The Real Estate Law Review

The Real Estate Law Review

Fourth Edition Editor David Waterfield

Law Business Research

The Real Estate Law Review

The Real Estate Law Review Reproduced with permission from Law Business Research Ltd. This article was first published in The Real Estate Law Review - Edition 4 (published in February 2015 – editor David Waterfield). For further information please email [email protected]

The Real Estate Law Review Fourth Edition Editor

David Waterfield

Law Business Research Ltd

THE LAW REVIEWS THE MERGERS AND ACQUISITIONS REVIEW THE RESTRUCTURING REVIEW THE PRIVATE COMPETITION ENFORCEMENT REVIEW THE DISPUTE RESOLUTION REVIEW THE EMPLOYMENT LAW REVIEW THE PUBLIC COMPETITION ENFORCEMENT REVIEW THE BANKING REGULATION REVIEW THE INTERNATIONAL ARBITRATION REVIEW THE MERGER CONTROL REVIEW THE TECHNOLOGY, MEDIA AND TELECOMMUNICATIONS REVIEW THE INWARD INVESTMENT AND INTERNATIONAL TAXATION REVIEW THE CORPORATE GOVERNANCE REVIEW THE CORPORATE IMMIGRATION REVIEW THE INTERNATIONAL INVESTIGATIONS REVIEW THE PROJECTS AND CONSTRUCTION REVIEW THE INTERNATIONAL CAPITAL MARKETS REVIEW THE REAL ESTATE LAW REVIEW THE PRIVATE EQUITY REVIEW THE ENERGY REGULATION AND MARKETS REVIEW THE INTELLECTUAL PROPERTY REVIEW THE ASSET MANAGEMENT REVIEW

THE PRIVATE WEALTH AND PRIVATE CLIENT REVIEW THE MINING LAW REVIEW THE EXECUTIVE REMUNERATION REVIEW THE ANTI-BRIBERY AND ANTI-CORRUPTION REVIEW THE CARTELS AND LENIENCY REVIEW THE TAX DISPUTES AND LITIGATION REVIEW THE LIFE SCIENCES LAW REVIEW THE INSURANCE AND REINSURANCE LAW REVIEW THE GOVERNMENT PROCUREMENT REVIEW THE DOMINANCE AND MONOPOLIES REVIEW THE AVIATION LAW REVIEW THE FOREIGN INVESTMENT REGULATION REVIEW THE ASSET TRACING AND RECOVERY REVIEW THE INTERNATIONAL INSOLVENCY REVIEW THE OIL AND GAS LAW REVIEW THE FRANCHISE LAW REVIEW THE PRODUCT REGULATION AND LIABILITY REVIEW THE SHIPPING LAW REVIEW THE ACQUISITION AND LEVERAGED FINANCE REVIEW THE PRIVACY, DATA PROTECTION AND CYBERSECURITY LAW REVIEW

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PUBLISHER Gideon Roberton BUSINESS DEVELOPMENT MANAGER Nick Barette SENIOR ACCOUNT MANAGERS Katherine Jablonowska, Thomas Lee ACCOUNT MANAGER Felicity Bown PUBLISHING COORDINATOR Lucy Brewer MARKETING ASSISTANT Dominique Destrée EDITORIAL COORDINATOR Shani Bans HEAD OF PRODUCTION Adam Myers PRODUCTION EDITOR Anne Borthwick SUBEDITOR Janina Godowska MANAGING DIRECTOR Richard Davey Published in the United Kingdom by Law Business Research Ltd, London 87 Lancaster Road, London, W11 1QQ, UK © 2015 Law Business Research Ltd www.TheLawReviews.co.uk No photocopying: copyright licences do not apply. The information provided in this publication is general and may not apply in a specific situation, nor does it necessarily represent the views of authors’ firms or their clients. Legal advice should always be sought before taking any legal action based on the information provided. The publishers accept no responsibility for any acts or omissions contained herein. Although the information provided is accurate as of February 2015, be advised that this is a developing area. Enquiries concerning reproduction should be sent to Law Business Research, at the address above. Enquiries concerning editorial content should be directed to the Publisher – [email protected] ISBN 978-1-909830-39-4 Printed in Great Britain by Encompass Print Solutions, Derbyshire Tel: 0844 2480 112

