Above you’ll see a handy dandy flowchart (click it to zoom) that I actually had to set up for myself to keep my thoughts straight on all this stuff as I implement it.
Five flags is a way in which you can minimize your taxes, maximize your freedom, and maximize your long-term security all at the same time, even while all the countries in the world suck. It frees you from being “stuck” to one or more shitty countries.
It’s a complicated system and it definitely isn’t for everyone. But for those of you who can benefit from such a system, you will benefit massively.
Using the above flowchart as a guide, here is the explanation and clarification on its various components.
First, you need to have location independent income before you look at any of this, since without location independent income, five flags is impossible.
Then we have your Country A. This is where you live most of the time but where you are NOT a citizen, do NOT have a passport for this country and have NO ASSETS in this country. This way they can’t tax you or confiscate any of your stuff. This is how I can choose to live in a left-wing, socialist country like New Zealand or Australia and not be affected by its laws.
There are two ways you can handle this. One is that you pick a country you really like that does NOT tax worldwide income, just income you make from sources inside the country. You become a resident there (not a citizen, which is very different, but a resident), and live there full time. You just make sure your business doesn’t have any customers or clients there.
A second way you can do this, the way I will probably handle it, is to live anywhere you want, even in countries with terrible tax laws, but just make sure you never stay in any one country for longer than 6 months. You could pick two countries and do 6 months in each, or 3 countries and do several months in each, and so on. Digital nomads who are constantly on the move also qualify for this.
At the moment, I plan on splitting my time between New Zealand or Australia, Hong Kong, and the US. But that’s just me; you can set up any kind of system you like.
Next, we have your Country B. This is the country (or countries) where you have citizenship and a valid passport but where you DON’T live (or at least don’t spend any significant time in). You’re an actual, legal citizen (not resident) of this country. As such, you are subject to all of their tax laws and other insane laws. Thus, you need to make sure that this country does not tax worldwide income. You also can’t live in this country, because if you live in a country where you’re a citizen, they’ve got you by the balls, and now you have to get all pissed off about whatever the government is doing there. So you’ve got a passport there, but you don’t live there.
Ideally, you need at least two passports. This way if there is ever a serious problem with one of these countries (they go to war, or they go bankrupt, or they pass a bunch of unfavorable tax laws), you’ve got a second passport as a backup.
You can get a passport from another country by buying it (“citizen by investment”), which is very expensive but fast, or you can go the ancestral route, which takes about three years and is paperwork intensive, or you can go the residency route, which takes anywhere from 3-15 years.
Getting your Country B is, by far, the most complicated and time consuming of these five flags countries, so if five flags is of interest to you, you need to get that process started as soon as you can.
Then you have your Country C. This is where you base your legal business entity and your business checking accounts. You need to make sure you use a country with zero or low corporate taxes, and that is at least somewhat friendly to foreign business owners. Not all countries are.
Because foreign banks can suddenly just close your checking account whenever the hell they want, you need to use at least two different accounts, at two different banks, in your Country C to prevent any hassles.
Also, just like having at least two passports, you also want a secondary, backup Country C just in case things change with your current Country C. That doesn’t mean you have to literally set up two different international companies in two different countries (though you certainly can). It just means that if your current Country C’s company vanishes or becomes unworkable because that country goes to war or goes bankrupt, you quickly execute your well-thought-out Plan B to quickly set up a new company and checking account in a new country, instead of just freaking out like most people do.
Also, as always, you never keep a lot of cash in your Country C bank accounts, as I already talked about here. Holding assets would be for your County D…
Country D is the country or countries where you store your assets and investments. You do not want your assets in your Country A where you live, nor in your Country B where they can control you and tax you. No, you want your assets in other countries where you don’t live, don’t have citizenship, and don’t do business. You need to keep all of this stuff legal though, so you may still need to declare some or all of these assets to your Country B, but that’s usually not a problem.
For your key assets, you need to make sure your Country D is very, very stable. For more speculative investments, you can choose any countries you think will do well (provided you don’t live there, are a citizen there, or do business there).
You want lots of Country Ds, not just one. As always, you need to diversify, diversify, diversify. Don’t throw all of your assets into one Country D no matter how much you like it. That’s just not good financial management.
