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Eversheds Global Estate Management

Luxembourg

Real Estate Guide

Principles of ownership

Principles of ownership

Freehold/Ownership - freehold is the most common type of real estate ownership. The ownership right (‘droit de propriété’) is a fundamental constitutional right in Luxembourg, which is defined under article 544 of the Civil Code as the right to enjoy and dispose of assets in the most absolute way, provided that no use is made thereof which is prohibited by laws and regulations. Also that no trouble beyond the normal neighbourhood annoyances that break the balance between equal rights. As a principle, no one may be forced to transfer its ownership right except for public utility and subject to a fair and prior compensation.

Common hold/Usufruct - pursuant to article 578 of the Civil Code, usufruct is the right for the usufructuary to enjoy a property which belongs to another (the bare-owner) like the owner itself, with the obligation for the usufructuary to preserve the substance of the property. Usufruct can be legal or contractual, and has to be registered in the mortgage register. The usufructuary has the right to enjoy the property, to lease to a third party, and to sell or give its right for free. The usufructuary has to perform only maintenance repairs, whereas the bare-owner remains in charge of the major repairs unless they arise from a lack of maintenance repairs. Usufruct ceases in case of death of the usufructuary, expiry of the period for which usufructuary was granted, abuse of the usufructuary, namely degradations or lack of maintenance jeopardizing the preservation of the property, loss of the subject of the usufruct, the usufructuary and the bare-owner being the same person, or not using the usufruct for a thirty-year period. Usufruct granted to a corporate body is limited to thirty years.

Condominium ownership - condominium ownership governs any built up real estate, the ownership of which is divided between several co-owners in lots, each lot consisting of a private unit for the exclusive use of the co-owner, and a portion of the common area for the use of all or some of the co-owners. Each co-owner has the right to dispose of his lot and encumber it with rights even prior to any planning or building. He has the right to freely use and enjoy his private unit and the common units under the condition that the rights of the other co-owners and the purpose of the real estate are not affected. The purpose of the private and common units, the conditions of use, the administration of the common units and the portion of charges for each lot are governed by condominium rules (“règlement de copropriété”) All co-owners must be in a condominium corporation (“syndicat”), represented by a “syndic” who is appointed by the general meeting of the co-owners for a maximum period of three years. The syndic is the condominium corporation's legal representative and has legal personality. The condominium corporation is in charge of the preservation of the real estate and administration of the common units. It is also in charge of establishing or modifying the condominium rules. The condominium corporation is liable to co-owners and third parties for all damage caused by structural defects or lack of maintenance of the common units. All decisions of the condominium corporation are made during a general meeting of the co-owners.

Joint/Co-ownership - unlike condominium ownership, joint ownership consists of a real estate where full ownership is divided between several joint owners. Joint ownership can arise from a succession, a donation, a joint ownership agreement, or dissolution of a company or conjugal community. Each joint owner can take any measure to preserve the real estate without requesting consent from the other joint owners, but for any administration or disposal decision, the consent of all joint owners is required under the Civil Code. Each joint owner can use and enjoy the undivided real estate in accordance with its purpose, and respecting the right of the other joint owners. The joint owner who privately uses and enjoys the undivided real estate is liable to pay to the other owners compensation, unless otherwise agreed. The joint owner who intends to sell his rights in the undivided real estate to a third party must notify the other joint owners of the price and conditions of the sale as well as the name, address and profession of the third party who intends to buy, as the latter have a right of first refusal. Finally, article 815 of the Civil Code sets forth the basic principle that no one may be forced to remain a joint owner and can always request the division. Where a material division of the real estate is not possible, the undivided real estate must be sold, each joint owner receiving their portion of the sale price.

Registration - all land parcels and buildings in Luxembourg are registered in the Land Register kept by the Administration of the Land Register and Topography, which is publicly accessible. The Land Register contains information on the identity of current and past owners, and a description of the real estate. The “Bureau des Hypothèques” (part of the “Administration de l’Enregistrement et des Domaines”) keeps the mortgage register, also publicly accessible, which contains for each real estate the date and price of acquisition, all easements and encumbrances and, registered mortgages and long-term leases.

 

Restrictions on foreign ownership

Restrictions on foreign ownership

There are no restrictions on foreign ownership. Foreign companies and individuals can hold real estate directly or indirectly in Luxembourg.

 

Title to real estate

Title to real estate

Investigation of title - not applicable

Transfer of title - see under “Registration”.

