Overview of How Five Flags Works
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.