Why I Like the Flag Theory and You Should Too10 min read
The flag theory has gained popularity in recent years due to the explosion of nomad workers. Whether it’s to prolong global travel (often referred to as Perpetual Traveller or PT) or to settle in far off lands, there has been a growing demand for planting flags in numerous countries.
Whilst sounding like a practice adopted by the rich and famous (and spies – do you like the picture? LOL), the Flag Theory is accessible to more of us thanks to the nomad working movement and ability to be location independent.
The rules and regulations for residency and tax issues are confusing at best and so there has been a need for easy to understand advice for such individuals.
I found leaving the UK and the residency information to be confusing, even for my accountant who had to ask Her Majesty Revenue and Customs questions a number of times.
I have for many years wanted to live in Asia, in particular south-east Asia, and now I am there I cannot foresee wishing to leave anytime soon. I am a British expat living in Malaysia and am very happy being so.
This status brings with it both pros and cons, but one of the biggest pros is planting a flag in another country and ticks one of the boxes of what’s called the Flag Theory.
This article is likely to polarise readers. Some keen to adopt the flag theory lifestyle and others unhappy at what can appear to be taking the piss and avoiding tax. But its never black and white and so even though I can’t tackle all the questions here, I aim to educate those not familiar with this approach who could implement some of the stages discussed.
What is the Definition of the Flag Theory?
In essence the flat theory is a lifestyle that involves strategically placing flags around the world to increase freedom and prosperity.
Once designed for the wealthy, the flag theory can be used by people who live a nomad working lifestyle because they are location independent. So, such individuals can be free to travel or in my case, base oneself in a location outside your home country.
Flag Theory is a framework for strategically planting “flags” (such as a bank account, legal entity, or property) in different countries and jurisdictions. Edmund John
Benefits of the Flag Theory Lifestyle
I have touched on a few already in the introduction, but the main reasons the flag theory is so appealing is the potential to legally reduce tax (in some cases to zero), more fully protect your assets and increased level of freedom.
Whilst a big benefit for many, the flag theory is more than just about saving or eliminating tax. This is the situation for me in any case, as I and my family wanted to live in Malaysia for many reasons.
Don’t get me wrong, the tax breaks can be nice too though!
A big plus is the ability to use geographic arbitrage whereby you use money earn’t in a stronger economy and live and spend it in weaker one. So, in my case money earn’t in British pounds to ringgit!
Having a bank account in another country in different currencies also protects from currency devaluation, and so can be a great hedge. Purchase physical gold and storing it in a secure and robust country in a vault is even better (I use bullion Star for this very reason).
This is starting to sound a bit like James Bond I know (hence the tongue in cheek picture above), but it’s about living global and protecting your long-term future as well.
It’s very liberating knowing you can up and live in another country without feeling stuck to living in your home country. I know, this is the third time I have moved away from the UK having lived in Germany and Thailand before (see my about page).
Tax Benefits of Flag Theory
Most people first become aware of the Flag Theory because of the tax savings and in some case elimination of tax altogether. This subject is considerably complex and dependent on many factors way out of the scope of this article.
Also, more importantly for me, I am not qualified to give any tax or financial advice at all – so please do you own research and get professional advice here.
What I can outline is the different types of taxation though, these are; Territorial, Residential and Citizenship-based Taxation. I will briefly explain the difference using an example of a British passport holder Joe Blogs living in Malaysia with residency with a Singaporean company.
Joe is now not a resident of the UK and is a resident of Malaysia and works for his Singaporean company.
- Territorial Taxation: Income earned in Singapore would only be taxed there and not in Malaysia. As Singapore have no dividend tax then Joe could receive dividend income tax-free whilst living in Malaysia.
- Residential Taxation: Many countries have the general “183 days” resident rule. That means if you spend at least half of the year this country, you have to pay tax there. This depends on whether the country in question taxes overseas income, which Singapore and Malaysia don’t.
- Citizenship-based Taxation: This currently only really applies to US citizens as they are taxed globally no matter where you live. British expats are only taxed in the UK on UK derived income.
Please note: This is an example only and any resemblance to anyone living is purely coincidental.
