OPF Real Estate in Lux 2011

Real Estate
in Luxembourg
MARCH 2011
R E A L E S TAT E
OOSTVOGELS P f i ster Fe y ten
M A R C H 2 0 11
L U X E M B O U R G L O N D O N
This document is for information purposes only and does not constitute nor can it be relied
upon as binding legal advice. Before implementing a transaction on the basis of the information
included, it is highly recommended to seek detailed professional advice. Oostvogels Pfister
Feyten makes no warranty as to the completeness of the data and documentation.
Third party information is not under the firms control and has been provided for
information purposes only. The firm can, therefore, accept no responsibility or liabilities
whatsoever for any losses or penalties that may be incurred for the accuracy of
the content of such third party.
Oostvogels Pfister Feyten would particularly like to thank the various Luxembourg
bodies and businesses for their support in providing statistical information,
photos, reports that have been included in this brochure.
We trust that this will serve as a valuable working tool for
those of you involved with Luxembourg real estate.
CONTENTS
01 OVERVIEW PAGE 7
02 Luxembourgs Real Estate market PAGE 8
2.1 Market Activity PAGE 8
2.2 Real Estate Transactions PAGE 12
2.3 Real Estate and Construction Matters PAGE 21
2.4 Real Estate Taxation PAGE 26
03 Unregulated investment vehicles PAGE 28
3.1 Legal Regime PAGE 28
3.2 Investment Policy PAGE 28
3.3 Corporate Forms Available PAGE 28
3.4 Management and Corporate Governance PAGE 28
3.5 Taxation PAGE 29
04 Regulated investment vehicles PAGE 34
4.1 The Real Estate UCI PAGE 35
4.2 The SICAR PAGE 37
4.3 The SIF PAGE 40
4.4 Accounting and Valuation Issues PAGE 43
4.5 Typical Luxembourg REIF PAGE 44
05 Real Estate Investment through securitisation vehicles PAGE 45
5.1 Legal Regime PAGE 45
5.2 The Securitisation Vehicle PAGE 45
5.3 Compartments PAGE 46
5.4 Issuance of Securities and Granting of Security Interests PAGE 46
5.5 A Bankruptcy Proof Vehicle PAGE 46
5.6 Taxation PAGE 47
06 OUR EXPERTISE PAGE 48
6.1 Real Estate Expertise PAGE 48
6.2 Real Estate Know How PAGE 48
6.3 Our Real Estate Team PAGE 48
6.4 Our Fund Formation Team PAGE 49
07 ContAct INFORMATION PAGE 50
08 OUR OFFICES PAGE 51

O ostvogels P f i ster Fe y ten
Using weather forecast wording, we can say

that after the storm, we see some sunny spells
prelude to sustainable improvement.
PICTURE: LUXEMBOURG AIRPORT

PACZOWSKI ET FRITSCH ARCHITECTES S.AR.L. PHOTOGRAPHER ANTOINE HUOT
O ostvogels P f i ster Fe y te N
01 Overview
Did you say recovery? Notwithstanding the fact that Luxembourg is a European
leader in the fund industry ranking second worldwide
Two years after the financial crisis hit the real
and already well known for its UCITS funds, the Minister
(estate) economy, we are currently seeing signs of
declared that now is time to also establish the financial
recovery within the global real estate markets in
centre as a brand name for alternative funds. In the
various jurisdictions across the world. Some
meantime, due to the governments high reactivity,
analysts and experts may however mitigate this
Luxembourgs deficit has improved significantly from
optimistic approach, arguing recovery is patchy
EUR 1.6 billion to EUR 760 million, and Standard
and fragile in many ways, but we now perceive the
and Poors rated the Grand-Duchy of Luxembourg
light at the end of the tunnel.
AAA/A-1+ sovereign credit rating at the end of
The Luxembourg statistics office (Statec) confirmed December 2010.
a modest but firm and widespread recovery in
Bearing in mind that real estate is a core pillar of the
2010 across all areas including industry and trade but
global economy, 2010 is still to be considered as a year
particularly in construction despite the difficult weather
of transition with, for instance, low property valuations
conditions in November and December 2010.
and significantly high vacancy rates. According to BNP
Luxembourg forecasts a 3% increase in GDP for 2011,
Paribas Real Estate, the London take-up market
which ranked at EUR 75,000 per capita in 2010.
increased by 53% compared to 2009, whereas the
Using weather forecast wording, we can say that after
Paris intra-muros one did by 17% including a significant
the storm, we see some sunny spells prelude to
progression of the prime rents. Residential markets still
sustainable improvement.
struggled in some southern European countries and, on
At a press conference at the beginning of February the office market forefront, take-up was more or less on
2011, Luxembourg Minister of Finance Luc Frieden par with 2009, with many new projects and developments
confirmed that the development of the financial centre remaining on hold. According to Jones Lang LaSalle,
is a political priority of the Luxembourg government. 2010 was a transition year in Luxembourg.
L U X E M B O U R G L O N D O N PICTURE: Unico building developed by CIP Luxembourg S.A.

