Perpetual travelers have so much interest in individual sovereignty where they considered it as “sufficient” for themselves since they are independent of the location. Most of the perpetual travelers are able to achieve this by doing what they called “Flag Theory”. In this way, this can possibly create an extraordinary life and have the comfort of having a residency in various countries.
“Flag theory is for those with courage enough to pursue freedom.” – W.G. Hill
What is Flag Theory?
Flag theory is the idea where it is the lifestyle of being a perpetual traveler. Its foundation implies that one country to another has different rules and regulations that make them have diverse advantages from one another. There are countries that are perfect for setting up a company, some that are great for personal residency and others that are best for a secure banking system.
Perpetual travelers can utilize these advantageous systems by globalizing their different aspects in life. It’s a famous tax optimization strategy that leverages offshore communities.
The concept of the flag theory came up first in the 1980s by Harry Schultz. It was originally a three flag theory that was extended later on with another two flags by W.G Hills.
Harry Schultz’s Three Flag Theory
Harry Schultz created the original Three Flag Theory, which gives you advice on planting flags for only three certain parts of your life:
1. Be a resident in a country where foreign income isn’t taxed
There are three types of taxes that governments can impose on their citizens: territorial taxation, residential taxation, and citizenship-based taxation.
Territorial taxation involves only paying taxes on your income if you earn it from the place you live. Income from other countries is excluded to local taxes. For example, Australian citizens can earn money from any place in the world without paying their taxes in Australia. However, if they earn an income from their coffee shop business in France, they will pay French taxes on their earnings from their retail establishment.
Residence-based taxation involves paying your taxes from where you live no matter where you earn your income. Many countries such as Spain, apply a version of the 183-day rule which means you are required to pay the taxes if you spend half of the year in this country. Nevertheless, you are not paying the taxes if you spend less than the 183-day rule of the country since you wont be considered as a resident.
Nationality-based taxation involves paying taxes in your country of origin and wherever you live. This kind of taxation is only applicable in two States: United States and Eritrea. The only thing that you can do to avoid paying such is to renounce your nationality. This is one of the reasons why second passports are so captivating, particularly for US citizens as they are paying taxes on their earnings from anywhere in the world. Meanwhile, in the case of Eritrea, the taxation there is not very severe as they only apply 2% tax on its citizens’ income.
2. Have your assets and companies in secure and stable havens
Either your foreign income isn’t taxed based on your citizenship or you’re a resident in a low or zero tax country, you can set up businesses and pay no tax based on the income earned. It’s highly recommended to select a country that has a low tax concern, since the global community is putting more pressure on the tax-free countries, which end up having to make several allocation.
Despite this, you can avoid all the taxes you would be forced to pay on the income you’ve earned if you are a perpetual traveler or if you live in a tax haven. This is possible to the following countries: Belize, British Virgin Islands, Cayman Islands, Hong Kong, Nevis, and Seychelles. Non-domestic companies don’t normally have to pay taxes in these mentioned countries. They don’t even do a yearly audit or accounting report sometimes. In view of this, flag theory isn’t only saying your money but is also saving you a lot of precious time.
3. Live as a tourist in a country for more independence
The concept of perpetual traveler is very evident here. Perpetual travelers are also known as “permanent tourists” since they are not having a formal residency anywhere. They travel from one country to another as tourists, even if they spend three to six months each year in one country.
Passport holders from wealthy countries can easily get into most of the Americas, Europe and much of Asia without a visa requirement. They are usually able to stay for anywhere from three to six months.
Keep in mind that tourists are treated better than the locals. For instance, tourists are normally capable of deducting the VAT from a certain purchase whenever they leave a country, comprising another type of tax they aren’t required to pay.
G. Hill’s Five Flag Theory
W.G. Hill added two more flags to the original three flag concept. His five flag theory provides even more global change.
1. Obtain a passport or citizenship in a country that doesn’t tax foreign income or control your actions
This flag planting strategy remains unchanged from the three flag theory, but clarifies that no country in the world should control your movements. For example, the United States citizens, are required to follow certain US laws even if you live overseas. This example is an addition to the policy of citizenship-based taxation in the United States which makes the US passport bad for the flag theory.
2. Legally reside in a tax haven
This is different from the original flag story where it points out on choosing one place as a base where you can manage your life without worrying on paying any debts to any country. You can definitely live totally tax-free when you get a permanent residence permit in a country where no taxes are imposed on your foreign income or even where no income is taxed at all.
3. Set up your business corporation in a tax haven
Register your offshore corporation in this country and receive salary payments there. This is possible in tax havens since they do not tax your income. If you are following the first two flag strategies of flag theory, neither your country of citizenship nor the state wont tax your offshore income.
4. Keep your assets in a country with stable banking
You may opt in keeping your assets in a stable place and this may not be the place where your company is listed. Your banking country may be different because you want a stable country that could give you a guarantee about the security of your assets with an effective judicial system.
5. Pick your “playgrounds”, where you spend your life however you want, preferable with no VAT or sales tax
Even though you live in a country without income taxes, you might be paying a lot of high sale taxes. One good choice that meets the criteria for residence flag and citizenship is Malaysia, however, the consumption taxes are high so it would be best to purchase your things such as clothes, kitchenware, CDs, etc. in another country where there’s a lower tax imposed.
This is the situation where you could have a playground for shopping of goods at a lower VAT. Also, a playground is useful when planting flags of residencies and citizenship in countries with high costs of living. As a perpetual traveler, going to your playground can make your dollar go further.
Freedom is maximized with flag theory
The way to maximize your freedom is to plant flags in many countries as possible. Just keep in mind to never invest your money in one company only and to never trust one country only. Planting flags one at a time is the best way in starting with the flag theory and one of the easiest places to begin it with is an offshore bank account. Gradually diversify your business, assets and life.
Global change is key, and flag theory is the way forward. The goal of flag theory is to distance oneself from having an owner of any country. You belong only to yourself and not to any state. Perpetual travelers are often on the move, but they don’t have to always travel to enjoy the benefits of flag theory.
Finding the right balance of such and the proper places to plant flags based on your interests can also help you maximize your freedom and make most of your own time and money. After all, being free from a country means being a “world’s citizen”. So, be wherever you want to be and do not stay where you are a citizen.