Territorial Taxation: What It Means and Where It Applies

Worldwide and territorial systems

Most countries tax their residents on everything they earn. Spain's corporate income tax, for example, taxes a resident company on all of its income, wherever it arose and wherever the payer is resident (BOE, Corporate Income Tax Law, article 7, as of November 2026). The United States goes further and taxes its citizens on worldwide income wherever they live (HMRC, as of November 2026).

A territorial system draws the line at the border instead: income from local sources is taxed, income from abroad generally is not. In practice many systems sit in between, with exemptions for some foreign income, conditions on others and special rules for passive income.

Hong Kong: profits arising in or derived from Hong Kong

Hong Kong does not tax on the basis of residence or domicile. Under section 14 of the Inland Revenue Ordinance, a person carrying on a trade, profession or business in Hong Kong is taxed on profits arising in or derived from Hong Kong from that business, excluding profits from the sale of capital assets (Inland Revenue Department, as of November 2026).

Two conditions follow from that wording. The business has to be carried on in Hong Kong for profits tax to apply at all, and only the profits that arise in Hong Kong are taxed. A Hong Kong company whose profits arise outside Hong Kong can claim that they are not taxable there, but the claim has to be supported with evidence of where the business was done. Our Hong Kong company page explains the offshore claim and the two-tier rates.

Since 1 January 2023, foreign-sourced dividends, interest, income from intellectual property and gains on the sale of equity interests received in Hong Kong by a member of a multinational group are taxable unless the recipient meets an exception, such as the economic substance requirement or the participation requirement. From 1 January 2024 the rule covers disposal gains on all types of property (Inland Revenue Department, as of November 2026). More on that test in our explainer on economic substance.

Singapore: taxed when received, with exemptions

Singapore is often described as territorial, but it works differently. Foreign income of a company is generally taxable when it is remitted to or received in Singapore; foreign income that arises from a trade or business carried on in Singapore is taxable as it accrues, whether or not it is brought in (IRAS, as of November 2026).

Specified foreign income received by a Singapore tax resident company, such as foreign dividends, foreign branch profits and foreign service income, is exempt if it was taxed abroad, the highest corporate tax rate in the country it comes from is at least 15% when it is received, and the Comptroller is satisfied that the exemption benefits the company (IRAS, as of November 2026).

For individuals the rule is simpler: overseas income received in Singapore is generally not taxable, unless it comes through a partnership in Singapore or falls under a few other specific cases (IRAS, as of November 2026).

What territorial taxation does not mean

• It does not mean tax-free. Local profits are taxed at the normal rates, and conditions such as Hong Kong's rules for foreign passive income can bring foreign income back into the tax net.
• It does not decide where you are resident. If you live in a country with worldwide taxation, that country may tax you, and in some cases your company's profits, regardless of what a territorial country does. Our guide to tax residency covers how residence is decided.
• It does not follow the bank account. Where a company holds its money is not where its profits arise. Banks also ask where the business is actually run, and a company that cannot answer clearly is harder to bank.

If you are weighing a territorial jurisdiction for a company or a move, our Global Structuring desk looks at the company, the residence of the owners and the banking together.

Frequently asked questions

Is Hong Kong tax-free for a foreign-owned company?

No. Hong Kong charges profits tax on profits arising in or derived from a business carried on in Hong Kong. Profits that arise outside Hong Kong are not taxed there, but an offshore claim has to be supported with evidence.

Does Singapore tax foreign income?

Companies are generally taxed on foreign income when it is received in Singapore, with exemptions for specified foreign income that meets the conditions. Individuals generally pay no tax on overseas income received in Singapore.

Does a territorial system protect me from tax in my home country?

No. Your country of residence applies its own rules. If it taxes worldwide income, it can tax you whatever the territorial country does, so check your residence position first.

What changed in Hong Kong in 2023?

Hong Kong introduced rules for foreign-sourced passive income of members of multinational groups: dividends, interest, intellectual property income and disposal gains received in Hong Kong are taxable unless an exception such as economic substance applies.

Sources

• Inland Revenue Department (Hong Kong): Company re-domiciliation regime, on section 14 of the Inland Revenue Ordinance (as of 3 November 2026)
• Inland Revenue Department (Hong Kong): Foreign-sourced income exemption (as of 3 November 2026)
• IRAS (Singapore): Companies receiving foreign income (as of 3 November 2026)
• IRAS (Singapore): Income received from overseas (as of 3 November 2026)
• BOE (Spain): Law 27/2014 on Corporate Income Tax, article 7 (as of 3 November 2026)
• HMRC (UK): Dual residents, helpsheet HS302 (as of 3 November 2026)

This article is general information, not tax advice. Source rules depend on the facts of each business; take advice from a qualified tax adviser before relying on a territorial exemption.