Architect Arlette Schneiders Photographer Antoine Huot
R E A L E S TAT E
O ostvogels P f i ster Fe y ten
02 Luxembourgs
Real Estate market
2.1. Market activity According to Jones Lang LaSalle in 2010, all

Luxembourg sector players were preparing for the
Real Estate consultants Property Partners consider future. Therefore, 2011 should see an increase in the
that the trend showing sustainable recovery should real estate activity led by corporate and business
continue in Luxembourg in 2011, a year which services sectors.
should see higher investment volumes compared
to 2010. Therefore, investment volumes in 2011 Lastly, it is worthwhile to notice significant developments
should be in line with the average of the last 10 originated by local authorities which are deemed to
recent years, due to portfolio arbitration from real fuel the Luxembourg real estate sector for the next
estate funds among others. Property Partners 5 years. These developments, such as the Luxembourg
foresee market stability in 2011 and confirm that an city Royal-Hamilius project managed by Codic
increasing number of investors value much more International SA (investor-promoter), Jones Lang
green projects with ecological certificates. LaSalle (real estate agency) and Foster & Partners
together with Tetra Kayser Paul et Associs
2010 was indeed and more than ever a green year (architects), may, all in all, strongly contribute to the
with environmental projects gaining momentum recovery and give a positive sign to the market.
worldwide. Institutional investors, investment funds as
well as large corporate and industrial players are At the very end of 2010, the Luxembourg financial
currently considering ecological real estate investments regulator (Commission de Surveillance du Secteur
as the present and no longer as the future. First Financier CSSF), which is growing in terms of
generation buildings (more than 25 years old) are employees and foresees to build new headquarters,
currently being emptied to be fully renovated according concluded a sale-and-leaseback operation on its
to new green and technological standards in order to present registered office. This kind of operation could
attract new tenants. be a temporary solution for other actors waiting for the
full recovery of the Luxembourg real estate market.
PICTURE: Serenity building developed by CLI

Architect Tatiana Fabeck
O ostvogels P f i ster Fe y te N
The Central Business District (CBD)

of Luxembourg City regains its leadership
with 26% of transactions.
2.1.1. TAKE-UP Vacancy rate versus take-up evolution
According to Property Partners research (Q4 2010),

take-up of office space increased by 10% with an
increase of up to 125,000 sq m. The Central Business
District (CBD) of Luxembourg City regains its
leadership with 26% of transactions. Rents for
prime locations slightly increased throughout 2010.
On average a square meter rented in new buildings
in the CBD records EUR 35 per month and could
even reach EUR 40 per sq m per month for core
buildings. Once again the ten year motto of Vincent
Bechet from Property Partners is still an accurate
Source: Property Partners Research
one location location location.
2.1.2. TRANSACTION MARKET
DTZ reported in its Property Times Q4 2010 that as
some developers decided to delay a number of office According to Property Partners, despite the
developments, only 85,654 sq m of new space was increase in demand, the investment volume
delivered in 2010, nevertheless this new supply takes broke down over 30% in 2010 due to a lack of
the level of office stock up to 3.2 million sq m. Due to products, and EUR 345 million were achieved in
this slowdown in the delivery of new office developments 20 transactions, mainly in redevelopment projects
and the take-up increases seen in Q4 2010, the vacancy by foreign investors. CB Richard Ellis also
rate has fallen from 7.74% in Q3 to 6.97% in Q4. analysed the low performance of the investment
market as mainly due to the inactivity of
CB Richard Ellis, in line with its colleagues, concluded
investors such as German Open-Ended funds. BNP
that in the coming quarters, the reduced development
Paribas RE reported a certain number of direct
pipeline will probably lead to a progressive erosion
investments principally made by Luxembourg
of supply levels and some office reconversion into
investors and indicated that Belgian investors are
residential should reinforce this evolution.
coming back as well as, in a lower proportion,
Dutch and English investors.
R E A L E S TAT E
1 0 O ostvogels P f i ster Fe y ten
02 Luxembourgs
Real Estate market
Prime office properties are traded at 6% yield in 2.1.3. RESIDENTIAL MARKET

