The flag theory was designed as a way for high net worth individuals to preserve and improve their wealth. The idea originated in the thought that financial wealth was directly related to achieving absolute freedom. It worked on the principle that once people let go of their national identities, they can also let go of their civic and legal obligations altogether.
The Flag Theory
The theory said that if people “plant flags” strategically across the globe, they can begin to shed their financial burdens as stemming from their national identities. To achieve this goal, flag theory outlines the following steps:
- Multiple Passports
- Creating Offshore Bank Accounts
- Having Legal Addresses at Offshore Locations
- Following millionaire investment behaviours
- Living in the places you wished to live all your life
The idea was to have your financial assets associated with multiple countries to avoid any financial obligations from possessing income in one particular country. Your nationality in one country protects you from your financial responsibilities of the other.
How Does Flag Theory Help With Taxes
Put simply, your taxes are a payment for the privileges a government extends to you as a citizen. Technically, it’s a way to buy your safety and security to live the life that you wish to live, under the protection of the laws of the state.
The flag theory recognizes that this creates a financial burden that people could easily avoid. After all, the state system is legally bound to protect your interests; why should you have to pay for it. So through the 5 steps outlined above, the theory outlines a way to do away with these payments altogether.
If you’re a citizen of the United States, you can’t be subjected to the laws of another country like Brazil. Similarly, if you’re a citizen of Brazil, the US government has no authority over you. However, if you’re a citizen of both countries each of the countries are bound to protect you from the other’s legal influence.
Of course, this is all based on where you reside and spend time.
This also extends to tax payments on any and all forms of income. Let’s see how that happens:
Offshore Companies to Save Taxes
If you register your companies to offshore locations, then technically they’re only subjected to the tax laws of the offshore country. Any profits the company generates in your home country will be repatriated to the offshore country.
If this offshore company has different and less stringent tax laws, then you can manage to save millions in corporate taxes.
Offshore Bank Accounts
Similarly, once your money is syphoned into offshore bank accounts; the money can’t be subjected to the banking laws of your home country. Especially if you save wealth in countries like Germany and Switzerland, then the privacy laws protect your income from any scrutiny, of course, things are starting to change with unethical programs like CRC (Common Reporting Standard) which is basically a global version of the highly controversial FATCA (Foreign Account Tax Compliance Act). Others refer to CRC as GATCA (Global Account Tax Compliance Act).
If you can’t be scrutinized for your income; then you have to only fulfil your obligations to these very low tax financial systems. This can effectively eliminate the burden of any tax payments.
If you play your cards right, you can manage to create tax strategies which will help maximize your returns from company revenues and profits from any investments. Ultimately, flag theory sets the ground for your financial stability and growth through its tax avoidance mechanisms.
The Expat Money Show is a financial advisory service that offers clients advice on how to form offshore financial entities. It helps clients create offshore bank accounts, offshore companies and offer advice on how they can capitalize on offshore tax havens. Get in touch with the company today for more information on our services or to hire us to guide you to the best offshore banking locations in the world.
ABOUT THE AUTHOR:
Mikkel Thorup is the host of The Expat Money Show podcast and the author of #1 Best-Selling book, Expat Secrets. He has spent nearly 20 years in continual travel around the world, visiting more than 100 countries including Colombia, North Korea, Zimbabwe, and Iran.
His goal now is to help Expats just like you to generate additional streams of income, eliminate your tax bill, and take advantage of offshore structures so you can travel the world freely and never have to worry about money again.