The concept of being a Digital Nomad and getting to choose the best parts of every country is officially called ‘The Flag Theory’.
At the core of the Flag Theory lies the fact that different countries shine for different reasons. Some are better for banking, others for investing, some for residency, and yet others as places to incorporate your business.
Whenever you base a part of your life in a new country, you plant a ‘flag’. The idea behind planting flags around the world is to diversify your personal and financial affairs so that no one government has control over you or your money. By living the Flag Theory you can protect your assets from the negative effects of instability.
Harry Schultz came up with the Flag Theory first, defining three flags. In the 80s this concept was extended by W.G. Hill who added two flags and today some even talk about seven flags.
The main idea is to distribute your life across five different countries or jurisdictions by traveling perpetually. That is why people who live by the Flag Theory are often called ‘Perpetual Traveller’, ‘Permanent tourist’ or ‘Prior Taxpayer’.
THE FIVE FLAGS
#1 Passport or Citizenship in a country that does not Tax Foreign earned Income
You should hold a (second) passport of a country, that doesn’t tax your foreign-sourced income.
This will most likely work best by living in a place that imposes a territorial taxation system. This means that even if you live in a country, income earned outside of that country is not taxable locally.
For example, residents of Malaysia can earn money anywhere in the world without paying Malaysian taxes. Only their local income (like their salary) is taxed. That means a Malaysian can own rental real estate in Spain and only pay Spanish tax on the income he/she earns.
Similarly, Malaysians can operate offshore companies and only pay tax on salaries they take from their own company (or pay no tax at all on dividends).
#2 Tax Residency in a Tax Haven
You should obtain legal residence in a country that does not tax overseas income. So, you won’t have to pay income taxes to the local government.
#3 Offshore Business in a Tax Haven
You should establish a business in a country where you don’t have to pay tax on your income earned.
For example, you could set up a company in Seychelles, Hong Kong, or The British Virgin Islands because those countries don’t tax offshore corporations. Further, after following the two previous flags your offshore income won’t be taxed by your country of residence.
#4 Offshore Banking in a Country with Stable Banking
You should open your offshore bank account in a country with a stable banking system even if it is a different one to where you have set up your offshore company.
It is important to make sure that you open your offshore bank account in a country with an efficient judicial system, good interest rates, and stable banking conditions.
#5 Actual Residency with no Sales Tax or VAT
You should spend most of your time and money in a country with low VAT, low consumption tax, and with an affordable cost of living.
WHAT TO DO NEXT
As you can see The Flag Theory is a great concept that guides you on how to be a perpetual traveller. Planting your flags in up to five countries can help to keep all or almost all of your money because you can lower your tax payments.
Keep in mind that you do not need all Five Flags. You only need to choose the ones that work best for you and your business. The travelling does not have to be fast, as many countries allow tourists to stay up to 6 months before considering them tax residents.
The best way to getting started with the Flag Theory is to plant flags one at a time. The easiest place to start with is to set up an offshore bank account today!
To summarize the main steps that you should be following to live the Flag Theory are these ones:
- Leave your passport country and officially become a non-resident.
- Acquire a new legal residency in a country that doesn’t tax foreign income, e.g.Paraguay, Panama or Malaysia.
- Pick another territorial taxation country to register on offshore business, e.g. Singapore or Hong Kong.
- Move your assets offshore, which strongly depends on the kind of assets you have and your home country.
- Start traveling in tax-friendly countries, that have a high quality of living and also a low cost of living.
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NOTICE: The content of this article is not to be considered as a legal opinion or tax advice. Wanderers Wealth does not hold itself out as a legal or tax advisor. If you want to receive a legal opinion or tax advice on the matter in this article please contact us directly and we will refer you to a legal practitioner.