You want to travel around the world and make money on the go – it sounds like a dream come true for many. However, in a constantly evolving age of technology, it makes perfect sense these days. To keep it simple, imagine a freelancer.
An experienced freelancer or a self-employed professional offering online services can actually do that, and the truth is many of them do. But then, what happens with taxes? Which jurisdiction do you stick to for a bank account? The same questions come when you think about your residency.
This is where things can get messy – in fact, this is what needs planning. There are, indeed, lots of possibilities. While this is a good thing, it could also be quite confusing for most people. Fortunately, a little attention to small details can push you in the right direction.
This is when the nomad flag concept kicks in. This is a step in a digital nomad's life that everyone will need to go through at some point or another. What does it mean, and what is the purpose of this nomad flag?
Understanding the digital nomad flag theory
The principles behind the digital nomad flag concept are easy to understand. The base is that each country has its own laws and rules. Therefore, each country has pros and cons – what works for some freelancers will not work for all of them.Some countries provide excellent benefits when it comes to residency, so you can apply for a temporary one before going for the permanent solution. Some other countries have flawless banking systems, while others are more suitable for company registration services.
The idea is to become international and grab a bit of everything. Internationalize your personal life, and you will benefit from each of these systems. In fact, this is a very common option for offshore entrepreneurs.
Harry Schultz – a former investment advisor – came up with the nomad flag idea.
According to his theory, there are a few flags out there.
Exploring the nomad flags
There are seven different flags, and each of them comes with specific requirements.The citizenship flag is the main one – also known as the passport flag. This is an option when you get a second passport. Ideally, it should be a country that does not tax international income. In other words, foreign-sourced income must not be taxed locally.
The tax residency flag is another major concept, especially if you are after tax optimization. Legal residence is fairly simple to obtain in more countries, and again, you have to find a jurisdiction that will not tax overseas income.
The third flag relates to your offshore business. Interested in starting a business? The lower the income tax, the better. At this point, you can find tax havens that will not tax offshore corporations. These are your main priorities at this point.
The fourth one is about your offshore banking options. You can start your business in a low tax country in the middle of nowhere, but you want your money in a stable and solid financial economy for safety. This is not necessarily about money, but also about other assets – such as gold, for example.
Moving on, your actual residency is the place where you live. This is where you spend both time and money. In the best possible case, you should pick a country with a relatively low cost of living. Taxes and prices – as well as the VAT – should be relatively low.
Digital security is another flag worth some attention. In a world where everything can be digital, your accounts, documents, and infrastructure must be safe. Different countries have different standards in terms of data protection and privacy.
Last, but not least, the flag addressing digital assets is not to be overlooked either. Digital assets must be kept in countries with top-notch security systems, as well as open-minded regulations. Basically, you want digital currencies and other similar assets in countries that can protect them.
Assessing the different types of taxation
There are three different types of taxation, and each of them comes with its own specifications. In order to optimize tax whatsoever, you need to become familiar with them and find a middle solution to keep as much money as possible.The territorial taxation means you would have to pay income tax only if you earn it in the respective country. For instance, you could be a citizen of one country and get your income from another one. You pay income where you get the money from.
Residential taxation is a different idea. It makes no difference where you get the money from – it could be the country where you live or another one. You will have to pay income tax where you live. Now, many countries have specific rules.
Some of them stick to the 183 days rule. In other words, if you spend half a calendar year in a particular country, you become a tax resident in that country. Obviously, there are more rules involved, but this is a general idea.
Finally, citizenship-based taxation is the most dramatic one – the one you want to avoid. If you have certain citizenship, it makes no difference where in the world you live or where you get paid from. You will pay tax in those countries.
This means you are very likely to be double taxed. The USA is one of these countries. The American government will tax you regardless of your residency and income. Eritrea is the second one. There are no other countries like this out there.
Applying the nomad flag concept by the book
The nomad flag concept aims to help you keep the money you work for, rather than waste lots of it on tax. Sure, tax can help if you want infrastructure, a good healthcare system, and so on, but it is often exaggerated.Believe it or not, while more and more difficult with every new year, it is actually possible to avoid paying tax at all. You do not have to be a criminal, but simply diversify your assets and plant flags in the right places.
