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Eversheds Global Estate Management

Serbia

Real Estate Guide

Principles of ownership

Principles of ownership

Freehold/Ownership - is not limited in time. It may be structured as individual ownership, co-ownership (in Serbian: susvojina) and joint and undivided ownership (in Serbian: zajednicka svojina). The holder of ownership rights over a property may choose to occupy and use it or may grant a lease. After the lease expires, the right to occupy and use the property passes back to the owner of the property. Title may be transferred while the property is subject to a lease. Transfer of title may be subject to pre-emption right of co-owners and, with respect to the agricultural land, to the pre-emption right of owners of neighbouring land parcels.

Leasehold – institution of leasehold, in the sense of right to live in a home on long-term tenancy, does not exist in Serbia, at least not in the manner recognized in certain common law countries. There does exist, as relict of socialistic era, the residence right, as right on long lasting and uninterrupted use of apartment in order to satisfy personal and family needs, which, under certain circumstances, affords its beneficiary the right to purchase the apartment. This type of right cannot be established any more, and situations where such rights still exist are rather rare. The law also recognizes the easement of residence, which is defined as personal easement allowing one person to live in an apartment/house, usually until his/her death – this type of easement is quite rare in practice. Finally, as of recently, Serbian law has allowed for financial leasing of immovable property – up until now, this innovation has had rather limited effects on the market and mostly in business real estate transactions.

Common hold/Usufruct - usufruct rights can be acquired from the owner either through contract or by a decision of a competent governmental body.

Condominium ownership - is not explicitly and formally introduced as such through Serbian laws. However, Serbian law does prescribe that ownership may be acquired over the apartments as separate parts of the buildings, whereas such owners simultaneously hold joint and undivided ownership over the parts of buildings which serve for use of each apartments (elevators, laundry rooms, hallways, etc.).

Utilisation right - newly adopted Serbian legislation allows for a private ownership over any type of construction land. Until the moment of coming of this legislation into legal force, the maximum title one could have had over the city construction land was either a) the permanent right of use (until 2003), b) a long term lease of up to 99 years (from 2003) or c) private ownership in rare situations where other type of land in private ownership (eg agricultural) was converted into construction land by adoption of adequate zoning plan (after 2003). We note that, apart from the privately-owned construction land and subject to a minor exception, titles under a) and b) above over real estate could have been transferred individually, but only along with the ownership over object(s) on such land. In practice, this often presented the impediment for investors to acquire the land with no object(s) constructed thereon. Contrary to these rules, the new legislation principally stipulates that all construction land is transferable and that it may be subject to all types of ownership, including the private ownership.

The latest Planning and Construction Law allows for conversion of different historical types of rights over construction land (eg rights of use on state-owned construction land) into private ownership, subject to specific conditions and procedure prescribed by the applicable regulations. The conversion may be subject to payment of compensation by the person/entity acquiring ownership on certain construction land. Compensation is payable, inter alia, when conversion is performed by entities which were acquired in privatization, ie entities which were previously either state-owned or socially-owned.

Due to problematic methods of calculating the compensation for conversion, the Serbian Constitutional Court has declared parts of the Law on Planning and Construction unconstitutional, hence creating a set-back in the conversion procedure. Amendments to the Law on Planning and Construction are in the pipeline, aimed to unlock the conversion procedure and boost up the construction industry.

Joint/Co-ownership - Co-ownership is explicitly envisaged in Serbian law and is not limited in time. Any co-owner has its own determined asset share over the real estate which is free to dispose with, subject to pre-emption rights of other co-owners. Each co-owner is entitled to initiate the procedure for division of co-owned property at any time.

Registration - Property ownership must be registered at the relevant public registry maintaining data on real estate. While a property purchase contract represents a legal basis for acquiring ownership rights, registration in the registry is the constitutive element for acquiring ownership rights.

 

Restrictions on foreign ownership

Restrictions on foreign ownership

The law regulates in principle the right of a foreign natural or legal person to purchase property. If a natural or legal person conducts business in the Republic of Serbia, they may, under conditions of reciprocity, acquire ownership rights over property that is required for their business activities in Serbia. Furthermore, natural persons may, under conditions of reciprocity, acquire ownership rights over an apartment or residence building, irrelevant of whether they conduct business activity in Serbia. In exceptional circumstances, the law may prescribe that foreign natural or legal persons may not acquire title over immovable property located in particular areas of the Republic of Serbia.

For the time being, foreigners cannot acquire ownership over agricultural land.

 

Title to real estate

Title to real estate

Investigation of title - the buyer/tenant usually investigates the title through a lawyer who carries out research in the public available registries maintaining data on real estate and raise queries in respect of any claims or aliens over the property.

