Source‑Based vs Residence‑Based Taxation
Summary
Source‑based taxation and residence‑based taxation are two fundamental approaches used by tax systems to determine which income a country may tax. Under source‑based taxation, income is taxed where it arises. Under residence‑based taxation, income is taxed based on the taxpayer’s residence status. Most European tax systems apply a combination of both approaches.
Main explanation
What is source‑based taxation
Source‑based taxation means that a country taxes income because it is generated within its territory.
- applies to income arising from economic activity performed in the country
- is governed by domestic tax law
- applies regardless of the taxpayer’s residence or nationality
Examples include income from work performed in the country, business activities carried out there, or income generated from assets located within the territory.
What is residence‑based taxation
Residence‑based taxation means that a country taxes income based on the individual’s status as a tax resident.
- applies to persons considered resident for tax purposes
- may extend to worldwide income
- is independent of where income is earned
Why both approaches exist
- source‑based taxation ensures income contributes where it is generated
- residence‑based taxation ensures residents contribute to public systems
Interaction between source and residence taxation
- source rules determine taxation at origin
- residence rules determine taxation based on status
In cross‑border situations, both claims may apply simultaneously.
Differences across countries
- tax residency definitions
- domestic-source income rules
- balance between approaches
- conflict resolution mechanisms
What this page does not cover
- country‑specific tax rules
- tax treaties
- double taxation relief
- permanent establishment rules
- tax planning
References