How can you live a tax-free life as a citizen of the world? Is it possible to travel the world and pay no tax?
A nomadic lifestyle and a tax-free lifestyle go hand in hand. But how do you make it work?
The easy and most simple answer is flag theory. Explaining and practicing flag theory, however, is a bit more complicated. In this article, we are going to break it down into simple pieces and explain internationalizing with flag theory and why you should adopt flag theory in your offshore plans, and how flag theory can help you live a low-tax or no-tax lifestyle.
In this article, we’ll discuss:
- What is flag theory?
- Flag Theory Today
- Getting a Second Citizenship
- Obtaining a Permanent Residence in a Tax Haven
- Setting Up Your Offshore Business in a Corporate Tax Haven
- Keeping Your Assets Secure
- Having Fun in Your Playground
- Why You Should Use Flag Theory
WHAT IS FLAG THEORY?
The original idea for flag theory was developed by Harry Schultz in the 1980s. It was broken into three parts that make up the basis for your offshore plan.
The original three-flag theory proposed that you should become a resident of a country that doesn’t tax foreign income, keep your company and assets in a stable and secure tax haven, and live as a perpetual traveler, visiting other countries as a tourist.
Since the eighties, flag theory has been further developed. W. G. Hill expanded flag theory by adding two more flags. His proposed five flag theory included getting a second passport and citizenship, residing in a tax haven, having your business in a corporate tax haven, keeping your assets in a stable location, and picking a playground where you can spend your time and money. We are going to break these pieces down below and show how you can apply them today.
Flag theory is designed to help you reduce your taxes to as low as zero and diversify your life while spending time traveling and going where you most want to be. Flag theory makes up the basis for most offshore planning. Understanding the basic components of flag theory can help you prepare for a tax-free life as a citizen of the world.
The basic idea behind flag theory is like that old saying: don’t put all your eggs in one basket.
Basically, flag theory teaches that you can handpick countries throughout the world for where you want to live, where you want to do your business, where you want to keep your assets, and where you want to visit.
No one country is going to be the perfect solution for all your problems. Different countries offer different opportunities. Finding a combination of the right countries for the right flags can help you come up with an offshore plan that will allow you to live a life filled with more personal and financial freedom. So why limit yourself to just one?
FLAG THEORY TODAY
A lot of things in the world have changed since flag theory was first developed in the 1980s. While the basics are the same, flag theory and tactics have changed a lot. They’ve had to. More countries are cracking down on nomads and those who take advantage of offshore opportunities.
The biggest changes for flag theory since the 1980s have come from the development of more laws. Countries have caught on to this idea of living as a tourist to avoid taxes, and this is why the permanent tourist lifestyle doesn’t really work anymore.
You may have heard of the 183-day rule. This rule basically says that if you are a citizen of any country other than America, you can avoid paying taxes by spending less than 183 days in a country, because countries can’t tax you unless you live there for more than 183 days each year.
This is a super common misconception. In most cases, it won’t work. Because they’ve caught on, many countries no longer base their tax laws just on how many days you spend there. You can still be taxed in countries where you have a close connection. If you own a home or have your center of life in a particular country, that country can claim you as a tax resident and you’ll be obligated to pay taxes there.
It’s getting harder to set up a tax-free structure, but it’s still possible to reduce or eliminate your taxes completely.
You can’t spend 182 days in a country and travel as a tourist the rest of the year and never pay taxes. However, you can reduce your taxes with flag theory. It just takes more steps than spending half of your year living out of a suitcase.
We’re going to talk about the different aspects of flag theory from a more modern perspective. Flag theory still works today. The key is adapting it to you individually. How you set up your offshore structure is going to be unique.
You can add more flags if you need to or change some of these flags around. Most of the flags are going to interlock and come together like pieces to an offshore puzzle. As you come to understand the basics, you’ll be better prepared to deal with the details of your own customized plan.
GETTING A SECOND CITIZENSHIP
First of all, a second citizenship is exactly what it sounds like. Typically, at birth, you become a citizen of the country in which you were born. This would be your first citizenship. You can also become a citizen of another country. There are multiple ways to get second citizenship but the basics are through naturalization, descent, or investment.
When you get citizenship in another country, you’ll also have access to a passport through that country. In the offshore world, the terms second citizenship and second passport are often used interchangeably.
Why do you need second citizenship? Second citizenship gives you more options, can serve as a backup plan, can help you bank in another country, expands your options for travel, and more. It’s a key component of your tax planning.
At the same time, dual citizenship itself is not a get out of taxes free card. You aren’t going to become a tax-free citizen the second you have that second passport in your hands. Getting a second passport is usually just the first step, especially for citizens of the United States.
For everyone, no matter where you have your first citizenship, second citizenship will give you more freedom. If for some reason or another there are problems in your home country, you now have backup citizenship and another country you can claim.
The United States is one of the very few countries that have citizenship-based taxation. This means that as long as you are a US person (citizen or permanent resident) you are subject to pay taxes in the United States, no matter where you live in the world.
