Building upon this, Harry D. Schultz proposed the Three Flags Theory – essentially a philosophy detailing that you are more likely to save on taxes and live better if you have a second passport and an address in a tax haven, apart from the primary country of residence.
This idea was then picked up by numerous others and popularized in no time. Why? Because it works. Soon, the idea expanded to the Five Flags theory, adding two more flags, or countries, to have in your collection.
The core idea behind the Flag theory is to maximize freedom, reduce taxes, and improve your lifestyle by leveraging geography and law. The world is huge, with possibilities unlimited. If you are not capitalizing on the different opportunities that different parts of the world provide, you are missing out.
The only fair exceptions are when you are locked down in a place due to personal reasons (can be family, job, personal finances, or something else) or when you are simply unable to travel (can be due to disabilities, travel bans, or the fear of dropping dead mid-air).
If you are a high-earner and not really free simply because the whole idea sounds far too adventurous or risky, then let us rest your mind at ease. By the time you finish with this piece, you are going to feel a lot safer in actually trying it out. Take it slow, one step at a time, and you will be on your way to become the true nomad!
Five Flags theory – here’s what it means
The Five Flags theory cements the perpetual travel idea and clarifies precisely how you can keep more of your hard-earned money while objectively improving your life – all by being open to discovering new lands and as a bonus, collecting new experiences.Here are the five flags, or places, you should have under your belt to avoid excessive interference (including taxes and surveillance) while protecting your privacy better:
Citizenship Flag:
The primary passport country. It shall not tax your income outside the country. If your current one does, now is the time to leave it and choose a more forgiving country as your primary passport/citizenship nation. Even if it doesn’t tax your external income but controls your life or wealth in excruciating ways, you guessed it, time to pack your bags. The key distinction between the citizenship country and your country of original residence is just that, so there’s no need to move out if you are already in a financially-conducive nation.- Choose a respected, neutral, visa-free travel country that doesn’t tax the non-resident and allows multiple citizenships.
- Good examples: Canada, most Caribbean countries, and most European countries.
Legal Residence Flag:
Your legal residence has to be in a tax haven. This allows you to save money, quite simply. The legal residence is a formality, you will not really live here.- This is the address you will give everywhere, such as when checking into hotels.
- Some good tax havens include Andorra, Monaco, Belize, Malaysia, and some Latin American countries.
Business Flag:
This is the business country. This is where you will do business and earn money. If your work does not require you to be physically present at all times, then you have a lot of options here.- Choose a country with remarkably low corporate tax rates.
- You can also choose to run more than one business in different countries, or do your business completely online.
- Note that the companies you own will be tied to the asset country (next flag), thus you won’t be paying personal taxes.
- Dozens of countries have a low corporate tax rate, notable among which are Hungary, the UK, Turkey, Israel, Finland, Spain, Belgium, and the US.
Asset Flag:
Fourth on the list is your asset haven. Much like a tax haven that protects you from the ravages of taxation, the asset haven protects your assets from many threats. This is where you will essentially “keep” your money. The asset haven is a country with low taxes on both, long-term capital gains (like stocks, bonds, and property) and passive income streams.- Ideally, you would diversify your money and invest in different asset classes in this country.
- You can also invest in borderless alternative assets such as DeFi protocols or digital assets such as cryptocurrencies and NFTs.
- The asset haven might require you to set up a base, such as fund managers, trusts, foundations, and so on to better manage and track your money.
- Financially stable countries such as Panama, Singapore, and Switzerland are great asset countries.
Recreational Flag:
The recreational country, also known as the playgrounds, is the country where you will spend your money (and the majority of your time). What, were you thinking that this theory was an all-work and no-play ancient philosophy?Note that this is one flag where your personal preferences take priority. Sure, Japan’s consumption tax is significantly low, but if you want to spend your money seeing Greek architecture then by all means choose Greece. By leveraging the other five flags correctly, you will be making enough to pay 1-5% more on consumption.
- The best part about the playgrounds is that they can keep changing, or be more than one at the same time. If you don’t like to settle, in the true spirit of the perpetual traveler, we would recommend a traveling playground.
- The preference here is completely yours. Geographical or cultural features, amenities, types of lifestyle, etc. can influence what country you make your playing ground.
- Ideally, you want to spend your money in countries with low goods and services tax rates. Among the OECD countries, the countries with the lowest consumption taxes are Switzerland, the US, New Zealand, Luxembourg, Korea, Japan, Canada, and Australia.
Wrapping up
The story of offshore companies, multiple passports, digital banking, and alternative assets for tax avoidance, more freedom, better privacy, and more fun is indeed lucrative. Sort of only requires guns to transform into a James Bond movie.But there are dangers, risks, and pitfalls hardly anyone pays attention to. To be a true nomad, a true perpetual traveler, and to use the Five Flags theory correctly, you have to first learn it all the hard way.
Thankfully, we are here to make that learning curve a bit smoother.