For example, you could be a British citizen. You could apply to get legal residency somewhere else – take Malaysia, for example. You do have residency in Malaysia, but you do not spend too much time there. You would rather spend your time in Thailand – tourist visas help.
Your bank account is established in a sound jurisdiction – take Switzerland, for example. Then, your business is registered in Hong Kong. You are an international citizen who has managed to optimize everything by the book.
You will not be asked for taxes in the UK because – despite having citizenship, you are not a resident. After all, your residence is in Malaysia. But then, there is no tax to pay in Malaysia either because you do not live there. Plus, your business is registered in another country.
As you spend most of your time in Thailand, you will not be taxed there because Thailand does not tax foreign-sourced income. Your bank account is irrelevant because you do not have to pay tax in a country just because you have a bank account there.
In other words, you are not paying tax anywhere. In theory, it sounds simple. In reality, applying the nomad flag correctly is more difficult, of course. At the same time, rules may change on a regular basis, so you need to keep up to date with the latest laws and regulations.
Considering the right amount of countries
Now, this nomad flag idea takes time to implement correctly, and obviously, you will experience all kinds of difficulties. To some people, getting involved with so many countries may seem a bit difficult and overwhelming.Do you really need to plant so many nomad flags? It sounds daunting, indeed, but great rewards come with hard work. If it was so easy, no one would pay tax anymore, and governments would be bankrupt overnight.
As a general rule of thumb, the more countries you choose to get involved with, the less control a particular government will have over you. More countries will give you more freedom and can help you overcome difficulties.
Some see this diversification as freedom. You do not want to be tied down like most people. At the end of the day, you need to go where you are treated best – the most popular advice in the offshore industry. Diversification is essential then.
What do most people do then?
- Most people only go abroad on holiday. They are born in one place, and that is where they spend their lives. They are not familiar with life in other countries, and they choose to stay in their comfort zone.
- They go to school in the same country. More than 99.9% of all people do this. However, it is not their choice, but their parents'. They do have a bit of a choice when it comes to university – it depends on the finances, though.
- They work in the country they have always lived in. Those in poor economies choose to move abroad and start all over, so they will get jobs there. It is not diversification, though – they will do everything in that new country.
- Most people will handle all their banking accounts in the same country. It makes no difference if they have bank accounts or savings accounts. Chances are their retirement accounts will be in the same country too.
- While people in lower-rated countries may choose to save in different currencies – such as euros around the EU or American dollars in other parts of the world, the truth is most people will keep all their finances in their national currencies.
- At some point, they need to buy real estate – or perhaps inherit it from their parents. Their real estate will be owned exclusively in the country where they spent most of their lives, with no future prospects.
- If they manage to get a bit above the average, they will store their valuables in the country they live in. Whether it comes to precious metals, jewelry, art, or other valuables, they will be kept locally.
- Finally, most people will only have one passport in their lives. Some of them have none at all. The passport is optional in most countries – you do not need one if you do not travel abroad. Unsurprisingly, lots of people never leave their countries.
Being in this situation is extremely absurd, and most people do what they see around them. This is how life goes, and people have no mental training to see things further. On the other hand, a professional investor will only see one thing – the average individual has all eggs in a single basket – their country.
No matter how much or little money you have, that is your personal wealth. It is stored in one place, making you vulnerable to all sorts of problems. Political issues could ruin everything within days. Social and economic turmoil, new laws, surveillance, and other issues could affect you straight away.
The average individual does not have a backup plan. This is when the nomad flag kicks in and clears out all these risks by providing international diversification. It takes time and work, but at least you no longer depend on a single government only.
Your government controls everything and always wins against you. The government tells you where to send your kids to school, brings in taxes that cost more than your income, and so on. You are told where to invest, and the list can go on. This situation will not save you money or make you a millionaire.
Instead, the government has full control over you and will play you like a puppet. This is why most people never experience actual freedom. If you want to be like this, fine – after all, it is your personal choice. But most people would rather push for better.
The nomad flag concept is an idea to insulate yourself against governmental abuse dressed in laws and regulations. It is also the key to protecting your money and future against instability of any kind. Everyone does it differently, but the concept is the same.
