Taxation By Residence Rule Vs Source Rule

Residence Rule Vs Source Rule under International Taxations Principle (Double Taxation of Income)

In tax laws of any countries, where income earned will tax in more than one country due to the tax structure of the respective country here is the basic principle of “Double Taxations” of Income.

As double taxation is generally considered undesirable, one of the objectives of international tax principles are to ensure that income is not taxed twice. 

The domestic tax laws in countries normally applied the following the International tax principle for taxations of income from resident or income from non-resident, based on connecting factors : 

-      Residence Rule / Residence Code : Unlimited taxation rights are granted to the country of residence, due to the “personal attachment” of persons. The country of residence (or nationality) may imposed its taxes on the worldwide income of individual or corporations due to the protection it offers to the tax subject.

-      Source Rule / Source Code : Limited taxation rights are granted to the country of source due to the “economic attachment” of persons. The country of source reserves the right to tax the income that is derived from the economic activities within its country / territory.