How Many Flags? Three, Five or Seven?
Depending on what source and who you read there are three types of flag theory, pretty much according to how many “flags” you plant.
The original concept was formed by Harry Schultz’s some 50 years ago now, he suggested a three-flag theory, which consisted of:
Three Flag Theory
- Be a resident somewhere that does not tax foreign-source income.
- Have your business in stable tax havens.
- Live as a tourist in a country for more freedom (and reduced taxes)
As highlighted by Nomad Capitalist, W.G. Hill recommend slight variation on the three flags and expanded on this to be even more internationally diversified, which include planting two more flags:
Five Flag Theory
- Passport or citizenship in a country that does not tax non-resident income or control your actions.
- Legal residence in a tax haven.
- Business base and salary-earning in a tax haven.
- Offshore bank account in a country with stable banking.
- Playgrounds where you spend your money, preferably with no sales tax or VAT.
With time this has been expanded to include other asset classes including a relatively new one, digital currency aka Cryptocurrency.
Other things that can be done to maximise diversification and asset protection can be done, such as:
Seven Flag Theory
- Owning and storing physical Gold
As a by-product of moving to Malaysia with my family I have managed to plant five of the seven flags.
When Sh*t Hits The Flag
So, I am fully sold on the benefits of global mobility for myself and family but what happens if it goes wrong?
I was talking with my wife about this article, and she highlighted that whilst the flag theory has many benefits, the fact is if it all goes wrong, I know that I have the British government to back me up (hopefully!).
This is a good point and one that I haven’t read about when researching Flag Theory.
You need a good backup, which can either be a lot of money that you know can help you out of any sticky situation OR the backup of your home country.
I have never needed to call upon the British government assistance, and hope I never need to, but they are there.
Best Countries for Flag Theory
Living in Malaysia works for me and my family, but if you’re not keen on living here there are plenty of alternatives.
I want to give credit to digitalnomadsoul.com for this little list:
No income tax: Cayman Islands, The Bahamas, Monaco, Belize, The British Virgin Islands
Low income tax countries: Guatemala, Georgia, Nicaragua, Costa Rica
Tax Lax countries: These are countries, where you can live semi-permanently as a tourist by doing visa runs. Since you have a tourist status, you don’t have to pay taxes. Technically you are often not allowed to work on these visas. But as long as you work online only, many countries are ok with it, won’t tax you or don’t enforce taxation. Popular countries are: Thailand, Indonesia, or Vietnam.
How to Kick Start the Flag Theory Lifestyle
Depending upon your financial position and maybe the type of business or work you do, getting started with the flag theory is straight forward.
Being able to make money online by either having an online business or being a digital nomad makes it a lot easier as your location independent and can literally live anywhere (with an internet connection).
If you’re not there yet but keen to be there are options. You can start an online business like I have with my supplement company, use your knowledge to create a digital info-product, or become a freelancer and embrace the digital nomad lifestyle.
How can you get started with planting global flags?
- Leave your passport-country and officially become a non-resident.
- Acquire a new legal residency in a country that doesn’t tax foreign income, e.g. Panama, Singapore or Malaysia.
- Pick another territorial taxation country to register on offshore business, e.g. Singapore or Hong Kong.
- Move your assets offshore, which strongly depends on the kind of assets you have and your home country.
The Bottom Line
Unless you’re wanting to become a perpetual traveller and have an online business that can operated remotely, jumping from country to country is tiring and was certainly not for me.
If like me, you have a family and want them to have a solid more stable lifestyle then you ideally want to settle in one place for at least sometime. With my wife being Malaysian it makes sense for us to base ourselves in Malaysia for the time being.
We’re not restricted to staying in Malaysia or the UK, but Malaysia ticks pretty much all the boxes for us. A real positive is that for me I get to tick many of the seven flags of the flag theory.
The biggest downside is being far away from my parents and sister. Yearly trips back for a few weeks at a time is a good compromise and with FaceTime it’s easy to feel more connected these days.
So, if you’re looking at being more a global citizen, being tax efficient and protecting your assets then it’s worth looking at the Flag Theory.