ACKNOWLEDGEMENTS

The publisher acknowledges and thanks the following law firms for their learned assistance throughout the preparation of this book: AIDAR SBZ ADVOGADOS AL TAMIMI & COMPANY BALCIOĞLU SELÇUK AKMAN KEKİ BONELLI EREDE PAPPALARDO BUN & ASSOCIATES CAREY OLSEN DE BRAUW BLACKSTONE WESTBROEK NV DELOITTE ADVOKATFIRMA AS DENTONS DE PARDIEU BROCAS MAFFEI DRYLLERAKIS & ASSOCIATES G ELIAS & CO HENGELER MUELLER HERBERT SMITH FREEHILLS LLP KROGERUS ATTORNEYS LTD LEE AND LI, ATTORNEYS-AT-LAW LEKS & CO

i

Acknowledgements

LENZ & STAEHELIN LIEDEKERKE WOLTERS WAELBROECK KIRKPATRICK LOYENS & LOEFF LUXEMBOURG SÀRL, AVOCATS À LA COUR MAPLES AND CALDER MASON HAYES & CURRAN NISHIMURA & ASAHI PAPADOPOULOS, LYCOURGOS & CO LLC PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP SHIN & KIM SLAUGHTER AND MAY SOŁTYSIŃSKI KAWECKI & SZLĘZAK TSMP LAW CORPORATION URÍA MENÉNDEZ VIDAN LAW OFFICE VIEIRA DE ALMEIDA & ASSOCIADOS, RL WOLF THEISS ATTORNEYS AT LAW ZÁRECKÝ ZEMAN ĎURIŠOVÁ

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CONTENTS

Editor’s Preface

��������������������������������������������������������������������������������������������������vii David Waterfield

Chapter 1

AUSTRIA���������������������������������������������������������������������������������� 1 Peter Oberlechner

Chapter 2

BELGIUM������������������������������������������������������������������������������� 13 Yves Delacroix

Chapter 3

BRAZIL����������������������������������������������������������������������������������� 29 Marcelo José Lomba Valença and Tamiris Micheletti Britzki

Chapter 4

CAMBODIA���������������������������������������������������������������������������� 40 Sophealeak Ing

Chapter 5

CAYMAN ISLANDS��������������������������������������������������������������� 52 George Loutas

Chapter 6

CHINA������������������������������������������������������������������������������������ 61 Alex Wang and Edward Hsu

Chapter 7

CROATIA�������������������������������������������������������������������������������� 74 Hrvoje Vidan

Chapter 8

CYPRUS���������������������������������������������������������������������������������� 88 Nicolas Th Papaconstantinou

Chapter 9

ENGLAND & WALES������������������������������������������������������������ 99 David Waterfield

Chapter 10

FINLAND����������������������������������������������������������������������������� 112 Samuli Palin and Leif Laitinen

iii

Contents

Chapter 11

FRANCE�������������������������������������������������������������������������������� 123 Pierre Gebarowski and Guillaume Rossignol

Chapter 12

GERMANY���������������������������������������������������������������������������� 138 Ingo Klöcker

Chapter 13

GREECE�������������������������������������������������������������������������������� 149 Paraskevi A Anargyrou and Stella G Yannika

Chapter 14

INDONESIA������������������������������������������������������������������������� 160 Eddy Marek Leks

Chapter 15

IRELAND������������������������������������������������������������������������������ 172 Kevin Hoy

Chapter 16

ITALY������������������������������������������������������������������������������������� 181 Alessandro Balp

Chapter 17

JAPAN������������������������������������������������������������������������������������ 192 Norio Maeda, Tomohiro Kandori, Naoko Katakami, Toshiyuki Yamamoto and Kozo Kuromatsu

Chapter 18

JERSEY���������������������������������������������������������������������������������� 204 Christopher Philpott and Will Whitehead

Chapter 19

KOREA���������������������������������������������������������������������������������� 216 Kyung Don Lee, Robert C Young and Eun Nyung Lee

Chapter 20

LUXEMBOURG������������������������������������������������������������������� 233 Véronique Hoffeld and Marc Meyers

Chapter 21

NETHERLANDS������������������������������������������������������������������ 242 Annemieke Wessels, Maarten Tinnemans and Max van Drunen

Chapter 22

NIGERIA������������������������������������������������������������������������������� 254 Gbolahan Elias and Lynda Chinweokwu

