify for double taxation relief, as the DTT would overwrite (supersede) any local tax laws. If none of the tests apply, the question is settled in court by mutual agreement of the countries.

If there is no DTT in place (often the case for blacklisted or tax haven countries), then you might be subject to double taxation. However, the other country would usually have no tax, very low tax, or territorial tax (where foreign-sourced income is exempt from taxes). In other cases, you may be exempt from tax based on the terms of your visa (ex: digital nomad visa).

Tax avoidance vs. tax evasion