The impact of COVID-19 on the Five Flag Theory

A while ago I wrote a blog post about the Five Flag Theory. If you can’t remember what the Five Flag Theory is all about, then I highly recommend you check out that blog post first by clicking HERE.

In summary, the Five Flag Theory was designed for perpetual travellers or what we call nowadays ‘Digital Nomads’. The aim of the Five Flag Theory is to make sure that you don’t put all your eggs in one basket. I would actually go as far as recommending this theory to ANYONE and not just to people who are living a nomadic lifestyle.

It appears that with this current Coronavirus Crisis people are starting to realize that it might not be the smartest choice to have all their assets, wealth and money in one single country, as governments are increasingly starting to interfere with individuals’ rights and lives.

The idea of the Five Flag Theory is to make sure you distribute your life across different countries depending on what their best offer is. You might want to get citizenship in one country (1st flag), obtain tax residency in another country (2nd flag), establish your company in yet another country (3rd flag), open up your bank account in another country (4th flag), and actually live in yet another country (5th flag).

In this article, I will explore how the Five Flag Theory has been impacted by the current Coronavirus Crisis.

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THE FIVE FLAGS

#1 Passport or Citizenship 

With COVID-19 many governments have implemented drastic measures when it came to closing down their borders. In some cases, tourists and people on temporary visas, were urged to fly back home to their home country.

I would argue that it was at this exact moment that many Digital Nomads, travellers and location independent entrepreneurs would have wished they had a few citizenships or passports in their hand to be able to pick and choose where they could have ‘settled’ down for this crisis.

I say this because I had quite a few people contacting me, looking for immigration lawyers contacts in order to start their process to at least obtain a more permanent residency solution for whatever country they decided to be stranded in.

Many Nomads that relied in the past on tourist visas may have now come to the realization that certain Digital Nomad hubs might have actually become their new home base and that they want to solidify that feeling by starting their immigration process to be able to enter and leave as they please – especially in uncertain times.

Another reason why people are starting to realize that the Five Flag Theory is of great importance to anyone is because traditional residency-based tax systems might consider changing in the near future to citizenship-based tax systems.

No one really knows the implications of COVID-19 on the economy and countries’ financial systems. But in the long-term, countries will have to raise somewhow revenue and this will without a doubt be done through taxation systems.

This became very clear when a parliament member of the Canadian government publicly declared in April 2020 that ‘the case for citizenship-based taxation has been building for years, but with huge budget deficits to come, fairer taxation is all the more needed.’

If this statement were to become reality in the near future, this would imply that Canadians would get taxed just like their American neighbours – based on their citizenship and not on their residency. As a consequence, unless you would give up your Canadian citizenship, you would forever be taxed in Canada (same ways as Americans currently get taxed forever in the US unless they give up citizenship).

So, it’s never a bad idea to have another passport and to obtain a second citizenship.

#2 Tax Residency 

If you are currently stranded in your home country and you are worried about your tax obligations, then head over to THIS blog post I’ve written for you.

To recap what was written in that blog post: the OECD has provided some guidelines on how to deal with ‘stranded’ people and their tax obligations. They’ve stated that countries shouldn’t be taxing people if they are simply present in their home country due to the current circumstances. However, those are only guidelines. At the end of the day every country will make and apply their own laws.

If you come from a high tax country and you are currently stranded there, my advice would be to leave as soon as your country opens up its borders. The reason why I am saying this is because it is highly likely that if you stay any longer than past the Coronavirus Crisis, your country will likely argue that you intentionally stayed there and thereby making yourself a tax resident.

So far, only a couple of countries such as Australia, the USA, Ireland and the UK have provided guidance for people who are stranded in their country. The USA has provided relief to affected foreign citizens for up to 60 days to be treated as if they were not staying in the country. 60 days isn’t a whole lot when borders around the world are still closed.

This is why those people that have another citizenship or even a more permanent residency solution in another country will be able to return to their second home base (hopefully a country with lower taxes) without having to worry about what implications their stay in a high tax country might have in the future.

#3 Overseas Business

In some countries businesses have been able to access certain tax benefits if they could prove that their business activities have been affected by COVID-19. In other cases, employees of companies have been able to get salary substitutes and so on..

Many freelancers and self-employed people are now starting to realize that there might have been more benefits available to them if they had a business structure in place. The good news is that you can actually still incorporate an overseas business despite everything that is going on.

Forming a company these days is very simple and can be done in most cases online.

If you are unsure where to start when setting up your overseas business then you’ve come to the right place. I’ve created a freebie for you that will walk you through the most important considerations you need to keep in mind when deciding where you want to incorporate your business.

Click HERE to access your Freebie.

#4 Overseas Banking 

While governments are trying to eliminate cash based on the fact that it is unhygienic it appears that at the same time many people are worried about their money being  taken away from them when stored in banks.

Once again the application of the Five Flag Theory would have come in very handy if we had implemented all of the flags previous to the Coronavirus Crisis. It simply doesn’t seem to be a good decision to have all your eggs in one basket (or all your flags in one country). As such, those people that have multiple bank accounts around the world, have less to worry about when it comes to one government taking all of their money away.

Opening up bank accounts remotely isn’t as easy as it is with establishing an overseas bank account remotely. This is true because most ‘traditional’ banks are obliged to physically identify their customers and go through a KYC procedure (Know your customer) with their customers. The Common Reporting Standard (CRS obligations is what governs this system. I’ve written more about what the CRS is on THIS blog post.

However, what you can do meanwhile is set up a bank account with an ‘Digital Bank’ or a ‘Fintech’. Setting up an account with those providers can all be done remotely. There are also other benefits in having a Digital Bank account which I’ve just recently revealed in this blog post.

#5 Actual Residency 

Countries with a deficit in their budget oftentimes make up the lost revenue with other taxes or reduced services. This means that after Coronavirus we can expect governments to implement higher taxes, not only potentially on corporate and personal income taxes but also on sales taxes.

Sales tax is something that you won’t be able to escape unless you live in a country that doesn’t impose any sales tax and there aren’t many of those around the world. Sales tax, is the tax imposed upon the sale of goods and services.

There are several countries around the world that don’t apply any Sales tax at all which are usually classified as the typical ‘tax heavens and include Hong Kong, UAE, Bermuda, Cayman Islands etc.

While you might not be able to move right now to those places it might be worth it to keep it in mind for the future. It is important to understand that there are many form of taxes that will impact your life and it is not limited to only company and personal income taxes.

COMMENT

While the Five Flag Theory was developed in the 80s and has a lot of limitations these days mainly due to financial institutions talking directly to taxation authorities, the theory in its core still remains valid. There is no harm in making sure that you distribute your assets, wealth and money throughout multiple countries instead of keeping them all in one jurisdiction. Especially these days when you can set up companies, apply for residency, and open up bank accounts all around the world from the comfort of your couch I don’t see what is holding you back. Simply always keep in mind that you comply with your tax obligations in every single country that you decide to establish a ‘flag’.

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We hope you have enjoyed this article. If you have any further questions please leave us a message below and we’ll get back to you as soon as we can.

 

NOTICE: The content of this article is not to be considered as a legal opinion or tax advice. Wanderers Wealth does not hold itself out as a legal or tax advisor. If you want to receive a legal opinion or tax advice on the matter in this article please contact us directly and we will refer you to a legal practitioner.

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