When the concept first kicked in, there were only five flags. With time, they changed a little – as the world has also changed. Initially, everyone hoped they would become James Bond, sipping champagne on a yacht in the Caribbean with a bag of money and passports.
This might have been the case a few decades ago, but things have changed a little lately.
In terms of the amount of countries to choose, you are free to do whatever suits you. A couple of countries might be enough for a lot of people – you can enjoy a bit of freedom and have enough money to live and have fun.
Some other people may need five flags or perhaps seven of them. Everyone has different goals. Their circumstances and situations are also different, so never copy what others do – instead, develop your own plan.
At the same time, some countries may provide the perfect scenario for five flags. It sounds tempting, but you should still diversify a little. Plant a couple of flags there and keep looking for other similar locations – simply avoid having all your eggs in one basket.
Myths associated with the nomad flag concept
The James Bond idea is by far the most popular one. It might actually become a reality, but it depends on more factors. Chances are the less known you are, the easier it becomes – a celebrity will always be targeted by the press.Now, another common myth is related to your taxation. Most people assume that leaving their home country means they are exempt from taxation. They still have citizenship, but they live somewhere else. This is not always the case, though.
In some countries, it works. You have no income there, so nobody cares. In others, things are different. In fact, it could be quite difficult. Take the USA, for instance. You will be taxed on income regardless of where you live or where you get it from.
Germany is similar – being exempt from taxation depends on how long you are away for. This is the main factor. Basically, you have to cut every single tie. While no one would know about it, having a second key to your parents’ home could mean residency.
No matter where you live, you have to double-check the laws and ensure you do it right.
How to start the nomad flag concept
In theory, it takes time and patience. You will make mistakes, learn from them and avoid repeating them. If you have the finances, you can hire a professional service – such as lawyers or accountants to help out. At the end of the day, you want a clean new life, rather than penalties later on.The first step implies leaving your home country. You will need to become a non resident – do it officially, whatever the local rules are. Leaving just like that may not count in all countries.
Second, find legal residency in a country that does not tax foreign-sourced income. There are quite a few out there.
Third, choose a territorial taxation country to come up with a business. Your offshore company must be registered in a country that supports companies and corporations by lowering taxes to a minimum. Again, there are many good options.
Depending on the assets you have, you will need to move them offshore. Money, for instance, is relatively easy to move.
Finally, start traveling. Check out tax-friendly countries and seek a balance between a low cost of living and high quality of living. Basically, you want value for money.
Countries worth some attention for your nomad flag venture
Now, different countries have different laws. The problem is these laws change on a regular basis. Even if you manage to find the perfect scenario, you might be surprised by how quickly laws change. Some countries are perfect today and could be a real problem tomorrow.For instance, the Cayman Islands, the Bahamas, the British Virgin Islands, Monaco, and Belize are some of the most popular choices for those who look for no income tax.
Some countries have low taxation laws. Sometimes, they could be better than no tax countries because they are better established and have more stable economies. Take Costa Rica, Georgia, Guatemala, or Nicaragua, just to name a few.
Tax lax countries are quite appealing too. This is a unique category because you basically go around the law. In fact, this was a common choice before digital nomad visas were introduced, and no one was really bothered.
Such a country allows you to live there – not permanently, but quite a lot – by using tourist visas. You can do visa runs and refresh the visa just by leaving the country. Basically, you could live there for years by leaving the country every now and then.
You are a tourist, so no one will charge you any taxes. From a technical point of view, you should not work in such countries. But then, you work online – who is going to know? More importantly, who is going to bother?
You bring money into these countries, so authorities will appreciate that instead.
Furthermore, you only need a laptop and an Internet connection.
If this idea is appealing, try out Vietnam, Thailand, or Indonesia.
Conclusion
Bottom line, this nomad flag concept is not new at all. It has always drawn attention in one way or another, without anyone actually know that everything is part of a more sophisticated plan. Everyone is trying to find solutions to modern-day problems, and this old concept has remained overtime.While it does require lots of work, it is totally worth it. Moreover, it will always work, as long as countries maintain different rules and laws. Until the day the whole world will be under one law or leader, prolific investors will always try to reduce their dependence on local governments.
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