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Contents

Chapter 23

NORWAY������������������������������������������������������������������������������ 261 Thorvald Nyquist

Chapter 24

POLAND������������������������������������������������������������������������������� 270 Janusz Siekański and Agnieszka Piskorska

Chapter 25

PORTUGAL�������������������������������������������������������������������������� 280 Pedro Ferreirinha

Chapter 26

QATAR���������������������������������������������������������������������������������� 292 Frank Lucente and Seem Maleh

Chapter 27

RUSSIA���������������������������������������������������������������������������������� 305 Sergey Kolobov

Chapter 28

SINGAPORE������������������������������������������������������������������������� 316 Jennifer Chia, Cheryl Soh and Priscilla Lim

Chapter 29

SLOVAKIA���������������������������������������������������������������������������� 332 Tomáš Zárecký

Chapter 30

SPAIN������������������������������������������������������������������������������������ 346 Diego Armero and Rodrigo Peruyero

Chapter 31

SWITZERLAND������������������������������������������������������������������� 359 Cécile Berger Meyer and Andreas Rötheli

Chapter 32

TAIWAN�������������������������������������������������������������������������������� 372 Yi-Jiun Su and Yi-Li Kuo

Chapter 33

TURKEY�������������������������������������������������������������������������������� 383 Barlas Balcıoğlu and Ali Can Gören

Chapter 34

UNITED ARAB EMIRATES������������������������������������������������ 394 Ibrahim Elsadig and Joe Carroll

v

Contents

Chapter 35

UNITED STATES���������������������������������������������������������������� 406 Meredith J Kane

Appendix 1

ABOUT THE AUTHORS���������������������������������������������������� 421

Appendix 2

CONTRIBUTING LAW FIRMS’ CONTACT DETAILS��� 437

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EDITOR’S PREFACE

The fourth edition of The Real Estate Law Review is testament to the book’s success and the significance of real estate as a global asset class. A great deal has happened since the first edition appeared in 2012, and this fourth edition coincides with renewed confidence in the real estate market. The real estate market is often described as cyclical, and there is no doubt that we are now seeing positive investor sentiment in a market enjoying upward momentum. The fourth edition of The Real Estate Law Review features 35 jurisdictions, and we are delighted to welcome a number of new notable practitioners who have helped bolster the strength and depth of this invaluable publication. Each chapter of The Real Estate Law Review has been updated to focus on key developments in that jurisdiction and their impact on the relevant domestic and wider global real estate market. The Real Estate Law Review offers real estate practitioners and their clients an immediate and accessible summary of the position in the many countries covered, as well as the global real estate market as a whole. The globalisation of the real estate market continues apace, and it is fundamentally important to develop an understanding of the legal and commercial opportunities and challenges pertinent to each country, and how each local market forms an integral part of the global picture. This fourth edition seeks to provide an overview of the state of the global real estate investment market. Although there is without question significantly more good news around, the financial and economic turmoil of recent years serves as a reminder of how fragile markets can be, and a number of obstacles remain on what may prove to be a bumpy road to global recovery. Sustainable growth across the eurozone remains illusory, Japan continues to flirt with recession, the fear of a hard landing in China and other developing economies remains, there is continuing instability in Ukraine and the Middle East, and the Ebola outbreak in West Africa is a global concern.

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Editor’s Preface Once again, I wish to express my deep and sincere thanks to all my distinguished colleagues who have contributed to this edition and the success of The Real Estate Law Review. I would also like to thank Gideon Roberton and his publishing team for their tireless work in coordinating the contributions and compiling this fourth edition. David Waterfield Slaughter and May London February 2015

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Chapter 20

LUXEMBOURG Véronique Hoffeld and Marc Meyers1

I

INTRODUCTION TO THE LEGAL FRAMEWORK

i

Ownership of real estate

In Luxembourg, other types of ownership exist in addition to full ownership: usufruct and bare ownership. Usufruct is the right to use a property vested in another person (the bare owner). The usufructuary may use and take the benefits deriving from the property as long as the property’s substance is not impaired. Bare ownership gives the owner the right to dispose of the property but not the right to use or benefit from it. Generally, the bare owner only recovers full ownership of the property on the death of the usufructuary. Two other rights are of interest to investors, namely the surface right and the emphyteusis or long-term lease. The surface right gives the tenant the right to construct and own buildings on the land it has rented. On termination of the lease, the owners of the land repay the tenant the market value of the buildings it has constructed. The emphyteusis is a long-term lease for between 27 and 99 years giving the tenant a right in rem, and a right to make full use of the property, which may be freely assigned to third parties. Its main characteristic is that in exchange for a very moderate rental payment, the lessor becomes the full owner on termination of the lease of all the improvements and constructions made by the tenant. Finally, easement is the right to use real property belonging to another person without owning it. ii