Transfer of title - ownership title is finally transferred to the new owner once registration is performed with the relevant public registry maintaining data on real estate. As of 1 September 2014, any real estate transfer transaction has to be produced in the form of notarial deed.

Registration - Property ownership must be registered at the relevant public registry maintaining data on real estate. While a property purchase contract represents a legal basis for acquiring ownership rights, registration in the registry is the constitutive element for acquiring ownership rights.

Information on the register – the Cadastre of Real Estate, as the single and comprehensive database on immovable property and rights thereon has been established in Serbia recently. Until its formation on the whole territory of Serbia, there were two additional registries maintaining data on real estate (land and buildings) - (i) Cadastre of Land and (ii) Land Books. The Cadastre of Land was originally developed for technical purposes ie to record land lots, determine the exact area covered by particular land lot, etc., and did not maintain relevant data on legal title to buildings. On the other hand, the Land Books contained data on legal title to land and buildings and encumbrances established thereon, if any. In parts of Serbia not covered with Land Books, the so-called deed system (in Serbian: tapijski sistem) was applicable, where a title to property was recorded in a deed, held by the owner, whereas encumbrances were registered in a separate registry maintained by the courts. Once the Cadastre of Real Estate was established for the whole territory of Serbia, the data from Land Books, Cadastre of Land and deeds were merged into it and hence became irrelevant, though, given that this establishing came to place only recently, certain appellate procedures are still pending, so the data from the Land Books, Cadastre of Land and deeds could be relevant in certain cases.

Commercial leases - there is no special law dealing with the commercial leases in Serbia. Commercial leases are regulated by the general lease provisions of the applicable Serbian law.

 

Structure of a real estate transaction

Structure of a real estate transaction

Negotiation/terms of agreement - commercial terms in real estate transactions are usually negotiated between the seller/landlord and the buyer/tenant. However, each of the parties concerned usually has an estate agent or a lawyer representing them during the negotiation process. Either party may withdraw from negotiations before concluding a purchase or lease agreement.

Heads of terms – Heads of terms is an optional tool in contract formation. Their binding effect of heads of terms depends on the agreement of the parties, ie the parties need to define whether it is binding or not.

The law regulates that, during negotiations, if one party withdraws from concluding a contract without justifiable reasons, causing damage to the other party, such withdrawing party is liable for damages sustained by other party due to negotiation withdrawing.

Furthermore, party conducting negotiations without actual intention to enter into contract, shall be liable for damages caused by conducting such sedulous negotiations.

Investigation of title - the buyer/tenant usually investigates the title through a lawyer who carries out research in the public available registries maintaining data on real estate and raise queries in respect of any claims or aliens over the property.

Purchase deed - not applicable.

Completion/closing - once signed by the parties, the purchase contract is certified before the court (as of 1 September 2014, it has to be produced in form of notarial deed). Completion of a contract takes place when the contracting parties have executed the transfer of title/lease and the balance of any money due has been paid. The buyer is usually entitled to take possession of property once payment has been made.

Post completion – court/notary fees regarding the certification of contracts are usually borne by the buyer/tenant. Fees concerning the registration of property in the Cadastre of Real Estate are borne by the buyer/tenant. Contracts are certified before the court until 31 August 2014, and notarized by notary public as of 1 September 2014.

Leases - according to the Serbian law, if the ownership over the leased property is transferred, the lease survives and the new owner becomes the new landlord. Nevertheless, the tenant is entitled to terminate the lease in such situation.

Transfer of ownership of leased property (alienation) - leased property may be assigned or sublet to a third party if allowed under the lease contract. If the leased property is sold by the owner/landlord to a third party during the lease term, the lease will be effective against the third party.

Language requirement – Sale and purchase agreements have to be in Serbian, given that they need to be certified by Serbian court (ie produced in form of notarial deed as of 1 September 2014). Lease agreements involving foreigners or subsidiaries of foreign companies are usually produced bilingually.

Governance of lease signature/administration – lease agreements may be signed by parties directly, ie there is no need for local representative. In principle, leases do not require notarization/court certification (though parties may always opt for certification/notarization). Major exceptions to this rule are leases which are to be recorded in the Cadastre of Real Estate (long term lease of construction land, other leases which the parties wish to register in the Cadastre of Real Estate).

 

Usual commercial lease terms

Usual commercial lease terms

Summary of available lease types - the general provisions on lease are contained in the Law on Obligations. This law does not distinguish between different types of leases.

The Serbian Law on Property Relations regulates long-term lease contracts between foreign natural or legal persons and companies engaged in tourism industry. Such companies may lease property intended for tourism activity to foreign natural or legal persons according to the lease terms. This kind of long-term lease may be concluded for not less than five years and not more than 30 years with the possibility of extension.

