Perhaps you’re already familiar with the idea of Flag Theory if you stumbled upon this article or maybe you need a quick intro. Anyway here’s a quick refresher or introduction to the original theory:
Flag Theory was originally coined by investor Harry Schultz in the 1960s, who originally talked about three, not five flags. The main principle was to look at countries as corporations competing for your business. Said business being citizenship, business, and my personal favorite, play.
The world moved on and Schultz’s theory was being used, tested, and re-examined by many but in the 1980s one particular variant of Flag Theory gained popularity, W.G. Hill’s Five Flag Theory.
Having built on the shoulders of giants, Hill took the original three flags used by Schultz and added two additional ones, residency and asset haven.
Today’s world is very different than Schultz’s world in the 1960s or Hill’s world in the 1980s. Globalization and digitalization have rearranged the cards, making us wonder what the Five Flag Theory looks like today in 2022.
Do we apply the flags differently now or maybe not? Do we add flags? Do we remove some of them?
The scope of this article is not to give you specific recommendations because every situation is different so any plan will need to be personalized also we don’t have the specific know-how on the matter. If you want help getting additional flags, contact us and we can help you connect to some of our vetted partners.
What does Five Flag Theory look like for online entrepreneurs and digital nomads in 2023?
The first flag to plant is one that’s easily overlooked but perhaps it’s the most important one of them all. The citizenship flag is the insurance flag, additional citizenships are completely irrelevant until you need them for whatever reason. As someone with an IT background, I personally tend to give importance to the idea of redundancy and having a “backup citizenship”.
Applying it to digital entrepreneurship or digital nomadship (or nomadness?), I think we cannot underestimate the importance of being able to move around as freely as your business’s data. It’s why it’s important to have a second citizenship outside your sphere.
If you live in Germany, Austrian citizenship will not help you much. You were already able to move freely inside the Schengen area anyway. Unless you can pick it up easily through your ancestry it’s not worth the effort. But non-western citizenship would allow you more free movement across the globe without needing to apply for a visa every time and risking getting it denied.
Online businesses are much more ephemeral and easy to establish than physical ones. It’s why you can and should have multiple ones across the world. Some things to consider when establishing a business entity for your online business are access to major currencies, local data regulations, ease of establishing and transferring a business entity, and most of all, a friendly fiscal climate.
Some interesting options are establishing a US LLC as a non-resident, which will make it a tax-neutral entity, or go for one of many countries, mostly (former) UK territories, with a non-dom or non-territorial taxation system. If you want to establish your business in Europe, you could generally consider Eastern European countries like Estonia or North Macedonia, which both allow you to not be taxed on profits until you actually take them out of the business.
For your playgrounds, it doesn’t matter too much if you have a physical or digital business. Just don’t live in countries where you’ve established any of your 4 other flags is the golden rule.
And perhaps don’t live too far away from them too, even though as an online entrepreneur you can mostly take care of stuff, well, online.
Just find a place (or multiple places) that fits your lifestyle. Do you like the culture big cities provide or do you prefer to live near the beach or in the mountains?
When it comes to residency, any non-territorial or non-dom tax system will do, just take a different one than where your business is established, for obvious reasons. Portugal’s NHR system is also a great alternative, especially for EA nationals or people eligible for a golden visa.
Since in Flag Theory you’re not actually supposed to live there, you just need a tax-friendly place of residence and enjoy life in one of your playgrounds.
Let’s go wild and assume you have mostly digital assets to store. What’s most important to you?
You first of all want a country that recognizes your digital assets as actually being existing assets so your ownership is recognized. You want a country that isn’t likely to confiscate any of them or isn’t likely to cut itself off from the internet.
Also, think further than crypto or NFTs, for your business, data is just as well an asset. You want countries with strict privacy laws like Iceland, Luxembourg, Switzerland, the Netherlands, etc. as those are generally going to respect your digital ownership best.