Because of this, some US citizens consider renouncing their US citizenship so that they can escape the US tax net completely. If this is a part of your tax plan, getting second citizenship becomes essential. You cannot renounce your US citizenship if you do not have a second citizenship, because then you won’t have any citizenship or passport at all.
OBTAIN A PERMANENT RESIDENCE IN A TAX HAVEN
While not always the case, your permanent residence is usually where you reside. Having a permanent residence in a country is going to allow you to stay and establish a life there.
You can establish permanent residence in a country by spending time in the country on a temporary residence which you can usually obtain through work or family connection. Or you can get a residence by investment, by donating to the country, or starting a business there. (Do you see how all these pieces link?)
A permanent residence can also at times lead to second citizenship, but not always.
In flag theory, you want to establish a permanent residence in a country that would be considered a tax haven. These are low and no-tax countries that aren’t going to tax you on your worldwide income.
When you think of the 183-day rule, you’re thinking of residential tax countries. These are countries that tax you when you reside there.
Territorial tax countries only tax you on income made within the country. This means if you live in a territorial country, such as Malaysia, but do all your work and business in Georgia, you won’t have to pay tax on the income you make in Georgia to the Malaysian government.
While Malaysia isn’t a zero-tax country like Vanuatu or Monaco, it can function as one as long as you’ve set up a proper offshore tax structure. Basically, you can have your citizenship in one country and reside in another country tax-free.
SET UP YOUR OFFSHORE BUSINESS IN A CORPORATE TAX HAVEN
The next part of flag theory includes incorporating your business in a no-tax or low tax jurisdiction. By incorporating offshore, you get to choose the tax rate you’ll pay for your business. Starting a business overseas is a legal way to reduce your taxes.
Now, if you’re a US citizen, you can’t just live in America with an offshore business and pay no tax. Maybe people got away with that in the past, but the laws have changed. This is one of the reasons it’s important to have a residence somewhere else. If you don’t want the US to tax your company, you’re going to have to incorporate overseas and move out of the United States.
There are other benefits to doing your business overseas. In some cases, starting a business overseas can help you with other parts of the flag theory by helping you to get access to set up a bank account in that country, helping you to obtain a permanent residence, or even helping you to get citizenship.
You may also find that business laws in other countries may be more in your favor. Or you may find you prefer employing people from the offshore company better than people you could employ at home.
KEEP YOUR ASSETS SECURE OVERSEAS
When we talk about banking overseas, we aren’t talking about hiding your money. It’s pretty much impossible in this day and age to hide money offshore, and there’s really no reason to do it. Still, you can bank and invest overseas legally. Keeping your assets in a secure and stable country overseas is a great way to diversify and protect your assets.
Believe it or not, the banks in your home country might not be the safest banks in the world. Banking overseas can be a way to keep your money safer. It also allows you to diversify and protect your assets when you don’t keep all of your money or valuables in the same place.
It wouldn’t be smart to put your entire life savings in one company’s stock. Similarly, it isn’t smart to put all of your assets in the same bank, same currency, or same country. Markets can crash at any point. Currency values can drop. This is why diversification is so important.
When you’re looking to bank overseas you want to find a bank that’s safe with high yields. You can earn money by storing your money in a bank that is going to give you high interest on a term deposit.
You should also look into investing in real estate or gold, silver, and other precious metals. If you are a US person, real estate and precious metals kept in private storage are the only offshore assets that you don’t have to report to the IRS.
Having different types of assets is also a great way to diversify your assets even further. Investing in real estate can help you turn a profit if you are going to rent or sell the property. And in some countries, a real estate investment can help you get a permanent residence through a Golden Visa program.
HAVE FUN IN YOUR PLAYGROUND
In the first five flag theory, the “playground” is where you want to shop and spend your time. It somewhat replaced the permanent travel portion of the original flag theory. Basically, if things you want to buy are too expensive in the place you reside, you’ll want to purchase them in your playground instead.
While you won’t have to pay Malaysian taxes on the income you earn in Georgia while you live in Malaysia, you are still going to have to pay sales tax on the products you buy in Malaysia. Some low-tax and no-tax countries actually have a high cost of living. This is where your playground comes into play.
Today, this last flag can be adapted to fit you and your needs. If you are wanting to travel, you can have multiple countries where you play. This doesn’t necessarily have to be a country where you go to save money on tax. It can simply be a place you like.
This flag can also be adapted to fit your social needs such as dating. You may find the dating culture and environment in one country fits you better than it does in another country. Lucky for you, you don’t have to date in the same place where you do business or bank. It’s kind of the whole point of flag theory.
WHY YOU SHOULD USE FLAG THEORY
Why should you use flag theory? Does flag theory work for everyone or just Americans?
Flag theory is a great way to reduce your taxes, diversify your assets, and provide yourself with a Plan B that will protect you in the event anything should happen.
Flag theory can be applied to everyone. It doesn’t just benefit Americans.
More countries are adopting US-style taxation. Especially in Western countries, there are more rules and regulations and higher taxes. There has even been some talk of some Western countries adopting a citizenship-based taxation program.
While this might not happen today or tomorrow, would you rather be prepared or get caught up in an ever-expanding tax net? It’s better to get your Plan B together now rather than waiting till it’s too late.