System of registration

According to Article 1583 of the Civil Code, a sale is complete between the parties and ownership is acquired as soon as the property and the price are agreed, even if the

1

Véronique Hoffeld and Marc Meyers are partners in Loyens & Loeff Luxembourg Sàrl, Avocats à la Cour.

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Luxembourg property has not yet been delivered or the price paid. The parties, however, may delay the date of transfer of ownership. Concerning enforceability against third parties, the Law of 25 September 1905 (as amended) on the transcription of real rights for the sale of immoveable property provides that the sale must be authenticated by notarial deed and recorded at the Mortgage Registry. The notary conducts a full search at the property registry and notifies the tax authorities of the property transfer to obtain tax clearance. The signed transfer deed is then registered with the Luxembourg Land Registration and Estates Department, which sends the deed to the Land Registry so that the new owner is duly registered. iii

Choice of law

Article 3 of the Civil Code provides that Luxembourg law is applicable to real estate situated in Luxembourg. The lex rei sitae principle, whereby real estate is governed by the law of the country where it is situated, also applies to the prerogatives attached to the rightholder, the power of disposal and use, rights concerning shared ownership schemes, the compensation obligation between the bare owner and the usufructuary, and all ways of acquiring real estate (e.g., acquisitive prescription) and contracts involving a right in rem. II

OVERVIEW OF REAL ESTATE ACTIVITY

As a result of Luxembourg’s strategic position at the heart of Europe and flexible legal and fiscal environment, it has become very attractive for foreign investment. The investment market in 2014 was characterised by encouraging results, in particular due to the increase of the office real estate market.2 Indeed, the Luxembourg office market continued its growth and remained highly dynamic in the Q3 of 2014 as it passed the 3.5 million square metre symbolic mark. The prime yield for the best buildings is confirmed at 5.5 per cent. The most important investment criteria are location, the lease term (a minimum of six years is preferred), the quality of tenants and the energy efficiency of buildings. The Inowai Luxembourg office market report for Q3 2013 shows that the investment volume in this period was encouraging, with a volume of €181 million. The investment volume of transactions for the first three quarters of 2014 reached €572 million. This suggests that the year’s final figure should exceed that of 2013, which was already a record year since the 2008 crisis. The investment market was again boosted by large-scale transactions, and in particular by massive demand by the European Commission. As regards nationality, German investors dominated the market with 48 per cent of the total volume of transactions, followed by Belgian investors with 38 per cent and Italian investors with 8 per cent. Local investors contributed only to 6 per cent of the transactions, which is the lowest contribution since 2007 (5 per cent).3 Concerning the vacancy rate, according to the Jones Lang LaSalle Luxembourg office market report for

2 3

Investment market figures are based on the Inowai Q3 2014 office market report and the Jones Lang LaSalle Luxembourg office market for Q3 2014. Jones Lang LaSalle Luxembourg office market report for Q3 2014.

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Luxembourg Q3 2014, the vacancy rate declined further to 4.1 per cent compared with 4.6 per cent in Q2, and by the end of the year it may dip to 3 per cent or below. Luxembourg is the leading fund centre in Europe (and the second-largest worldwide),4 and has become a leading centre for the use of regulated and unregulated Luxembourg investment vehicles for structuring investments in real estate property located outside the country (see Section IV, infra). III

FOREIGN INVESTMENT

Except for applicable obligations resulting from Luxembourg anti-money laundering rules, there are no restrictions on investments in Luxembourg real estate by foreign investors or foreign-registered or foreign-controlled entities. Foreign nationals have the same rights as nationals regarding the sale, purchase, lease or holding of real estate on Luxembourg territory. IV

STRUCTURING THE INVESTMENT

Luxembourg offers a broad range of unregulated and regulated investment vehicles (authorised and supervised by the Luxembourg Financial Sector Supervisory Commission (CSSF)), which cater for all investor needs. i

