Five Flag Theory and Perpetual Travel
Imagine being able to live anywhere you please, know that your assets were safe, your privacy was intact, and your tax obligations were zero. Flag Theory can help you accomplish that and live a freer life.
So what is Flag Theory? Here at Nomad Capitalist, we frequently talk about concepts of internationalization: having an offshore bank account, obtaining a second passport, and even hosting your website overseas.
Quite simply, Flag Theory is the idea that you must “go where you’re treated best”. While we have introduced new ideas to bring Flag Theory into the 21st century, the idea has been around for decades.
The basis is simple: follow a process called “planting flags” around the world to diversify your affairs. Each country you base one part of your life in is called a “flag”.
The idea is to diversify your personal and financial affairs so that no one government has control over you or your money. Basically, the belief is that intelligent people who loved freedom should not be shackled to just one government.
This concept probably flies in the face of everything you were ever told. The average person:
- Is born in one country and spends their entire life living there
- Goes to school – including university – in that same country
- Get a job in that country
- Maintains all of their bank accounts, retirement accounts, and savings there
- Keeps their entire finances in the national currency of the country they live in
- Owns real estate exclusively in one country
- Stores their precious metals or other valuables in one country
- Has only the passport of one country (if they have a passport at all)
If you live in a Utopia, that may work out fine.
But in the real world, your government is probably all too happy to tax you to death, control your movements, tell you how you must educate your children, tell you how to invest your money (or even outright confiscate it), and devalue your currency.
Governments can change on a dime, and being tied to just one place is not a good idea. Consider that, throughout history, societies have risen and fallen. Today’s world leader may be on tomorrow’s ash heap. Governments can become tyrannical overnight; although chances are your government has been growing tyrannical over the years already.
As Doug Casey puts it, “any country can become… Russia in the ’20s, Germany in the ’30s, China in the ’40s, Cuba in the ’50s, the Congo in the ’60s, Vietnam in the ’70s, Afghanistan in the ’80s, Bosnia in the ’90s”. Add to that Argentina in the 2000s.
Why use Flag Theory?
Flag Theory is often tied with perpetual travel. As a perpetual traveler, I spend time in as many as thirty countries in a year. But you don’t have to live that way. The idea of perpetual travel (also known as “PT”, “permanent tourist”, or “prior taxpayer”) is to follow my five magic words: “go where you’re treated best”.
The original Three Flag Theory
Harry Schultz devised the original Three Flag Theory, which advises “planting flags” for three parts of your life.
1. Have citizenship somewhere that does not tax foreign-source income.
There are three types of taxation countries impose on their citizens: territorial taxation, residential taxation, and citizenship-based taxation.
Territorial taxation means that, even if you live in a country, income earned outside of that country is not taxable locally. For example, residents of Singapore can earn money anywhere in the world without paying Singapore tax. Only their local income (such as salaries) is taxed. That means a Singaporean can own rental real estate in Spain and only pay Spanish tax on the income he earns. Similarly, Singaporeans can operate offshore companies and only pay tax on salaries they take from their own company (or pay no tax at all on dividends).
Residential taxation means that you pay taxes based on where you live. Many countries use a version of the “183 days” principle, meaning that if you spend at least half your time living in the country, you are liable for tax on your worldwide income. However, if you choose to leave the country and live elsewhere, you can do so and no longer pay tax once you are no longer deemed a resident.
Citizenship-based taxation is applied by only two countries: the United States and Eritrea. It means that your income is taxable no matter where in the world you live, so long as you hold citizenship in that country. Eritrea, a war-torn country that broke away from Ethiopia several decades ago, applies a 2% tax on its citizens worldwide income (it’s rarely enforced). The United States does tax your entire income at normal rates, which means even “accidental Americans” need a sound offshore strategy to avoid unnecessary taxation.
In Flag Theory, you hold a passport that allows you to leave the country and not pay tax there. For example, while France imposes high taxes on its citizens, French expats are not liable to pay French tax (except if they live in Monaco). Holding a US passport is not conducive to Flag Theory. This is where to concept of obtaining a second citizenship comes into play.
2. Have your business and investments in stable tax havens.
Now that you have a passport that does not tax your non-resident income, you can establish businesses and investments in zero-tax countries and pay no tax on income earned.
This is where the idea of offshore corporations and offshore trusts come into play. If your country of citizenship doesn’t require you to pay tax to them, and you live in a tax haven or are a perpetual traveler with no permanent address, you can set up your income to be entirely tax free.
