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International tax systems can be broadly divided into two categories: territorial and residence-based (worldwide) systems.

Territorial systems tax income earned within a country’s boundaries while allowing an exclusion or exemption for active income earned anywhere else in the world. Some territorial tax systems are referred to as “participation exemption” systems ("To Be or Not to Be -- Sweden's Participation Exemption and Qualifying Business Entities"). Under these tax systems, active business income earned abroad by a foreign subsidiary is partially or entirely exempt from home country tax with no foreign tax credits. Under these systems, foreign subsidiary earnings can be repatriated with little to no tax.

Residence-based systems tax resident companies on their worldwide income, while also taxing nonresidents on income earned within the country. Under a worldwide tax system, income earned by a foreign subsidiary is subject to home country tax, with a credit for foreign income taxes paid. Foreign tax credits are generally provided on a per-item, per-country, or overall approach. Under the U.S. worldwide tax system, corporations may defer the tax on active foreign earnings until the income is repatriated. Subpart F establishes rules for income that is not subject to deferral. ("U.S. Report Suggests Consensus on International Tax Reform.")

Under both territorial and worldwide tax systems, many countries have controlled foreign corporation (CFC) regimes that treat passive income earned abroad as if the income had been earned in the parent company’s home country. ("Reshaping the Italian CFC Rules: Selected Issues.") CFC regimes generally provide foreign tax credits for this income and target mobile income such as interest, royalties, and dividends.

Corporate tax residence is a central concept used to determine taxing rights over a company’s income. Residence is generally determined by looking to where a company is incorporated, or where a company is managed and controlled ("News Analysis: Uncertainty for U.K. Banks After Levy Hike."). The method used to determine residence varies by country. Mismatches between the two systems have been exploited by some companies seeking to reduce tax liabilities. ("News Analysis: The Celtic Tiger's Last Roar?")

If multiple countries claim taxing rights over a company’s income, a risk of double-taxation frequently exists. In order to alleviate this risk, countries often enter into tax treaties in order to adjust for differences between their tax systems. Treaties generally limit the extent of taxation imposed by each of the treaty countries on transactions that have connections to both. Recently, treaties have also sought to eliminate the possibility of double-non-taxation that may occur due to differences in countries’ tax systems.

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