Unregulated structures

The most popular Luxembourg unregulated investment vehicle is the SOPARFI, which is an ordinary commercial company whose purposes are holding and financial activities. The SOPARFI is often used for cross-border investments in real estate (located outside Luxembourg). SOPARFIs that invest directly or indirectly in real estate are subject to corporate income tax and municipal business tax on their worldwide profit at a current aggregate rate of 29.22 per cent (for companies located in Luxembourg City) and a net worth tax of 0.5 per cent on their net asset value at 1 January. An annual minimum corporate income tax of €3,210 is in principle due from the SOPARFI. Dividends and gains from shareholdings in real estate companies are generally exempt under the Luxembourg participation exemption regime. Under the double tax treaties Luxembourg has concluded, SOPARFIs may also benefit from tax exemptions on income and capital gains deriving from foreign directly held real estate. If such exemption does not apply, expenses associated with the foreign real estate are deductible. A SOPARFI, which is not subject to any risk diversification requirement and is available to any type of investor, sophisticated or otherwise, may be formed as one of the following: a a public limited liability company (SA); b a private limited liability company (SARL); c a partnership limited by shares (SCA);

4

Based on assets under management.

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Luxembourg d e f

a cooperative company in the form of a public limited liability company (Coop-SA); a common limited partnership (SCS); or a special limited partnership (SCSp).

ii

Regulated structures

Investors may establish a regulated real estate investment vehicle as an undertaking for collective investment (UCI), a specialised investment fund (SIF) or an investment company in risk capital (SICAR). UCIs set up under Part 2 of the Law of 17 December 2010 on Undertakings for Collective Investment, with the aim of investing in real estate in accordance with the risk diversification principle (CSSF Circular 9 1/75), have proved very popular. They may take the legal form of a SICAV, a SICAF or an FCP, and all types of investors are eligible. Real estate UCIs are characterised by their tax neutrality, as they are exempt from corporate income tax and net worth tax. In addition, distributions made by UCIs are generally not subject to Luxembourg taxation, although they are subject to an annual subscription tax of 0.05 per cent. The SIF, based on the Law of 13 February 2007 (as amended) on Specialised Investment Funds, is a lightly regulated, operationally flexible and tax-efficient investment fund structure, which has rapidly become the vehicle of choice for international investors. A SIF may be created as an FCP, a SICAV or a SICAF. While SIFs may cater for investments in almost any asset class, including real estate, they have to abide by a 30 per cent safe-harbour diversification requirement. SIFs are only subject to an annual subscription tax of 0.01 per cent on their net asset value, but may benefit from certain exemptions. While UCIs and SIFs with a corporate form may benefit from certain double taxation treaties concluded by Luxembourg, UCIs formed as FCPs generally may not. The SICAR, created by the Law of 15 June 2004 (as amended), is a vehicle specifically dedicated to private equity and venture capital investments, whether diversified or not. Although SICARs may not invest directly in real estate, they may nevertheless do so indirectly by investing through other entities. The SICAR, which like the SIF is reserved for qualified well-informed investors, may only invest in real estate qualifying as risk capital. In general, SICARs are tax-neutral. A SICAR formed as an SCS or SCSp is tax-transparent and not subject to corporate income tax, municipal tax or net wealth tax. SICARs with a corporate form (e.g., SA, SARL or SCA) are non-transparent vehicles subject to corporate income tax and municipal business tax; however, a SICAR will benefit from tax exemptions for income and capital gains realised on transferable securities, and for the return on cash held for up to 12 months pending investment in risk capital. Non-transparent SICARs are exempt from net wealth tax. V

REAL ESTATE OWNERSHIP

i Planning Local and national planning control measures limit the owner’s right to use and dispose of its land. The legal basis for planning control in Luxembourg is the Law of 19 July 2004

