Examining EU Citizenship Through the Lens of the ‘Five Flags Theory’

The Five Flags Theory is a tax optimization strategy originally proposed by Harry D. Schultz in the 1980s as the Three Flags Theory, later expanded by W.G. Hills to include two additional flags. The core concept involves leveraging the different rules and regulations of one country against another, utilizing their respective advantages. Some countries are ideal for setting up businesses, others for personal residency, and others still for secure banking systems. As early as 1994, The Times advertised information about acquiring a second passport and becoming a “permanent traveler,” indicating that high net-worth individuals have long utilized second nationalities. By globalizing different aspects of their lives, they exploit these advantageous systems to enhance personal freedom and reduce taxes through location independence and geographical arbitrage.

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To implement the Five Flags Theory, one must carefully distribute their life across at least five different jurisdictions (flags).

• First flag: Passport and citizenship should be in a country or region that does not tax based on citizenship.
• Second flag: Tax residency should be in a true tax haven or a territorial tax system country or region, such as Hong Kong or Singapore, where only locally earned income is taxed.
• Third flag: Business base, where the company is registered, should be in a true tax haven or a country/region that does not levy high taxes on the type of income generated by businesses, such as the former offshore havens like the Cayman Islands, Seychelles, BVI, as well as low corporate tax areas like Ireland, Hong Kong, and Singapore.
• Fourth flag: Assets should be kept in economically stable and well-governed countries or regions, preferably where passive income and capital gains are taxed minimally.
• Fifth flag: Long-term residence should be in a country or region where one spends most of their time and that does not tax foreign income, and where consumption taxes are also relatively low.

Who needs it?

An example circulating online involves John, a Canadian citizen and a tax resident of Malaysia. Canada typically does not tax its non-resident citizens, and Malaysia does not tax its residents’ foreign income if they spend less than 182 days within the country in any given year. John’s business is based in the Cayman Islands, with a payment processing subsidiary in the UK. Both jurisdictions do not tax the type of income generated by John’s business. John holds his liquid assets in Hong Kong and Singapore, where he is not liable for any form of taxation. He spends most of his time traveling from one country to another, not staying long enough in any place to become a tax resident or establish a permanent residence. As a result, John lives and operates his business without paying any taxes.

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Regarding EU citizenship from the perspective of the Five Flags Theory, an increasing number of wealthy individuals are seeking second citizenship for security purposes, with many turning their attention to Malta. Malta does not tax the global income and assets of applicants. According to Bloomberg News, “If you have a yacht and two airplanes, the next thing to get is a Maltese passport.”

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According to data from Knight Frank’s Attitudes Survey up to 2019, 36% of ultra-high net worth individuals (those with a net worth of over $30 million US Dollars) already possess dual citizenship. Additionally, 29% of these wealthy individuals are considering acquiring a second nationality, and 26% are contemplating permanent migration.

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EU citizenship is arguably one of the most useful and valuable citizenship programs in the world. It is not an exaggeration to say that citizenship in one EU country equals citizenship in 27 countries. For individuals with substantial assets, the considerations for obtaining a green card or citizenship in another country include global travel convenience, high-quality education for children, wealth inheritance and planning, a secure retirement, and a good living environment. The Maltese passport can provide these at a high standard.

According to the “Global Wealth Migration Review” published by AfrAsia Bank in 2020, Malta, as a premier offshore destination, has been highly favored by global wealth elites and has seen a significant inflow of wealth assets in recent years aside from well-known offshore locations like Monaco, Mauritius, and Bermuda.

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The Maltese citizenship program is considered the most rigorous and highest standard in the global immigration landscape. Successfully obtaining a Maltese passport is a testament to the value of the citizenship. With the continuous changes in global situations and the evolution of geopolitics, more high-quality, high-net-worth individuals are willing to invest and relocate, allowing themselves and their families the opportunity to broaden their horizons and become part of the EU as Maltese citizens.

