Territorial Tax System is a tax system that taxes only income sourced within the country and generally exempts foreign-source income of resident companies.
A territorial tax system taxes residents only on income that has its source within the territory of the country. Foreign-source income, particularly active business profits earned through foreign branches or subsidiaries, is generally exempt. Hong Kong, Singapore (broadly), Panama, Costa Rica, Georgia, Paraguay, and most of the Gulf operate territorial or quasi-territorial regimes.
The United States moved closer to a territorial regime through the Tax Cuts and Jobs Act 2017, which introduced the dividends-received deduction (DRD) for foreign profits but kept GILTI as a backstop.
Under a worldwide regime (the historical US, India, and many Latin American countries), residents are taxed on global income, with credit for foreign taxes paid. Under a territorial regime, the source rule does the heavy lifting: only domestically-sourced income is in scope, and offshore activity falls outside the tax net entirely - subject to anti-abuse rules.
Territorial regimes are extremely friendly to international holding and operating structures. They reduce exposure to home-country tax on foreign profits, simplify dividend repatriation, and avoid the layering of foreign-tax-credit calculations. They are not a free pass: substance, transfer pricing, and CFC rules still apply.
You will weigh territorial systems when choosing a holding-company jurisdiction, when comparing Singapore or Hong Kong against Delaware or India, when planning international expansion through branches, and when assessing how foreign profits flow back to the parent without triggering domestic taxation.
See what a company actually costs in year one, and how the jurisdictions compare on tax, capital and timeline.