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Luxembourg (as amended) concerning city planning. Article 7 of the Law provides that every locality must have an urban development plan, on the basis of which the mayor grants licences to build and fixes the requirements that must be met. The Kirchberg district of Luxembourg City, where a number of financial establishments and European institutions including the European Courts of Justice are located, is subject to specific rules that implement a global urbanisation concept applied by the Kirchberg Urbanisation and Development Fund. Due to their size or nature, some real estate projects also require a commodo-incommodo authorisation issued by the Ministers for the Environment, and for Work and Employment. Other authorisations may also be required, depending on the specifics of the project. ii Environment In Luxembourg, liability for contaminated land is governed by the Law of 20 April 2009 (as amended). It is based on the polluter-pays principle. The person responsible for contamination normally must bear all costs related to the decontamination, even if that person is no longer the owner or the occupier of the land. If the person responsible for the contamination cannot be identified, or is insolvent and has no insurance coverage, the public authorities will ultimately cover the costs of the decontamination. In the case of land contamination, the polluter must immediately notify the competent minister and authorities and take the necessary preventive measures. If it fails to do so, the authorities may take the corrective measures they consider appropriate. The parties may agree contractually on who will bear the cleanup costs. Survival provisions in relation to long-time environmental liability are frequent. In the case of wilful misrepresentation regarding the pollution of the property, the purchaser may take legal action to request the cancellation of the contract or to claim compensation, or both. Criminal penalties may apply to both individuals and companies for the violation of environmental legislation. iii Tax Municipalities in Luxembourg impose a land tax at a rate of 0.7 to 1 per cent on the unitary value of real estate, determined by reference to the value of a similar building in 1941. As a result, the land tax is very low. It is then multiplied by coefficients fixed by each municipality and varying according to the type of real estate. Stamp duties are also levied at various rates on the registration of notarial deeds. In addition to notarial fees, the buyer will pay a total of 6 per cent of the property’s market value in registration fees (transfer tax), and 1 per cent of its market value in transcription duty (transcription tax). For real estate located in Luxembourg City, an additional charge of 3 per cent is imposed; exemptions are available, however. VAT is also applicable (under certain conditions, a rate of 3 per cent may be applied) on the sale of future constructions. Under certain conditions, it is also possible to opt for VAT on the sale of constructed properties, in which case VAT will be borne in addition to the transfer tax. iv

Finance and security

In Luxembourg, the main methods by which a lender seeks protection from default by a borrower are mortgages and pledges (if the real property is bought by means of an

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Luxembourg investment vehicle). The lender generally asks for a first-ranking mortgage on any type of specific property and leasehold property. The lender will also generally require, if available, a pledge over shares, a pledge over receivables from tenants, insurance proceeds and a bank account pledge. To secure the lender’s ranking, however, an entry must be made in the mortgage register. Unlike certain other jurisdictions, Luxembourg law does not provide for floating charges. VI

LEASES OF BUSINESS PREMISES

Unlike residential leases, commercial and office leases are only regulated by some general provisions in the Civil Code, which means that the parties are generally free to agree on the terms of the lease. Rents for commercial and office leases are usually linked to and increased according to the consumer price index as published by the STATEC, the Luxembourg statistical institute. The term of a commercial lease is freely negotiable between the parties; however, commercial leases are usually entered into for a term of three, six or nine years. If the lease does not specify a term, reference is made to local practice, which in Luxembourg is established by case law as three years. Commercial tenants may be entitled to a preferential lease renewal right for up to 15 years, on condition that they have been conducting their business in the premises for at least three years. Tenants of premises in which they conduct their business have a preferential right to request a new commercial lease for a fixed term before the contract expires. Lessors opposed to a renewal may raise one of the five objections exhaustively listed in the Civil Code: they can prevent the renewal if they can prove a real and truthful higher offer or legitimate grievances (left to the court’s discretion), if they (or their relations) wish to occupy the premises themselves, if they wish to stop leasing them for a similar or analogous type of commerce, or in the case of construction or transformation. The securities payable for commercial leases are more substantial than those for residential leases. A deposit of three to six months’ rent is usually required. A deposit of three to six months’ rent will generally be required for offices, and a deposit of six months’ rent for commercial business premises such as shops. There is no legal provision laying down a maximum deposit. Additional security such as a personal guarantee may also be required. In this case, a third party, commonly the manager of a limited liability company, will take over the tenant’s debt if the tenant is unable to pay the rent. This security is rarely used, as lessors do not consider it very effective. Guarantees on first request, generally given by a Luxembourg-based bank, are usually adjudged as better security. The advantage of a guarantee on first request is that the lessor may at any time ask the bank that issued the guarantee to pay the debt. Certain court rulings have allowed banks to refuse payment when a request was considered to be clearly abusive, but those rulings were given under special circumstances and remain uncommon. Office leases are usually concluded for nine years; however, the trend has recently been to renegotiate the lease when it is due to expire within the next two years, extend the period and reduce rental instalments. The new types of contract are in the tenant’s favour (they involve free rental periods and offer fitting-out or refurbishing), and a term of three, six or nine years is now the usual practice.