Tax-Friendly Environment

Malta boasts no inheritance tax, gift tax, or capital gains tax, making its tax system straightforward. Moreover, taxation in Malta is based on an individual’s tax residency and the source of their income, rather than their citizenship. This means that even after obtaining citizenship in Malta, investors are not required to pay taxes in the country, especially considering that most investors do not reside in Malta. Foreign assets and income are taxed at the source, meaning that as long as the income is not derived from within Malta, there is no obligation to pay taxes in the country.

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High Migration Flexibility

EU citizens enjoy the citizenship rights of 27 EU countries plus the right to move freely within 31 European countries. With a Maltese passport, one can live, work, study, and retire in the 27 EU countries as well as Switzerland, Norway, Iceland, and Liechtenstein—four countries in the European Free Trade Association. They enjoy the same welfare benefits and rights as local citizens.

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Prestigious Status

Malta recognizes dual citizenship, and among the citizens of only 41 visa-exempt countries allowed to stay in the United States for 90 days visa-free (as shown in the figure below), Malta is the only one with an investment citizenship law that allows direct donation for citizenship acquisition. In contrast, the other 40 visa-exempt countries have longer naturalization processes and more stringent conditions.

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Limited Citizenship

The only passport that allows immediate citizenship among the 27 countries in the EU is the Maltese passport, which is supported by authoritative legislation. A new policy introduced in November 2020 has sparked enthusiasm among many observers. With 1,500 limited citizenship slots rapidly being filled, this program may permanently close by 2025. Now is the last chance to apply.

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Looking at the analysis above, the Malta Citizenship by Investment (MEIN: “Maltese Exceptional Investor Naturalisation”) program is well-suited for virtually any aspect of the Five Flags Theory.

• First flag, Citizenship: Fits. Malta does not tax or control income earned abroad by its citizens.
• Second flag, Taxation: Fits. Investors do not have to pay taxes in Malta after obtaining citizenship.
• Third flag, Business: Fits. The corporate tax burden in Malta is reduced to 5%, a taxation system approved by the EU and OECD (Organisation for Economic Co-operation and Development).
• Fourth flag, Assets: Fits. Malta is often referred to as the “Switzerland of the South,” maintaining good liquidity of assets.
• Fifth flag, Residence: Fits. Choosing Maltese citizenship means becoming a citizen of the 27 EU countries, enjoying shared resources such as education, healthcare, work, residence, and tourism across these nations. It is suitable for those seeking high social welfare, quality education, and healthcare resources.

In the field of MEIN programs, Globevisa offers specialized solutions for high net-worth applicants, drawing on years of experience and case data in operating the Malta passport program. With a professional team of experienced lawyers, Globevisa ensures thorough scrutiny of your immigration application. For more details, feel free to contact Globevisa professional consultants for consultation.

References

https://en.wikipedia.org/wiki/File:Scope_advertising,_The_Times,_1994.jpg

https://www.canada.ca/en/revenue-agency/services/tax/international-non-residents/information-been-moved/determining-your-residency-status.html

https://www.hasil.gov.my/en/individual/introduction-individual-income-tax/who-is-taxable/

https://www.bloomberg.com/graphics/2018-buying-citizenship/?leadSource=uverify%20wall

https://content.knightfrank.com/resources/knightfrank.com/wealthreport/2019/the-wealth-report-2019.pdf

https://www.afrasiabank.com/en/about/newsroom/global-wealth-migration-review-2020

https://cfr.gov.mt/en/inlandrevenue/legal-technical/Documents/Guidelines%20on%20The%20Remittance%20Basis%20of%20Taxation%20for%20Individuals%20under%20the%20Income%20Tax%20Act.pdf

https://europa.eu/youreurope/citizens/residence/residence-rights//index_en.htm#eu-citizen

https://travel.state.gov/content/travel/en/us-visas/tourism-visit/visa-waiver-program.html

https://legislation.mt/eli/ln/2020/437/eng/pdf