Law also regulates long-term lease contracts for lease of the state owned construction land for the purpose of development of the buildings, whereas such long term leases are commonly agreed for 99 years.

Besides long-term lease of construction land, the law provides for long-term lease of state owned agricultural land as well, which long-term lease may be concluded for not less than one year and not more than 20 years (exceptionally 40 years for vineyards and nurse ponds).

Leases may be registered in the Cadastre of Real Estate. If the owner/landlord sells the leased property to a third person the existing leases will be effective against the third party, regardless of whether the lease has been registered in the Cadastre of Real Estate or not.

Alterations/modifications - alterations of the leased property that demand structural alterations and modifications require the landlord's prior consent.

Assignment and sub/under letting - leased property may be assigned or sublet to a third party if allowed under the lease contract. If the leased property is sold by the owner/landlord to a third party during the lease term, the lease will be effective against the third party.

Destruction/reinstatement - it is regulated by the law that the tenant is obliged to reinstate any alterations or modifications at the end of the lease term and to return the leased property to the landlord in the same condition as at the start of the lease. The tenant is not usually compensated for improvements. However, this is not a mandatory solution of the law and otherwise a stipulation may be agreed by the parties.

Duration of lease - the contracting parties are free to determine the length of the commercial lease term.

Forfeiture/irritancy - irritancy clauses are often stipulated in leases in Serbian practice prescribing that the landlord may terminate the lease unilaterally if the tenant fails to comply with its lease obligations. Notwithstanding, the Serbian applicable law explicitly provides for the possibility of the landlord to terminate the lease should the tenant, even after landlord’s warning, continue to use the premises contrary to its purpose and contrary to the lease agreement or neglect its maintenance, which all may cause damage to the landlord. The law also prescribes that the landlord may terminate the lease if the tenant fails to pay the rent within 15 days as of the landlord’s payment warning.

Insurance - the owner/landlord may insure leased property, such as large business premises. However, there is no such explicit obligation in the Serbian law, but it is usual in a practice that the landlord provides insurance of the subject premises, while the tenant insures its employees and equipment used within the subject premises.

Rent review - parties to a lease contract may, and usually do, agree on the possibility of rent review, particularly in respect of rent price, depending on market price stability.

Repair/decoration/furnishing - repair or decoration of leased property are the responsibility of the tenant, while structural repairs are the responsibility of the landlord.

Service Charges - a lease may stipulate a service charge under which certain costs may be recovered from the landlord if the tenant repairs the structure and common parts of the leased premises. The tenant is responsible for regular maintenance of the leased premises.

Tenant’s duties - specific tenant’s duties are designated in the lease agreements. However, the Serbian law prescribes certain minimum of obligations imposed to the tenants. Those are, inter alia, use of the property in accordance with the lease agreement and its purpose, payment of the rent, and return of the leased property after expiry of the lease.

Termination/break clauses - it is usual to agree on early termination rights in the lease agreement. Unless explicitly agreed otherwise, fixed term agreements cannot be terminated prior to expiry of the lease term (save for reasons of breach).

 

Increasing covenant strength

Increasing covenant strength

Lease deposit – a rent deposit is one of the most common forms of security when leasing a property. The deposit involves placing an agreed sum of money in the landlord's account. The deposit amount varies from one monthly rent to three monthly rents and is rarely above that amount.

Surety - it is possible, but unusual, to use a surety.

Warranty - in commercial leases it is common to provide unconditional, on-demand bank guarantees. The usual amount of the bank guarantee is three monthly rents.

Rent deposit/bank guarantee - in commercial leases it is common to provide unconditional, on-demand bank guarantees, monetary deposit or bills of exchange. The usual amount authorized under these security instruments is three monthly rents.

 

Security of tenure

Security of tenure

The tenant must return the leased property to the owner/landlord when the lease expires. However, it is common to negotiate terms of a new lease before the previous lease expiries, or to extend the existing lease.

 

Taxes

Taxes

On sale/acquisition of real estate - tax on the transfer of title over property is payable by all natural and legal entities who transfer ownership rights in relation to real estate, and is 2.5% of the market value of real estate property. Transactions are often structured as share deals in which case no transfer tax is payable for the acquisition of shares in SPV that owns the property.

Acquisition of real property is subject to three taxes: property tax, tax on the transfer of title and capital gains tax. Value added tax (VAT) may also be payable as alternative to the tax on transfer of title, but only in certain cases.

Immovable property tax - is payable by all legal and natural persons who own or have rights over the immovable property located in Serbia, such as:

  1. ownership, including ownership to land over 10 acres;
  2. apartment lease constituted under special regulations on residency, social residency or refugees, with lease term over one year or indefinitely;
  3. right of use of construction land over10 acres;
  4. right of use of publicly owned immovable by the beneficiaries of the right of use, under special regulations on public ownership;
  5. use of publicly owned immovable by users, under special regulations on public ownership;
  6. possession of immovable where the title holder is not known or is not determined;
  7. possession of publicly owned immovable, without legal basis;
  8. possession and use of immovable on the basis of financial leasing.