There is an optional Country E, which I probably won’t do. This is a country that has zero sales tax or VAT taxes on foreigners and has extremely low prices on everything (like Thailand or Paraguay) or very low prices on certain things (like buying electronics in Singapore). Country E is where you buy your stuff or go on vacations.
Since I don’t really buy a lot of stuff, I’ll probably skip Country E, but it’s certainly an option for you.
Five flags means you can drop your overall taxes to 4%, 1%, or even zero percent, legally. It also means you are forever decoupled from anything really stupid or evil any one country does. It also means you have massive freedom of movement all over the world, and can go pretty much anywhere you like, whenever you want, with relative ease. Five flags is the next optional level beyond Alpha Male 2.0.
That being said, as you can probably see, five flags is complicated, expensive, and time consuming. It’s not worth it for most men. But it is worth it for some men. In an upcoming article I will discuss who five flags is good for, and who should probably skip it and just live a standard Alpha Male 2.0 life.
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Caleb
As the US taxes worldwide income, is your strategy to renounce your US citizenship?
If so when is the best time to do this as it may be more difficult / costly as the economy collapses?
As a UK citizen, this doesn’t affect me personally but I’m currently looking at options re getting the hell outta Dodge in the most tax advantageous way possible.
Comment deleted for violation of Rule Number Three.
Love these articles. They way you explain it is simple and informative. Can’t wait for the next article
Likely eventually, way down the road, but not any time soon. There are several ways around the worldwide taxation (at least partially) that don’t require renouncing.
The best time to do what? Renounce? If your motivations are solely financial, you should renounce as soon as possible, since over time, as more people renounce their American citizenships due to increasing taxes and regulations, the USA will enact / increase more “exit taxes” to those who are renouncing.
You have many more options as a UK citizen than I do as a US citizen. Your empire already collapsed long ago so it’s not going to get much worse. Mine is collapsing right now, and will get much worse.
Caleb
Are you gonna be posting much more detailed articles on each of the 5 flags in near future?
Like name exact countries that fit each flag the best and explain why, step by step to do list for each, calculations of expenses and time that await someone going fo it, etc. ?
Thanks.
To a degree, yes.
That level of detail I’m not giving away for free. I will sell that info in the form of a book or course at some point down the road. It will be a while though.
Hey Caleb, excellent article. Long time reader here, whose planning on implementing Five Flags in the future (as soon as I get an Alpha 2.0 business going).
Two questions:
1. Regarding living country A, would it be possible for someone to do five flags and stay as a resident in their home country? For example, I’m from the Dominican Republic (which doesn’t tax worldwide income), so couldn’t I get two additional passports (say Spain and Panama), then renounce my dominican citizenship and stay here? I technically wouldn’t be a citizen anymore, so would that still violate five flags theory somehow?
2. Regarding not owning any assets in country A, I assume that would mean you would just rent your home forever, which I certainly wouldn’t have a problem with. However, you might need some extra conveniences. For example, you need a car most of the time here in DR, since public transportation is a mess. That would mean that you’d either have to buy the car (directly violating the no assets rule), or lease it (therefore going into debt, thus violating a core Alpha 2.0 rule). Is there any way around this? or could I just make an exception in that particular case (by either buying or leasing)? Thanks in advance.
I assume whether one should do it on from financial perspective depends on how much hes earning and how much savings he has. If its not much I guess its not worth it.
It becomes worth it when the amount of money saved on taxes is so much it is well worth the money and hassle. Also when one has financial savings to an extent that keeping it in a single country constitutes high risk. Never the less, are there simple diversification options for someone who has just sever – several 10s of thousands? Or should one stay with cash – gold – crypto to keep it simple at these numbers?
There is also the personal freedom and political risk questions. I have recognizes since a while the benefits of having passport from one country and living in another country. I am doing that already since a long time and it has some downsides but also many benefits. What I would like eventually is to indeed have a second citizenship eventually regardless of income, though with “normal” income that seems difficult. In the meantime in immediate future my plan is to get a second passport from the same citizenship (this is possible in many countries when one does some kind of right tricks and it does have some benefits also).
