What is Flag Theory?
Governments around the world impose a variety of tax and financial laws. These can impact your life once turning the age of 18. Financial laws can make life frustrating, especially when tax obligations exist, making it difficult to preserve your finances.
Luckily, flag theory was developed, altering the way financial laws that affect individuals. Flag theory is a concept that applies to digital nomads, who spend time in various countries working remotely. The idea of Flag Theory is very liberal in principal and allows individuals to escape financial rules and regulations.
How does Flag Theory work?
Flag Theory was developed by Harry Shultz. Born in 1923, Shultz was an investment advisor and author. For nearly half a century, he published The International Harry Shultz Letter gaining a presence as an advisor and financial influencer. A staunch Libertarian, Shultz created the Three Flags Theory in the 1960s. The first three flags suggested that everyone (investors and financially wealthy individuals) should have a second passport (from a different country), possess an address in a tax-haven country, and keep all assets outside of their home country to prevent being taxed on them.
In his opinion, residents of the United States are not economically free due to the rules and regulations that surround taxes. Shultz’s theories were highly controversial. Flag Theory suggests that different countries benefit people for different financial reasons. Some countries are bettering for banking, some for investing money, others for living in, and others for owning and running businesses.
By living in a new country, an individual plants a ‘flag’. Every time you plant a flag in a different country, you diversify your financial and personal affairs. Therefore, no government has control over your finances or life. It is believed that Flag Theory and living in different countries can protect your finances from instability in the market.
Shultz’s initial ideas were added to by W.G. Hill in the 1980s. There are now five flags as part of the overall concept. Interestingly, the original flags developed by Shultz (flags one, two and three), were created for millionaires or wealthy individuals to protect their money. The two flags introduced by Hill were designed for people seeking to travel constantly and those who are high-net individuals.
The five flags of Flag Theory
The central idea behind Flag Theory is that you should disperse your life around the world in five different countries. The way this occurs is by traveling consistently around the globe, establishing personal and financial roots in each country. People who subscribe to the idea of Flag Theory are often nicknamed ‘Perpetual Travelers’, ‘Permanent tourists’ or ‘Prior Taxpayers’. More modern individuals subscribing the theory may be known as digital nomads.
But what are the five flags of Flag Theory?
Passport or citizenship in a country that does not tax foreign earned Income
Individuals should possess a (second) passport of a country that doesn’t tax foreign-made income. You should live in a country in which income that is made outside of that nation is not taxed locally. For example, Malaysia allows you to earn money in another country without being forced to pay tax in Malaysia. Only local Malaysian income is taxed.
Tax residency in a tax haven
To prevent paying taxes to a local government, you should obtain legal residence in a country that doesn’t impose taxes on overseas earned income.
Offshore business tax haven
You should open a business in a country that doesn’t impose income tax on your income. By setting up a company in a tax haven, you won’t have to pay corporate income tax.
Offshore banking in a nation with stable banking
One establishing your offshore business, you should open an offshore bank account. If you decide not to open a bank account in the country you opened the offshore business, then it should be a stable country in terms of banking.
Low VAT and sales tax
Once the first four steps are completed, you should then live most of the time in a country with low VAT and sales tax. The country should also have a low cost of living.
Benefits of Flag Theory?
There are numerous advantages to Flag Theory that allow you to perpetually travel the globe. You can experience the benefits throughout your time living abroad and adhering to the five flags of the theory.
Here are some of the benefits of Flag Theory you can enjoy:
- When having two passports, the laws of anyone country do not apply to you anymore. Being a citizen allows you to be protected from prosecution, financial penalties and other legal penalties that can be incurred.
- Placing your money in financial institutions that are safe havens for your money, keeps your earnings private. Regardless of intervention, safe havens prevent anyone from knowing how much money you possess. If a country doesn’t know how much money you have, they do not know how much to tax you.
- By setting up a company in a tax haven, you will pay lower taxes on your income. Therefore, you will be able to take home more profits.
- When an individual globalizes their finances, they experience life with two separate nationalities. These means that laws do not technically apply to them. When this occurs, you establish yourself as a perpetual traveler. Legal and financial obligations do not apply to you.
How to get started with Flag Theory
The first thing is, don’t try to plant all five flags at one time. Each step should be done distinctly and separately, one at a time. The first step to get started is simple and that is to open an offshore bank account and remember the Flag Theory is not only for Sophisticated Investors.
It should be noted that you may not need all five flags of the theory. You should select the ones that fit most into your lifestyle and the business, you own. Keep in mind that when you travel to most countries, you will become a taxable resident after six months. Still, you don’t need to move around too quickly to enjoy the benefits of Flag Theory.