What is Flag Theory?
At JH Marlin, internationalization is our bread and butter. Offshore bank accounts and second passports are a part of this. Flag theory embraces these ideas.
Flag Theory is essentially a form of diversification, only it is done using passports or doing residency programs worldwide. Every time you gain residency or citizenship in a new country, you are essentially planting a flag.
This allows you to diversify your assets geographically, financially, politically, amongst other factors. By diversifying your personal and financial affairs, no government has control over your mobility or your money. You are in control of your future.
Flag Theory History
The original three Flag Theory components were conceptualized by investor Harry Shultz in the 1960s. He proposed that to protect your wealth, you should plant three different flags:
- Second Passport
- Offshore Incorporation, to reduce taxation
- What he called “Playgrounds”, which is a tax haven country to visit, live, and enjoy spending time in.
However, the world was a different place in that era, and as much larger, thus making Flag Theory outdated. In the 1990s, WG Hill expanded the theory, adding two new strategies for even better diversification.
- Legal Residence, to reap the benefits of residency without the tax obligations of citizenship
- Asset Haven, which includes storing your assets offshore in an offshore bank account
Since then, these concepts have become much more accessible to the average person. The world has become more and more internationalized. It is easier to travel, incorporate, or open bank accounts internationally.
Why Use Flag Theory?
The average person is born, raised, and lives in the same country permanently, and has only one passport. Having all your wealth, assets and personal freedom tied to one country leaves you dependent on social, economic and political factors of your home country. There are no redundancies to protect you against these things.
However, this does not mean that you are limited to putting all your eggs in one basket. Flag Theory offers a solution to this problem by offering you protection against instability of your home country. International diversification frees you from dependency on any one government. It takes diversification to a whole new level, allowing you to be in charge of your investments, taxation, mobility and place of residence.
H4: The benefits of Flag Theory generally include:
- Business Optimization: Incorporate a company offshore in a low-tax jurisdiction.
- International Investing: Protect your assets using offshore bank accounts, foreign trusts, international real estate, or other options.
- Residence and Citizenship: Have a choice in your future and where you want to live. Ensure that you are not limited to the political and social influences of one country.
No one country is ranked highest in every area. You must decide which factors of life are most important to you. This means that the decision you make will be individual to you, depending on your unique situation and priorities. However, you have many options. You can pick and choose where you want to do business in each country.
There are many nuances to Flag Theory, including where to plant each flag. This decision is an important one, and many factors must be considered when making it. A combination of principles goes into the Flag Theory strategy.
Maximizing Flag Theory
Since Flag Theory was created, the world has changed. There have been major shifts in the approach to internationalism. The way people live, work, travel, and optimize their business has changed drastically, and continues to do so. We must look at Flag Theory with a modern perspective in order to reap all the benefits possible.
The main point of Flag Theory is to diversify your citizenship. This way, you weaken the hold that any one country has on you, your wealth, and your mobility. Dividing your time between countries is the best way to do this.
Citizenship to every country has different benefits, rights, as well as responsibilities and obligations. You must do your research to choose a country that best suits your needs and in exchange, balance those with the obligations you are willing to engage in. One such example is choosing how high of a tax scheme you are willing to accept.
If you are a citizen in the United States and do not renounce your citizenship, you will still have to pay taxes in your home country or you can choose to renounce your citizenship.
Incorporation in a Tax Haven
As we discuss on our offshore company page, there are many benefits to planting business flags around the world.
The biggest benefit in planting flags internationally when it comes to business is that you have control over choosing your tax rate.
There may be tax benefits to incorporating your company in a low-tax or zero-tax country, such as the Cayman Islands, Hong Kong, Or St. Kitts & Nevis, however proper tax planning would be essential to ensure you comply with all tax laws. Many countries like Canada or Australia will tie you to your business, no matter where you set it up. Regulations in countries like this may dictate that you will be taxed in your place of residence.
If you want to effectively lower your tax burden for both your personal and business income, you must plant flags in tax havens.
Thanks to digital technologies, businesses can now live exclusively online in the cloud. Laws are being created to deal with digital taxation. If you live in countries that are not tax-friendly for businesses, potentially going digital and living in a no tax country can reduce your taxes substantially.
Business-friendly countries are not always zero-tax. Countries with low corporate tax rates can sometimes offer different benefits. You must take into account banking systems, credibility, transparency, and reputation. Sometimes, you may end up sacrificing operational efficiency for tax reduction and asset protection.