Then my plan is to build several location independent income streams and then I will start thinking about this. However, in the meantime I am already thinking to put some of my small ish savings out of dodge. I am thinking of some brokerage accounts in HK / Singapore / Chille / Switzerland. I already have regular bank accounts in 2 countries and planning to open a third one. I will probably go for some major international broker in those countries because it seems to take too much effort to figure out anything else than that which isnt worth it for the amount of money I want to send there.
The plan is to not use them except of the main one and just keep them for later if I need them so they are already set up. The money will be spread between physical gold, cryptos, overseas brokerage accounts and my main bank account.
Love these 5 flags articles.
So what I’ve seen that puts barriers with 5 flags is controlled foreign corporation tax laws and tax entities saying if you don’t have residence anywhere by living in 3 countries a year for 4 months each then your residence is your citizenship country.
I’m guessing then you’ll say your residence will be panama to avoid all of these issues? Or say it’s the USA because it has citizenship taxation anyway so you might as well use that ‘fact’ to help you?
So in this example the guy returned to be resident in his citizenship country again. What if you never “return”, as per 5 flags? No problem I think. Also I guess most countries give you the option to register you have no residency there for nationals. I have that for example already set up. In my country of citizenship you have a registered residency even if you live long term somewhere else and have residency there. The address is in your ID card. In fact I think if you wanted to you can request to have your address abroad there. I have specifically requested to register a removal of residency from the system. I have since a few years an ID card with no address at the back, unlike almost every other citizen in my country of citizenship. So I am quite sure in my case they would not be able to argue a residence for the missing years. There is always a way around these things.
Just keep in mind this will likely be even more expensive and time-consuming than it sounds. My setup is not nearly that complicated, and it is already a massive hassle, 10x more time consuming and expensive than I initially expected. No online article I read came close to telling the truth. It also only became obvious several years in.
From what I have seen it is mostly done / advocated by those who travel and live all over the place anyway / want to do that anyway. So I think they do not even think of some of these costs because they would have had those costs anyway. This certainly includes myself, so I again would not see some of those expenses as actual costs. If you like to / plan to stay mostly in one place then its a whole different story.
“My setup is not nearly that complicated, and it is already a massive hassle, 10x more time consuming and expensive than I initially expected. No online article I read came close to telling the truth. It also only became obvious several years in.”
Care to expand on that one? How expensive per year? Has it been worth it?
Every country is wildly different. You can’t make any assumptions based on what one country does.
Both, as needed, depending on the scenario.
Uh, then why the are you doing it?
If my scenario was that painful I would immediately stop it, change it, and do something else. I wouldn’t tolerate any condition in my life that made me unhappy.
In other tweets, the guy talks about how dutch / eu nomads get screwed over tax wise because they didnt mark their residence anywhere, even if they dont return to their citizenship country.
This guy despite owning nomad list and being nomadic currently pays taxes to denmark because of that fact. Maybe he should get panamaian residency 😉
I also wouldnt assume that you would never travel back home. It feels easier and safer to create a residency (note: not citizenship) somewhere low / no tax vs flit around on tourist visas around the world
Another option, available in places with open borders such as Europe (are there any others? Wikipedia suggests no other decent places have similar arrangements), is to live in one country but have residency in another. Portugal with its NHR program immediately springs to mind. Most other places, I guess, would abide by the strict meaning of the term “residency” and traveling too much can make you a resident of some undesirable jurisdiction.
Sounds like nonsense. As far as I know those countries you mention do not tax worldwide income. It is irrelevant what your residency is or isnt. If you dont live there they do not have any legal claim for that tax money. They might ask though, but the thing to do is to just ignore it. Besidedes how could they even ask? I think thats where the problem lies. He probably still had an address somewhere back home. You can see that they might think he should pay taxes there if he has address there. I had specifically request the authorities to de-register my address and remove it from the system. They did that, but I had to show that I have an address somewhere else.
This kind of stuff is probably the source of the problem. If you live there you have residency there… now I know what you mean, registered residency isnt the same as actually living there but this can get complex quickly and lead to issues if done wrong. I think this the problem of the guy described above.
That’s a goal of mine. I like five flags, but it just seems way too complicated. The more I read about being a digital nomad, the more I said “holy shit that would be amazing!”
