TR: A never ending trip
Nov 29, 2015, 7:55 am
#19
Original Poster
Join Date: Mar 2013
Location: All around the world
Programs: Hilton, Hyatt, Marriott
Posts: 607
Harry Schultz devised the original Three Flag Theory, which advises “planting flags” for three parts of your life.
1. Have citizenship somewhere that does not tax foreign-source income.
There are three types of taxation countries impose on their citizens: territorial taxation, residential taxation, and citizenship-based taxation.
Territorial taxation means that, even if you live in a country, income earned outside of that country is not taxable locally. For example, residents of Singapore can earn money anywhere in the world without paying Singapore tax. Only their local income (such as salaries) is taxed. That means a Singaporean can own rental real estate in Spain and only pay Spanish tax on the income he earns. Similarly, Singaporeans can operate offshore companies and only pay tax on salaries they take from their own company (or pay no tax at all on dividends).
Residential taxation means that you pay taxes based on where you live. Many countries use a version of the “183 days” principle, meaning that if you spend at least half your time living in the country, you are liable for tax on your worldwide income. However, if you choose to leave the country and live elsewhere, you can do so and no longer pay tax once you are no longer deemed a resident.
Citizenship-based taxation is applied by only two countries: the United States and Eritrea. It means that your income is taxable no matter where in the world you live, so long as you hold citizenship in that country. Eritrea, a war-torn country that broke away from Ethiopia several decades ago, applies a 2% tax on its citizens worldwide income (it’s rarely enforced). The United States does tax your entire income at normal rates, which means even “accidental Americans” need a sound offshore strategy to avoid unnecessary taxation.
In Flag Theory, you hold a passport that allows you to leave the country and not pay tax there. For example, while France imposes high taxes on its citizens, French expats are not liable to pay French tax (except if they live in Monaco). Holding a US passport is not conducive to Flag Theory. This is where to concept of obtaining a second citizenship comes into play.
2. Have your business and investments in stable tax havens.
Now that you have a passport that does not tax your non-resident income, you can establish businesses and investments in zero-tax countries and pay no tax on income earned.
This is where the idea of offshore corporations and offshore trusts come into play. If your country of citizenship doesn’t require you to pay tax to them, and you live in a tax haven or are a perpetual traveler with no permanent address, you can set up your income to be entirely tax free.
To do this, you would set up a company or trust in a stable country that does not tax your income. Countries like the Cayman Islands, British Virgin Islands, Belize, Nevis, Seychelles, and even Hong Kong offer offshore corporations that require zero tax to be paid. Many of these offshore havens don’t even require you to file accounting reports or be audited.
You can use offshore corporations to run your business the way Google, Apple, and other large companies do. If you have investments, you can use them to set up offshore brokerage accounts or open offshore bank accounts. When doing business and banking in a stable tax haven, any interest income or dividends you earn are also tax-free.
3. Live as a tourist in a country where what you do is valued.
This is where the perpetual traveler concept comes into play. Perpetual travelers are also known as permanent tourists because they do not have formal residence in one place. As such, they are classified as a “tourist”, even if they spend three to six months each year in one place.
When you enter a country, you get your passport stamped with a visa. Holders of passports from wealthy countries can easily enter most of Europe, the Americas, and much of Asia with no visa required and be able to stay for anywhere from three to six months. A few countries like Georgia allow almost anyone to stay as a “tourist” for twelve months without a visa.
Now, consider that tourists are treated better than locals in almost all cases. Tourists get their sales tax refunded when they leave, but aren’t responsible to pay local income tax. After all, they’re just tourists.
By basing yourself in a few different countries that respect how you earn your income, you can live freely and pay zero tax in most cases.
1. Have citizenship somewhere that does not tax foreign-source income.
There are three types of taxation countries impose on their citizens: territorial taxation, residential taxation, and citizenship-based taxation.
Territorial taxation means that, even if you live in a country, income earned outside of that country is not taxable locally. For example, residents of Singapore can earn money anywhere in the world without paying Singapore tax. Only their local income (such as salaries) is taxed. That means a Singaporean can own rental real estate in Spain and only pay Spanish tax on the income he earns. Similarly, Singaporeans can operate offshore companies and only pay tax on salaries they take from their own company (or pay no tax at all on dividends).
Residential taxation means that you pay taxes based on where you live. Many countries use a version of the “183 days” principle, meaning that if you spend at least half your time living in the country, you are liable for tax on your worldwide income. However, if you choose to leave the country and live elsewhere, you can do so and no longer pay tax once you are no longer deemed a resident.
Citizenship-based taxation is applied by only two countries: the United States and Eritrea. It means that your income is taxable no matter where in the world you live, so long as you hold citizenship in that country. Eritrea, a war-torn country that broke away from Ethiopia several decades ago, applies a 2% tax on its citizens worldwide income (it’s rarely enforced). The United States does tax your entire income at normal rates, which means even “accidental Americans” need a sound offshore strategy to avoid unnecessary taxation.
In Flag Theory, you hold a passport that allows you to leave the country and not pay tax there. For example, while France imposes high taxes on its citizens, French expats are not liable to pay French tax (except if they live in Monaco). Holding a US passport is not conducive to Flag Theory. This is where to concept of obtaining a second citizenship comes into play.
2. Have your business and investments in stable tax havens.
Now that you have a passport that does not tax your non-resident income, you can establish businesses and investments in zero-tax countries and pay no tax on income earned.
This is where the idea of offshore corporations and offshore trusts come into play. If your country of citizenship doesn’t require you to pay tax to them, and you live in a tax haven or are a perpetual traveler with no permanent address, you can set up your income to be entirely tax free.
To do this, you would set up a company or trust in a stable country that does not tax your income. Countries like the Cayman Islands, British Virgin Islands, Belize, Nevis, Seychelles, and even Hong Kong offer offshore corporations that require zero tax to be paid. Many of these offshore havens don’t even require you to file accounting reports or be audited.
You can use offshore corporations to run your business the way Google, Apple, and other large companies do. If you have investments, you can use them to set up offshore brokerage accounts or open offshore bank accounts. When doing business and banking in a stable tax haven, any interest income or dividends you earn are also tax-free.
3. Live as a tourist in a country where what you do is valued.
This is where the perpetual traveler concept comes into play. Perpetual travelers are also known as permanent tourists because they do not have formal residence in one place. As such, they are classified as a “tourist”, even if they spend three to six months each year in one place.
When you enter a country, you get your passport stamped with a visa. Holders of passports from wealthy countries can easily enter most of Europe, the Americas, and much of Asia with no visa required and be able to stay for anywhere from three to six months. A few countries like Georgia allow almost anyone to stay as a “tourist” for twelve months without a visa.
Now, consider that tourists are treated better than locals in almost all cases. Tourists get their sales tax refunded when they leave, but aren’t responsible to pay local income tax. After all, they’re just tourists.
By basing yourself in a few different countries that respect how you earn your income, you can live freely and pay zero tax in most cases.