There are a number of asset protection strategies available, depending on your unique position. While you may end up planting just one flag, there are many angles to consider, and they will not always necessarily coincide.
For example, you may want to set your company up in a country that has great employment opportunities, such as employment laws, affordable wages, and specialized talent. You may want to incorporate in a country that has comprehensive intellectual property legislation to protect your company’s intangible assets.
Achieving tax residence in a country that does not tax foreign income (or any income at all), can be a real money-saver. To summarize, there are four different systems of taxation used around the world:
- Territorial taxation: Taxes are only paid on income earned within the country’s territory.
- Residential Taxation: Taxes are paid based on where you live. This is very common, and countries often use the 183 days principle. However, there are many other factors that can still make you a tax resident of a country. Simply acquiring a second passport or doing a residency program will not change your residential tax status unless you often become non-resident of the country where you are living.
- Citizenship-based taxation: This system is rare, with the most common example being the United States. This system means that any income is taxable as a citizen of that country, where you live does not matter.
- Zero Tax: Countries that do not have income tax. In many cases, they will also have no other taxes either, including no capital gains tax, no inheritance tax, no withholding tax, no estate tax, amongst others. However, these countries can also have high sales tax as compensation.
Maximize your offshore plan, means that you should try to become a tax resident of a territorial or zero tax country. Keep in mind requirements of each individual country to become a tax resident.
1. Playgrounds for Living
Income tax is not the only tax to consider. High VAT rates, or sales tax may also be a factor in your decision making. While it may seem like the lowest rung on the ladder in terms of priority, these types of considerations add up quickly and can have a pretty dramatic impact on your quality of life. You should not have to sacrifice your quality of life as a resident in a country just to save a few extra percent on corporate taxation.
One example is Malaysia. As an up-and-coming country in terms of economy, it has implemented a number of business-friendly policies, including tax incentives, to attract foreign talent and investment. However, sales tax is high and the cost of living is also increasing. You must balance your business advantages with those on the playground. Perhaps you do not want to establish residence in a country like this, and use it instead to visit as a tourist.
2. Asset Protection
Protecting your assets is very important. There are many ways to do this, ranging from using offshore trusts, to international real estate investments, to offshore banking. The easiest option if you are just starting to explore your options is usually creating an offshore bank account. This is the easiest way to ensure asset protection, greater stability, and much higher interest rates.
The most important part of this decision is deciding where to go. It is important to keep in mind that you may choose one country in which to base your business, and another to do your banking.
Things to consider when making your decision include the country’s judicial system, interest rates, and economic stability. These factors will all ensure that while your assets are being protected, your wealth will still grow long-term.
To reap these benefits, you just have to ensure that you legally move your assets overseas, adhere to any reporting requirements.
3. Digital Privacy Protection
While privacy is not everyone’s first priority, it is a factor that should be considered by everyone at even the most basic level. Make sure that your digital life, such as your website and email, is backed up. Store files in a country with high data protection. Countries like Iceland or Canada that value freedom of speech and privacy protection are good options. Digital flags can provide a source of security, which is sometimes even more important than freedoms.
4. Personal Life
Your personal life can also play a large factor. For example, if you are married or have children, you may want to consider and accommodate their wants and needs as well. Socially, you will want to live where you feel most comfortable connecting with other people and participating in the local community. This can have a massive effect on your quality of life.
These are not the only flags that exist, or the only flags you may want to consider. Depending on your unique situation and your priorities, other flags may pop up as you progress. However, the main concerns for most business-minded people, including taxation, lifestyle, and wealth are covered here.
Other concerns you may want to consider when planting your flag somewhere may include real estate, medical coverage, or even yacht registration.
Flag Theory Strategy
Flag Theory is a very complex idea. To use Flag Theory, you must create a solid strategy that maximizes your priorities and minimizes your responsibilities, thereby optimizing your freedom. A modern, holistic and legally compliant strategy will allow you to harness Flag Theory to meet your goals.
You possess the burden of proof in proving you are no longer tied to your home country. Otherwise, you may still be considered a tax resident. These responsibilities include proving residence in your new country, such as a permanent residence card, home ownership, existence of bank accounts or payment of taxes.
In other words, creating a Flag Theory plan is effort-intensive, but the benefits are worth it.
Note: This article does not constitute legal advice. The contents of the article are subject to change at any time without notice.