A reference field on Cities, which points to Countries: this lets each City entity know which Country it belongs to
A reference field on Restaurants, which points to Countries. This field must have the same name as the other field which points to Countries
A reference field on Restaurants, which points to Cities. This field needs to be configured to limit itself according to the other field on Restaurants.

Add your entity reference field, which you want it to be limited by taxonomy terms, to an entity. (ex. node type)
Add your taxonomy term field from the existing fields to the same entity. Note that the entity reference you added has to have the same taxonomy terms fields in it.
Go and edit the first entity reference field you have included, there appears the option limited field. Edit the settings as you like.