To do this, you would set up a company or trust in a stable country that does not tax your income. Countries like the Cayman Islands, British Virgin Islands, Belize, Nevis, Seychelles, and even Hong Kong offer offshore corporations that require zero tax to be paid. Many of these offshore havens don’t even require you to file accounting reports or be audited.
You can use offshore corporations to run your business the way Google, Apple, and other large companies do. If you have investments, you can use them to set up offshore brokerage accounts or open offshore bank accounts. When doing business and banking in a stable tax haven, any interest income or dividends you earn are also tax-free.
3. Live as a tourist in a country where what you do is valued.
This is where the perpetual traveler concept comes into play. Perpetual travelers are also known as permanent tourists because they do not have formal residence in one place. As such, they are classified as a “tourist”, even if they spend three to six months each year in one place.
When you enter a country, you get your passport stamped with a visa. Holders of passports from wealthy countries can easily enter most of Europe, the Americas, and much of Asia with no visa required and be able to stay for anywhere from three to six months. A few countries like Georgia allow almost anyone to stay as a “tourist” for twelve months without a visa.
Now, consider that tourists are treated better than locals in almost all cases. Tourists get their sales tax refunded when they leave, but aren’t responsible to pay local income tax. After all, they’re just tourists.
By basing yourself in a few different countries that respect how you earn your income, you can live freely and pay zero tax in most cases.
Here at Nomad Capitalist, we talk about second residences you can obtain to become a legal resident of a certain country. If you don’t want to constantly be on the go, this is a reasonable alternative. There are easy ways to prevent yourself from being taxed to death as you likely are now.
The next step: Five Flag Theory
W.G. Hill added his own two additional flags to the original Three Flag Theory to offer further international diversification.
1. Passport or citizenship in a country that does not tax non-resident income or control your actions.
This flag is the same, but adds that your country of citizenship should not control your movements. United States citizens, for instance, are required to follow many US laws even when out of the country. This, in addition to the US policy of citizenship-based taxation, makes a US passport bad for Flag Theory.
2. Legal residence in a tax haven.
This differs from the original perpetual travel theory, and mirrors what we talk about here at Nomad Capitalist. By obtaining legal residence in a country that does not tax overseas income (or any income at all), you can establish a base of operations for your life without having to pay taxes to the local government.
3. Business base where you earn your money, preferably in a tax haven.
This is the country where you base your offshore corporation, and from where your salary is paid. Because this country is a tax haven, it will not tax your income. And because you followed the first two flags as well, neither your country of citizenship nor your country of residence will tax your offshore income, either.
4. Asset haven where you keep your money, preferably with no capital gains taxes.
An asset haven may be different from your business base in that you want your assets to be stored in a stable place. At Nomad Capitalist, we believe that your business base should be a little-known country that has little interest or resources in making your life difficult.
However, where you store your assets is a different story. You want the country you bank in to be stable and have an efficient judicial system to ensure your money is safe. Beyond offshore bank accounts, you can store assets such as gold offshore. There are facilities to house everything from your classic car collection to your collection of rare art.
5. Playgrounds where you spend your money, preferably with no sales tax or VAT.
Even if you live in a country with no income taxes, you may have to pay high sales taxes. Malaysia, for instance, meets the criteria for the citizenship and residence flag (and the business flag in the state of Labuan), but sales taxes are rather high and goods can be expensive.
In this case, you would have a playground where you shop for goods at lower sales tax. A playground can also be useful when your countries of citizenship and residency are expensive places to live and you want to spend time in a place with a lower cost of living.
Additional ways to plant flags
You can come up with any number of flags to plant around the world. The more places you base your life and your assets, the less control any one government has over you.
Other flags include where you host your website or where you get your health care. Medical tourism and international internet services are just a few of the many ways Flag Theory can be easily applied in your own life.
How to maximize your freedom with Flag Theory
Planting flags in as many countries as possible helps you to maximize your freedom. Just as you wouldn’t invest your entire nest egg into one individual stock, you likely wouldn’t move your entire savings account to one country or currency. Diversification is key.
Perpetual travelers practice Flag Theory, but you don’t always have to be on the move to enjoy the benefits of Flag Theory. Often, people start planting flags one at a time, slowly diversifying their life and assets. One easy place to start is an offshore bank account.
In some ways, Flag Theory is aligned with the concept of “world citizens” in that the goal is to distance oneself from being “owned” by any one country. Finding the right balance of Flag Theory – and the right places to plant flags based on your interest – can help you maximize your freedom and keep more of your own money.