The Five Flag Theory isn’t about illegal tax evasion, hiding assets, or running away from your responsibilities; it’s about maximizing your personal freedom, guarding against financial pitfalls, and accessing worldwide opportunities all within the boundaries of the law (or at least in a grey area). It’s about holding yourself personally responsible for your well being; knowing that you can and will move yourself and your assets elsewhere when the conditions are not favorable.
How do you become a perpetual traveler?
Originally the theory went that you would have:
- Citizenship somewhere that does not tax foreign-sourced income.
Some countries allow you to work abroad without paying any domestic income taxes, so long as certain qualifications are met. For instance, Hong Kong has what is known as territorial tax, meaning that the only taxable income is that which is generated within the country’s borders. Ideally, your citizenship will also allow you to travel visa-free to many countries and has no obligatory military service.
- Your business(es) and investments in a tax haven.
Since your citizenship allows foreign income to remain tax-free, you will set up your business(es) and investments in a second country that has no or low corporate tax rates, including taxes on interest and dividends. Large corporations have used tax-avoidance strategies for years to increase shareholder value. But, these strategies aren’t only reserved for the ultra-wealthy and are often times perfectly legal, as long as they are reported properly.
The ideal country is economically sound, politically stable, and has competent lawyers, bankers and accountants, to manage your affairs when you are not able to be there.
- Live as a permanent tourist in countries that value your consumption.
Have you ever taken a cruise to a small island country? When you get off the boat you are treated like royalty. The locals know you’re a tourist, and they know you have money to spend. They work to make you happy, they aim to please, they make sure that you feel secure and valued.
In most cases, you don’t find the same sense of validation in your country of citizenship. Why choose to live somewhere, or contribute economically, to a country that doesn’t value your business?
Ideally, the countries you choose will allow you to take advantage of the many geoarbitrage benefits and increase your spending power through favorable exchange rates.
All countries are free and unfree in their own ways, so find the ones that are advantageous for your situation.
By 2016 the theory has been revised, people have added new flags, and there are many different interpretations, but the framework remains the same.
Spread yourself across different countries, banks, and asset classes, diversifying your resources so that you can enjoy everything that the world has to offer, without one government having control over your mobility.