In case where right, other than ownership right, is established over the respective immovable property, immovable property tax is determined in relation to such right and not in relation to the ownership right.

Tax rates are determined by municipality where the respective immovable property is located. However, the tax rates cannot exceed:

  1. 0.4% for tax payer who keeps books;
  2. 0.30% for tax payer who does not keep books, in relation to the land;
  3. for tax payers who do not keep books, except in relation to the land:
      a)
    • for tax base up to RSD 10,000,000 (c.ca EUR 87,000): up to 0.40%;
    • b)
    • for tax base from RSD 10,000,000 (c.ca EUR 87,000) to RSD 25,000,000 (c.ca EUR 217,000): tax from point a) above plus up to 0.6% for the amount exceeding RSD 10,000,000;
    • c)
    • for tax base from RSD 25,000,000 (c.ca EUR 217,000) to RSD 50,000,000 (c.ca EUR 435,000): tax from point b) above plus up to 1.0% for the amount exceeding RSD 25,000,000;
    • d)
    • for tax base over RSD 50,000,000 (c.ca EUR 435,000): tax from point c) above plus up to 2.0% for the amount exceeding RSD 50,000,000.

Income tax - entities subject to corporate income tax are: companies, enterprises or other legal entities established with aim to gain profit; co-operative which generates income from sale of goods or services on the market, as well as any other legal entity if it generates income by selling goods or services on the market. Corporate income tax rate is 15%. The tax base is taxable profit, which is profit stated in the taxation balance sheet by adjusting the profit of the tax payer from the profit and loss account, prepared in accordance with IAS ie IFRS and regulations on accounting and auditing. If the tax payer is not obliged to apply IAS ie IFRS, its taxable profit is determined in the taxation balance sheet by adjusting the tax payer's profit, presented pursuant to the manner of recognizing, measuring and appraising of income and losses, as set in applicable by-laws capital gains are determined as the difference between the sale price and purchase price of the concerned immovable property. Income generated on the basis of the capital gains is included into the tax base and subject to the profit tax. Natural persons generating income on the basis of the sale of immovable property are obliged to pay capital gains tax. Capital gains is determined as the difference between the sale price and purchase price of the concerned immovable property. Tax rate is 15%.The landlord, as a natural person, is obliged to pay tax on income gained from leased immovable property. Tax rate is 20%. Tax base is a gross amount received on the basis of the leased immovable property deducted for recognized costs in the amount of 20% (50% in case of lease of flats and rooms to the tourists). In case the lessee is a legal entity, it is obliged to withhold and pay the tax from the rent it owes to the landlord, natural person.

Land tax - please refer to the Immovable property tax section.

Lease tax - please refer to the Income tax section.

Local tax – not applicable.

Mortgage - according to the Serbian Law on Mortgage, the mortgage as a security of receivable may be established over the: a) immovable property (ownership over land, building and the like), b) part of the immovable property (in the event of physical division), c) co-ownership share of the immovable property, d) separate parts of building under ownership regime (apartment, business premises, garage etc.), e) rights to land which may be freely disposed with, and f) building under construction Mortgages are regularly based on the mortgage agreements or mortgage statements issued by the mortgage debtors. However, mortgage may be based on the court decision as well. Mortgage is finally and validly constituted by the inscription in the relevant Cadastre of Real Estate. Enforcement of mortgages may be enforced by the court or by the creditor itself, the latter, however, only if the mortgage agreement/mortgage statement satisfy certain formalities. Mortgage creditor is not considered as tax payer simply due to the fact that it has mortgage on certain immovable property.

Other taxes - income, generated by non-resident legal entities on the basis of the lease/sublease of immovable/movable property located in Serbia is subject to 20% withholding tax, unless otherwise stipulated by Double Tax Treaty concluded between Serbia and residence country of non-resident legal entity generating the respective income. Non-resident legal entity generating the income on the basis of the sale of immovable property located on the territory of Serbia are obliged to pay 20% capital gains tax, unless otherwise stipulated by the Double Tax Treaty concluded between Serbia and residence country of non-resident legal entity generating capital gains.

Property lease tax - please refer to the immovable property tax.

Value added tax - VAT of 10% (20% for commercial property) is paid for the first transfer of ownership title on newly built buildings or apartments (in limited number of cases, VAT is also payable in case of subsequent transfers). The state introduced a scheme by which certain categories of citizens are exempt from VAT. Lease of property from a VAT payer is subject to VAT.