Registration - registration gives a date to the contract and the contract becomes enforceable against third parties. Pursuant to the provisions of the Fiscal Code, registration of a commercial lease is mandatory. The lease contract must be registered, either by the landlord or the tenant, as agreed in the contract. The registration duty is 0.6% on the taxable amount which is the aggregate amount of the rental fees cover the term of the lease. Commercial leases are normally not subject to VAT. However, the landlord has the possibility to opt for the application of VAT (see under “Value added tax”). In that case, the registration duty amounts to €12.The transfer of real estate located in Luxembourg must be recorded in a notarial deed and registered. The notary public undertakes the administrative proceedings to register the notarial deed. The registration duty, owed by the buyer, is 6% plus a 1% transcription tax and a municipal surcharge of 50% on the value of the registration duties when the real estate is situated in the territory of Luxembourg City. The taxable amount is the value of the real estate, including VAT if applicable. Finally, all easements, encumbrances, mortgages must be registered, as well as long-term leases and usufruct.

Information on register

- not applicable

Commercial leases - commercial leases are governed by the provisions of the Civil Code relating to general contract law, and some other specific provisions of the Civil Code. Pursuant to article 1762-3 of the Civil Code, a commercial lease is a lease relating to premises for business or industrial use.

 

Structure of a real estate transaction

Structure of a real estate transaction

Negotiation of terms/Agreement - during the negotiations, due diligence is often performed by the potential buyer and involves, searching in the public register, reviewing leases and encumbrances, assessing the technical condition of the premises, the premises conformity to security legislation and their fitness for purpose. Due diligence also includes assessing building, construction and environmental concerns, especially pollution, through tests carried out by specialised firms, assessing the urban planning situation and potential difficulties in obtaining building permits. Professional engineering firms are now commonly used for building and construction checks and for environmental aspects of the due diligence.

Heads of terms – not applicable.

Investigation of title - not applicable.

Purchase deed - See under “Completion / Closing” and “Contracts”.

Contracts - aside from the final notarial deed, a preliminary contract, called “compromis de vente” is often entered into by the parties and must be registered as well. This preliminary contract states the conditions that apply to the sale, and usually includes a time limit for the signing of the sale contract before the public notary. This time limit allows the buyer to request and obtain financing, and allows the public notary to verify the mortgage register relating to the real estate that is the subject of the sale. The preliminary contract is final and binding between the parties. In case of unjustified refusal by one party to sign the notarial deed, the other party can seek damages. However, preliminary contracts usually include a penalty clause which provides for a fixed compensation amounting to 10% of the purchase price.

Completion/closing - to be enforceable between the parties, a real estate transaction must contain an itemised description of the real estate, the sale price, the date, and the parties’ original signatures (any amendments to the contract must be initialled by all parties). The contract must be signed before a public notary and becomes enforceable against third parties once registered as described under the paragraph “Registration”.

Post completion - all transfers of immovable property in Luxembourg are subject to a registration duty as described under “Registration”. Notarial fees, to be paid by the buyer, range from 4 to 0.05% of the sale price, depending on the sale price. The seller can find a buyer and negotiate the terms of the purchase agreement through a real estate agent of its choice. The duties of the real estate agent and the rate of its commission to be paid by the seller are agreed between the parties and stated in a contract. Since the regulation stating the maximum rate allowed for the commission of the real estate agent has been abolished, the commission is freely decided by the real estate agent.

Leases - not applicable.

Transfer of ownership of leased property (alienation) - In the event of transfer of ownership of the premises, it is forbidden by law for the new owner of the premises to evict the tenant, unless otherwise provided for in the lease contract and subject to compensation.

Language requirement – not applicable.

Governance of lease signature/administration – not applicable.

 

Usual commercial lease terms

Usual commercial lease terms

Summary of available lease types - commercial leases are used in Luxembourg for industrial and commercial premises.

Alterations/modifications - generally not permitted, except with the landlord’s consent. This is usually set out in the lease. Assignment and sub/under letting - pursuant to article 1717 of the Civil Code, it is permitted for the tenant to assign or sublet its lease totally or partially to a third party, unless forbidden by a clause of the lease.

Destruction/reinstatement - see under “Alterations”.

Duration of lease - there is no legal provision as to a compulsory commercial lease term. The most typical lease term in Luxembourg is 3 years. Under the so called “3-6-9” lease term entered into for 9 years, each party can terminate the lease every three years with prior notice.

Forfeiture/irritancy - not available.

Insurance - insurance for the building is usually taken out by the landlord, while the contents are insured by the tenant against fire and personal liability.

Rent deposit/bank guarantee - the parties may agree, in the contract, to a certain rent deposit (or bank guarantee) to guarantee payment of the rent, accommodation charges or possible deterioration of the Premises. In residential tenancies, this rental guarantee cannot exceed three months of rent. In commercial leases, it is freely negotiable but is usually fixed by the parties at a sum equal to six months’ rent.

Rent review - the rent can be increased according to an automatic indexation system following market practice, which is linked to the ‘Indice des prix à la consommation’ issued by Statec, a government agency.