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Luxembourg VII

DEVELOPMENTS IN PRACTICE

i

Lessor-friendly legislation for office leases

Although rents initially agreed between landlords and tenants for residential leases in Luxembourg may be challenged by a tenant and potentially mandatorily decreased down to 5 per cent on invested capital (see Section VII.i, infra), for leases on business premises (i.e., commercial and professional leases) the parties, particularly the landlord, are free to set the price and conditions. In Luxembourg, the parties generally conclude triple-net leases, which are very beneficial for the landlord as the tenant pays not only the rent, but also all taxes, insurance and maintenance expenses arising from the use of the property. Rental income is generally exempt from VAT. If, however, the landlord and the tenant are subject to VAT, they may opt for VAT by filing a request with the relevant tax authorities. Financial sector professionals are generally not allowed to recover VAT in full and therefore do not use the VAT option. In such cases, it is common for landlords to increase the rent by 15 per cent, which is the current VAT rate in Luxembourg (the VAT rate increased by 2 per cent, and thus rose to 17 per cent, as of 1 January 2015; however, landlords of residential leases are limited to a maximum 5 per cent return on the capital invested in the building, and the rental guarantee may not exceed three months’ rent. These limitations do not apply to luxury dwellings having a modern standard of living, although the law’s definition of modern standard of living is vague. ii

Extension of pre-emption rights under a pacte logement

The most recent and significant real estate law (the Law of 22 October 2008 that relates to a pacte logement, or housing agreement) aims to stabilise property prices by implementing a number of measures to encourage municipalities to increase the land and housing supply. Among the Law’s most relevant aspects are the pre-emption rights granted to long-term lease tenants. The pacte logement may in certain circumstances provide a pre-emption right in favour of municipalities, the Housing Development Fund or the state. Municipalities benefit from a pre-emption right for certain zones, namely development zones, zones scheduled for restructuring, holding zones, land reserve zones and zones adjacent to agglomerations. The Housing Development Fund benefits from a pre-emption right for holding zones, land reserve zones and zones adjacent to agglomerations. Finally, the state benefits from a pre-emption right for land necessary to achieve the lodging management plan. If the owner decides to sell the property, the pre-emption right offers these entities a right of pre-emption. It must not be confused with an expropriation, as the owner must at some point have expressed its desire to sell; however, if the holder of the pre-emption right waives its right, the owner may then freely sell the property to someone else. If the pre-emption rights are breached, the sale of the real estate may be declared null and void, and a court may rule that the holder of the pre-emption right is the legal owner of the property for the same price and conditions as provided for in the annulled purchase agreement. Legal action must be brought within two years from the registration of the purchase agreement.

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Luxembourg The pacte logement also strengthens the surface right, and its holder now benefits from more prerogatives. It also extends the benefit of the registration tax credit to registration fees owed upon the constitution or disposal of a surface right or an emphyteusis. iii

Energy certification for functional buildings

A building is said to be functional if less than 90 per cent of its area is intended for housing. Shopping centres, supermarkets, shops, offices, restaurants, banks, universities and airports are classified as functional buildings. The Grand-Ducal Regulation of 31 August 2010 (as amended) concerning the functional performance of buildings lays down the methods for calculating a functional building’s energy performance, the minimum requirements and the certification of its energy performance (Energiepass).5 Since 1 January 2011, an assessment of the energy performance (complying with the provisions of the Regulation) and the Energiepass are mandatory for any request for authorisation to build a new functional building or extend or modify an existing one. In specific cases (classified buildings, buildings of public interest, etc.), an exemption from the listed energy performance requirements may be obtained following a fully documented request. Additionally, according to the Grand-Ducal Regulation of 31 August 2010 (as amended), all new functional buildings built as of 1 January 2019 shall have a nearly zero energy consumption. iv

Impact of International Financial Reporting Standard (IFRS) on the accounting of lease payments

