Territorial Tax Jurisdictions Explained: Hong Kong, Singapore, Panama, Malaysia, and Costa Rica in 2026

In a territorial tax system, the country claims the right to tax only income that is sourced within its territory. Income that arises outside the country — for example, dividends paid by a foreign company, interest earned on foreign deposits, capital gains realized on foreign securities, or trading profits from operations entirely abroad — is generally not subject to the country's income tax, regardless of whether the income is remitted home.

A worldwide tax system, by contrast, taxes residents on their global income wherever it is sourced, with credits or exemptions for foreign tax paid. Most developed economies (the United States, Germany, France, Japan for individuals) operate worldwide systems for residents and citizens.

The 2024-2025 EU and OECD substance rounds have significantly modified the practical operation of territorial systems. The EU's listing process for non-cooperative jurisdictions and its 2018 Code of Conduct Group standards required Hong Kong, Malaysia, and several other territorial jurisdictions to introduce Foreign-Sourced Income Exemption (FSIE) regimes that condition the exemption on economic substance, beneficial ownership, and minimum-activity tests. 'Territorial' in 2026 means 'territorial subject to substance' — a meaningful refinement.

Hong Kong has operated a territorial tax system since 1947 under the Inland Revenue Ordinance. The historical position was that profits arising in or derived from Hong Kong are taxable; foreign-source profits are not. This held substantially until the EU's 2021 Code of Conduct Group review, which placed Hong Kong on the watchlist and required the introduction of the FSIE regime, enacted with effect from 1 January 2023 and refined in 2024.

Under the current FSIE regime, foreign-source dividends, interest, IP income, and disposal gains from passive holdings are exempt only if (a) the receiving entity satisfies an economic substance requirement (adequate human and physical resources in Hong Kong, with operating expenditure benchmarks), (b) the receiving entity is a beneficial owner under the participation exemption rules, or (c) other specific carve-outs apply. Active business income — for example, a Hong Kong-incorporated company conducting genuine trading or services entirely outside Hong Kong — generally remains outside Hong Kong's profits-tax net under the original territorial principle.

The 2026 practical reality is that Hong Kong remains an excellent territorial jurisdiction for active foreign-source business and for genuine substance-based holding structures, but is no longer suited to passive shell vehicles with no economic footprint.

Singapore is technically a territorial-with-remittance system: foreign-source income received by a Singapore resident is potentially taxable, but Section 13(7A) of the Income Tax Act provides a Foreign-Sourced Income Exemption for foreign-source dividends, branch profits, and qualifying service income, subject to the 'subject-to-tax' test (the income has been subject to tax in the source jurisdiction at a headline rate of 15% or above) and the 'beneficial-owner' test.

Practically, this means that foreign dividends remitted to a Singapore corporate or individual resident from a normal-tax jurisdiction (the U.S., the UK, Germany, Australia) are typically exempt under Section 13(7A). Foreign dividends from a zero-tax or low-tax jurisdiction may not qualify for the exemption and may be taxable on remittance.

Singapore's domestic source rules, combined with Section 13(7A), produce an effective territorial outcome for the great majority of cross-border investors and operating companies, while preserving Singapore's eligibility for full DTT relief and OECD-compliant substance.

Panama operates one of the cleanest territorial regimes globally. Income arising from sources outside Panama is generally exempt from Panamanian income tax, regardless of remittance. The system covers foreign-source dividends, interest, capital gains, royalties, and active business income earned through operations entirely outside Panama.

Panama has faced repeated EU listing pressure (most notably the 2020 grey-list and 2024 review cycles), which has required progressive substance reforms. In 2026, a Panamanian company claiming the foreign-source exemption must satisfy minimum-substance tests proportionate to the activity, and beneficial-ownership reporting is mandatory under the 2020 Beneficial Owners Registry Act. CRS automatic exchange of financial account information has been operational since 2018.

Personal residency in Panama via the Friendly Nations Visa (now operating under the 2021 reform) or the Pensionado Visa remains popular for retirees and remote-income earners. Panama-source personal income is taxed progressively to 25%; foreign-source personal income is exempt.

Malaysia historically operated a territorial system with a remittance-based exemption for foreign-source income received by residents. The 2022 Finance Act began a transition: from 1 January 2022, foreign-source income received in Malaysia by residents became chargeable to Malaysian income tax, with a transitional concession through 2026 for individuals (foreign-source income received by individuals continues to be exempt through the transition period, subject to substance and beneficial-ownership conditions introduced in the 2024 Finance Act).

For Malaysian-resident companies, foreign-source dividends received in Malaysia are exempt under Schedule 6 of the Income Tax Act, subject to substance requirements introduced as part of the FSIE-style reforms aligned with EU expectations. Malaysian-source income is taxed at standard corporate rates (24% headline, with reduced rates for qualifying SMEs).

The Malaysia My Second Home (MM2H) program, after substantial 2021 reforms tightening eligibility, remains a viable long-term residency option for higher-income retirees and remote workers, with progressive personal tax rates from 0% to 30% on Malaysian-source income only.

Costa Rica operates a constitutionally mandated territorial tax system. Income from sources outside Costa Rica is exempt; income with Costa Rican source is taxable progressively up to 25% for individuals and 30% for corporates.

The country was placed on the EU non-cooperative jurisdictions list in 2022 in connection with FSIE adequacy concerns, and in response enacted Law 10381 (2023) introducing economic-substance and beneficial-ownership requirements for Costa Rican entities claiming the foreign-source exemption. The country was subsequently removed from the list.

Costa Rica's residency program, particularly the Rentista (USD 2,500/month proven income for two years) and Inversionista (USD 150,000+ qualifying investment) routes, are popular with U.S.- and Canadian-citizen remote workers. Personal foreign-source income remains exempt under the territorial system, subject to source-of-income documentation.

The 2026 decision framework for territorial jurisdictions is no longer 'where is the headline tax lowest' but rather 'where can I genuinely run substance, where does the FSIE regime accommodate my income mix, and where is the broader infrastructure (banking, treaties, residency, lifestyle) right for me?'

Hong Kong and Singapore remain the institutional Tier 1 territorial regimes for substantive operating businesses and serious holding structures. Panama is the cleanest jurisdiction for genuinely passive foreign-income individuals and is excellent for retirees with foreign pension and investment income. Malaysia and Costa Rica are increasingly attractive for remote workers and lifestyle migrants with foreign-employment or foreign-business income, particularly given lower cost of living than Tier 1 alternatives.

All territorial structures should be supported by genuine substance, accurate source-of-income characterization, proper beneficial-ownership reporting, and full compliance with CRS, FATCA, and any applicable anti-avoidance rules in your country of citizenship or original residence.