Repair/decoration/furnishing - by law, maintenance repairs are borne by the tenant and major repairs by the landlord. The tenant pays for minor repairs, known as tenantable repairs (‘réparations locatives’) (under Article 1754 of the Civil Code) unless they arise as a result of dilapidation or “force majeure”. It is not possible to give an exhaustive list of what the term ‘tenantable repairs’ covers as this is not defined by law. Tenants are, of course, personally held liable for repairs resulting from their own wrongful acts or behaviour.

Service Charges - not applicable

Tenant’s duties - the tenant must pay rent on each due date as stated in the lease contract, enjoy the premises in a reasonable manner (“en bon père de famille”), and comply with the house rules (“règlement intérieur”).

Termination/break clauses - termination by mutual consent is valid for fixed-term and open-ended lease contracts. In a written fixed-term contract without any tacit renewal clause, the contract is automatically terminated at the end of its term. The parties are not allowed to terminate the contract prior to its term unless the other party commits serious acts making it impossible to continue the contractual relation between the parties. Where there is a tacit renewal clause, the contract must be terminated by a written 6-month notice before the end of the term.

 

Increasing covenant strength

Increasing covenant strength

Lease deposit - see under “Rent deposit”

Surety - not applicable

Warranty - not applicable

Rent deposit/bank guarantee - the parties may agree, in the contract, to a certain rent deposit (or bank guarantee) to guarantee payment of the rent, accommodation charges or possible deterioration of the Premises. In residential tenancies, this rental guarantee cannot exceed three months of rent. In commercial leases, it is freely negotiable but is usually fixed by the parties at a sum equal to six months’ rent.

 

Security of tenure

Security of tenure

If business premises are used commercially (for example, retail) for more than three years, the tenant has a legal preference of renewal of the lease. If the landlord wishes to terminate the lease, the landlord must first offer to renew it on the same conditions at which a ready, willing and able tenant is available for the same premises. If the current tenant accepts those terms, the landlord must renew the lease. If a commercial lease is terminated by the landlord, the tenant can make a request to a competent judge for up to two extensions of six months.

 

Taxes

Taxes

On sale/acquisition of real estate - in the event of acquisition of real estate, see under “Registration”. Registration duty must be paid within 15 days further to the signing of the notarial deed. In practice, the public notary requires the necessary funds on the day the deed is signed. No tax is owed by the seller for the transaction itself (other than any applicable income tax). In the event of sale, capital gains from the sale of one’s principal residence are always exempt, whereas capital gains from the sale of other real estate are taxable.

Immovable property tax - the property tax (“impôt foncier”) is a local tax on built up and non built up real estate, levied annually, and owed by the owner of the real estate. The rate of the property tax is calculated on the basis of the unitary value of the real estate and depends of the municipality of location and classification of the latter. It may not exceed 7.5% of the unitary value. The unitary value is determined by the Tax administration. In many cases the unitary value for tax purposes remains way below market value.

Income tax - under Luxembourg tax law, any individual resident or not in Luxembourg or owner of real estate located in Luxembourg is subject to personal income tax on the net rental income from the current rental of a building or the rental value of a building occupied by the owner itself. Companies resident in Luxembourg are subject to Luxembourg corporation tax on their worldwide income. Rental income and capital gains on disposal are taxable, except of course where the real estate property is located abroad and a double tax treaty allocates (as is generally the case) the exclusive right to tax income and gains on real estate to the country where the real estate asset producing such income or gain is located. In such a case Luxembourg will exempt the foreign-sourced item of income or gain.

Land tax - see under “Property tax”.

Lease tax - see under “Income tax”.

Local tax - each individual or company, landlord or tenant, is subject to local tax, which generally encompasses tax for waste management, supply of clean water, wastewater disposal, supply of gas and electricity in some municipalities.

Mortgage - mortgages over Luxembourg real estate must be registered. The registration entails payment of a 0.05% duty and has to be renewed every ten years.

Other taxes - for individuals resident in Luxembourg, a contribution called “assurance dépendance” is due on income from assets and amounts to 1.4% of the latter.

Property lease tax - see under “income tax”.

Value added tax - under Luxembourg law, the transfer of real estate is exempt from VAT, except where the transfer takes place before construction is started, and where the buyer uses the real estate mainly for activities giving him the right to deduct input VAT and has filed a relevant application with the administration for that purpose. Sales of new buildings that have not been used yet and sales of buildings to be built allow the buyer to further claim a VAT recovery up to 12%, the reimbursement being limited to €60,000. Lease rentals are normally VAT-exempt. However, for commercial leases, the landlord can opt for a taxable let where the tenant uses the premises mainly for activities giving the right to deduct input VAT. The benefit for the landlord is that he can deduct all input VAT on acquisition, renovation, construction and maintenance of the premises.