Luxembourg, which is quite high compared to the Paris
Luxembourgs annualized house price growth
Intra-muros at 4.75% and London city at 4%. However,
surged in Q3 2010 as the economy continued
Jones Lang LaSalle carried out a market research
to recover. In Q3 2010, the price index for sold
on the vacant buildings that are currently on the
apartments rose 5.8% with respect to the
Luxembourg market and as a result the figures below
previous year, whereas for new apartments
show that a core building could be let within 18 months
purchased before full completion of the project
(currently the market practice duration of the rental
(Vente en ltat futur dachvement VEFA) the
guarantee given by promoters).
increase reached 11.64%.
How long are the current vacant
Yields are low, as would be expected in a market where
buildings on the market?
the number of workers increases more than the number
of Luxembourg residents; therefore, yields are normally
below 4% and decrease with the size of the product.
As quoted by Property Partners Residential in its recent

newsletter: the residential real estate market has come
to maturity, with ambitious, always more sophisticated
projects of very high quality in terms of technique and
design. This is indeed a market that needs independent
and qualified professionals who will suggest and
implement original opportunities to all investors wishing
to diversify their portfolio.
2.1.4. TO BE OR NOT TO BE GREEN!
Real Corp Luxembourg reported on 22 January

2011 that as in other European markets, some have
focused on developing Green Buildings, with no
fewer than a dozen green projects in Luxembourg
Source: Jones Lang LaSalle for the next three years, totaling about 80,000 sq m
to be completed by 2013.
PICTURE: Serenity building developed by CLI

Architect Tatiana Fabeck
O ostvogels P f i ster Fe y te N 11
Tenants and buyers have at the same time

become more intuitive to the environmental
aspects of renting or buying properties.
Did you say green building? A green building is an Tenants and buyers have at the same time become
environmentally sustainable building, designed, more intuitive to the environmental aspects of renting or
constructed and operated to minimise the total buying properties. In practice, a building with a high
environmental impacts. green rating is also more likely to appeal to international
groups with stricter policies towards energy efficiency.
The main techniques to achieve a green building
include: Luxembourg still has not chosen the eco-labels that
should be used as reference, however, the main
Use of renewable energy, competing labels are:
Reduction of energy consumption, BREEAM (Building Research Establishment

Environmental Assessment Method, UK),
Water conservation and recovery of rain water,
HQE (High Environmental Quality, FR)
Recycling waste.
The aim of green buildings is to save money on a long DGNB (German Sustainability Building Council,
term basis, to increase comfort and create a healthier GE)
environment for people to live and work in, and, amongst
LEED (Leadership in Energy and Environmental
others, to improve indoor air quality, natural daylight,
Design, US)
and thermal comfort.
The early obsolescence of non-green buildings has
some consequences on their future market valuation.
Therefore, the costs associated with making a building
more compliant with environmental standards should
not always be seen as a stumbling block. Property
Partners highlights that the cost of electricity can be
reduced by up to 10% only by changing tenants
behaviour and that, in certain cases, a building can be
easily classified in category D rather than G without
PICTURE: PROJECT PARC RISCHARD DEVELOPED BY SOLUM REAL ESTATE necessarily investing heavily.
AND QBUILD ARCHITECT TATIANA FABECK
R E A L E S TAT E
02 Luxembourgs
Real Estate market
In addition, a good management of waste could Sale-and-leaseback: is a financial transaction, where