I suppose once I’m older and more established, I’d be able to do five flags or something like it.
Including all costs like required flights and hotels to set things up and maintain them, legal advice, accounting and audit services, virtual office services, company setup, residency setup, renewals, bank accounts, … it comes down to around $15-30k a year.
The main setup is with a HK company + residency in a second country that’s not my citizenship country. Bigger cost for me is the lost time, around 5-10 full days every year of “stupid shit that’s not productive” related to the setup.
Main things I did not expect, that were both expensive and time-consuming:
– Banks close your account without warning, or start time-consuming investigations into you, at any hint of unusual behavior. For example if you have a company in HK, even though your citizenship is another country, and your residency is in a different 2nd world country, and you receive a $50k wire transfer from HK. From my experience as soon as you’re not doing what the majority does they put you through all the extended AML and KYC checks, or just close down your bank account. Happened several times to me, in various countries and with various banks. My business is 100% legitimate by the way, and I pay all my taxes. You can’t operate anything properly without a bank account, but banks can just shut you down without giving any real reason.
– HK company accounting, audit, profit tax return questioning, cost a lot more and is a lot more time consuming than I expected. Plan in $10k+ a year at least if you have any significant business activity there. It’s fast and cheap the first year or two, then they slap you with the bills.
– the EU planning to change theirs laws to combat more digital nomad type businesses paying little taxes, so it became very questionable that my previous setup would work at all long-term.
Overall I saved money with the setup over the last 3 years, but for me personally not enough to justify the pain in the ass it is, so I am closing it down for a simpler setup.
I am in the process of closing it down , for 1 year already. Time consuming and expensive too unfortunately. Going for a much simpler setup that has a part of the benefits now, paying some more taxes though. I only noticed 2 years in how painful it became, the first year was great.
Just wanted to mention this, as part of this experience I’ve seen some of the most unfair, business unfriendly things by governments / banks I’ve experienced in my life – nothing like this happened when I was all in one country before, and I totally underestimated it even though I did proper research and got consulting.
In my opinion, they are doing a good job of shutting down such low tax options not by making it explicitly illegal, but by making it so annoying, difficult, expensive and time-consuming that it is not worth it in the end. That does not apply to all setups, but certainly to some, including the one I had. Several friends with similar setups share the same experience, specifically with Hong Kong companies.
Curious to see what your experience will be in 2-4 years.
Overall the world still has a long way to go to accommodate modern digital Entrepreneurs without a fixed living location. Even countries that are considered modern and business friendly are absolute Dinosaurs in my opinion, as well as almost all banks – forced through the government regulations mostly.
Sounds like it’s important not to be an outlier. What about jurisdictions such as Cayman Islands which specialize in no-questions-asked banking services? Does one have trouble receiving payments to such accounts?
@Kevin
Your experience on this is very interesting. Can you please list the countries A,B,C,D,E in your old setup 1, you current setup that you are shutting down 2, and you future simpler setup 3?
Repeat country names when 5 flags doesn’t technically applies. For instance, I don’t have any 5 flags setup, I am just nomad and my current income is nowhere near worth doing a full 5 flags setup:
A-Philippines, Thailand.
B-France (but I don’t even know if international income is taxed), I’d like to start the process to get other passports.
C-France (tax is somewhat okay in my current situation, but not for a A2.0 strong business)
D-France (investment tax is bad though, I want to change that)
E-Singapore, Thailand, (Malaysia, Vietnam – for short touristic stays)
How exactly do you enact this part of the plan? Say my country D is Switzerland because of no CGT. How would I open an account on a broker to buy stocks considering I have no residency in the country, no bank account in the country nor am I a citizen.
BTW, all of those are dependencies: to have a bank account you need to have residency (at least). To have a brokerage account you need a residency and a bank account.
Thoughts?
None of that matters. Foreigners open investment accounts in Switzerland all the time. It’s a paperwork hassle (particularly for Americans) but there’s no getting around that.
Some countries require you to open a bank account there first. Fine, go ahead (if you’re allowed to).
Incorrect. I have several foreign bank accounts in a few countries where I have no residency and I’m not a citizen. (I won’t say which countries.)
Incorrect again. Maybe in some countries, but not all. Not even most.