Lease accounting (international accounting standard (IAS) 17) is traditionally based on the distinction between an operating lease and a financial lease. The distinction is based on the analysis of the transfer of risks and rewards linked to the ownership of the asset as substantially agreed by the parties. The lessee in a financial lease is considered as the economic owner of the asset and will therefore book the asset on the asset side of its balance sheet. A financial lease is analysed according to the criteria for the transfer of risks and advantages, and the lessee is considered as the economic owner if the economic property is transferred to him or her. With a view to enhancing transparency about a company’s leasing activities, the International Accounting Standards Board and the US Financial Accounting Standards Board are working on a project to establish new accounting standards that would affect the accounting treatment of leases. The objective of the project is to develop new common lease standards that establish the principle that lessees and lessors should report useful information to investors and analysts about the amount, timing and uncertainty of cash flows arising from a lease. To meet that objective, a lessee should understand the assets and liabilities arising from a lease.

5

Under Directive 2002/91/EC, similar provisions have applied since 1 January 2008 to residential buildings.

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Luxembourg v

Taxation of speculative gains on real estate owned by individuals

When real estate is sold within two years of its acquisition, the capital gains realised are regarded as speculative and therefore taxed as ordinary income at the corresponding progressive rates. The capital gain basis to which the progressive rate is applied is the difference between the selling price and the acquisition price, increased by incidental costs. In this case, the deductible acquisition price will also be adjusted to inflation, thus further narrowing the taxable base. If the real estate is kept for at least 10 years, an additional €50,000 will be deducted for non-speculative capital gains. This amount is doubled when the property is owned by a married couple filing jointly. It is therefore advisable to hold a property for at least two years, as the tax rates on its sale drop to half the ordinary tax rate once this period has elapsed. vi

House prices increase

According to the Institute of Statistics and Economic Studies and the Real Estate Observatory analysis of the market, sale prices have increased for houses and apartments in Luxembourg. In particular, as regards the price for the apartments, an increase of 3.8 per cent was observed between Q2 2013 and Q2 2014.6 VIII OUTLOOK AND CONCLUSIONS The real estate market in Luxembourg is benefiting from improved economic prospects and forecasts. Indeed, the economic recovery that began in 2013 has been emphasised by the Institute of Statistics and Economic Studies, which has forecast growth of 3 per cent for the entirety of 2014.

6

STATEC, Observatoire de l’Habitat No. 1 October 2014.

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Appendix 1

ABOUT THE AUTHORS

VÉRONIQUE HOFFELD Loyens & Loeff Luxembourg Sàrl, Avocats à la Cour Véronique Hoffeld, partner, heads the commercial and litigation department of the Luxembourg office of Loyens & Loeff. Her activities cover commercial law (negotiation of contracts), litigation and arbitration, real estate law and environment law. She advises on all aspects of real estate law, including transactional work. She conducts due diligence investigations in the real estate sector and negotiates real estate contracts. She also has significant experience in handling real estate litigation for both claimants and defendants. Prior to joining Loyens & Loeff, she worked for more than 10 years in another major Luxembourg law firm, where she was made partner in 2003. Ms Hoffeld is a member of the Luxembourg Bar. MARC MEYERS Loyens & Loeff Luxembourg Sàrl, Avocats à la Cour Marc Meyers, partner, heads the Luxembourg investment management practice. He has significant experience in structuring and transactional work concerning Luxembourg alternative fund structures such as SICARs and SIFs, with a particular focus on private equity and property funds. He specialises in all regulatory work involving fund and asset managers as well as other financial sector professionals. In addition, Mr Meyers has extensive experience in handling matters involving multidisciplinary areas, including corporate, banking and capital markets matters. Before joining Loyens & Loeff, he established and headed the Luxembourg legal practice of another Benelux law firm. He worked for several years in the Luxembourg office of a leading international law firm, as well as in the New York and London offices of the US firm Cravath, Swaine & Moore LLP.

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About the Authors He is a regular speaker at international seminars and an active member of several working groups within the Association of the Luxembourg Fund Industry and the Luxembourg Private Equity and Venture Capital Association. Mr Meyers is a member of the Luxembourg and New York Bars.

LOYENS & LOEFF LUXEMBOURG SÀRL, AVOCATS À LA COUR 18-20 rue Edward Steichen 2540 Luxembourg Tel: +352 46 62 30 Fax: +352 46 62 34 [email protected] [email protected] www.loyensloeff.lu

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