decrease the bill by 38% within one year. For example, one sells an asset and leases it back for a long-term;
expenses with regards to energy and fluid in a new therefore, one continues to be able to use the asset but
green building amount to EUR 0.70 per sq m compared no longer owns it. Generally it allows the seller to retain
to EUR 1.70 per sq m in a classical office building. full operational control of the property for its own use;
however, the terms and conditions of the lease
Luxembourg has its part to play not only through the
agreement are to be carefully drafted in order for the
various incentives that have been introduced to support
former owner not to lose flexibility.
the development of green residential buildings, but also,
from an investment point of view, the jurisdiction offers a
2.2.1. EARLY STAGE (LETTER OF INTENT)
range of tax efficient regulated and unregulated vehicles
which can be used to structure investments in the area. Transactions usually begin with negotiations performed
These vehicles are covered in section 3, 4 and 5. under a confidentiality agreement. They are materialized
at a first stage with a letter of intent or head of terms to
2.2. REAL ESTATE TRANSACTIONS be counter-signed by the seller (binding or not and with
an exclusivity clause or not until the signature of a
Two types of transactions are occurring:
share purchase agreement). This stage is critical and
1. The sale of an existing portfolio (asset or share deal must be handled carefully. Any aggressive commercial
see comparative table on the right). This type behaviour may lead to litigation in case of untimely
of transaction can also take the form of a breach of negotiations.
sale-and-leaseback.
2.2.2. STANDARD CHECKS: DUE DILIGENCES
2. The sale of a project, generally through a share deal
with a binding engagement on the developer to build After having signed a letter of intent, the buyer performs
a specific office and retail building and to find first several due diligences to identify and limit the risks
class tenants for at least 75% of the surface area. associated with the acquisition of the real estate object
In such case, the deal is spread over several months (legal and tax, financial audit review as well as
(see time-line page 25). environmental and technical due diligences).
PICTURE: Plaza building developed by CIP Luxembourg S.A.

Architect Arlette Schneiders
O ostvogels P f i ster Fe y te N 1 3
Comparative table: share deal vs asset deal.
SHARE DEAL ASSET DEAL
DUE DILIGENCE Legal especially corporate file, ownership titles including Legal including securities over assets, date of construction
the existence of an emphytheutic lease, securities over the for decennial or biennial guarantees.
company and the assets and date of construction for Ownership titles.
decennial or biennial guarantees.
Lease agreements.
Tax especially relating to the company.
Environmental /technical.
VAT position, particularly for lease agreements
and recoverable amounts. Administrative authorizations (e.g. building permits and
commodo-incommodo authorization).
Financial statements and agreements.
VAT position.
Lease agreements.
All other agreements usually service agreements in place for
the use of the building and property development agreement.
Environmental / technical.
Administrative authorizations (e.g. building permits and
commodo-incommodo authorization).
TAX No registration fees. R

egistration fees of 6% and 3% over registration fees for
Risk of reclassification as asset deal is very remote. Luxembourg city.
Transcription fees 0.5 % to 1%.
VAT VAT not applicable on the transfer of shares. U

pon election and if the conditions are fulfilled, the sale could
Possibility for VAT recovery on building costs if the building is be submitted to VAT but the proportional registration fees are
leased to VAT tenants. still due.
Notary fees.
ACCOUNTING For annual accounts closing on 31 December 2010 and for Fair Market Value used for the valuation of
the one as from 1 January 2011, the use of IFRS is possible the assets.
upon option without obtaining any prior authorisation granted D
epreciation over 40 years, except on the plot of land.
by the Minister of Justice.
Luxembourg GAAP no longer requests that the building is
booked at a historical cost, and the companies, on option,
can assess some categories of assets under the fair value
accounting principle. Moreover the companies must now
record in the notes to the annual accounts the economic real-
ity of the operations beyond their legal aspect - substance
over form principle.
At the level of the shareholders (buyer), shares are booked at
Fair Market Value.
LEGAL Signing of a Share Purchase Agreement with schedules such S

igning of a public notarial deed (including that release of
as representations & warranties and bank guarantees. the securities granted on the assets is guaranteed by the
seller as well as warranty against defects or latent defects
and any pollution).
SECURITY INTEREST FOR THE Pledge of the shares, mortgages over the assets, assign- Mortgages over the assets.
FINANCING OF THE ACQUISITION ments of rental income or assignment of VAT claim. Guarantee from parent company (like in a share deal) can
be requested and all types of securities envisaged.
R E A L E S TAT E
02 Luxembourgs
Real Estate market
The core objective of the legal and tax due diligence is Completion usually encompasses construction until
to identify the commitments of the company by handing over and partial or full letting of the building.
screening its main contracts with clients, providers and
Closing will usually be the completion of the sale and
employees, if any.
purchase of the shares, i.e. the effective transfer of the
2.2.3. SHARE PURCHASE AGREEMENT (SPA) shares to the buyer and often the payment of the
purchase price. If the object of the SPA was to acquire
Thereafter, an SPA is drawn up to secure the sale.
a target company which owns a land with a development
The content is conditional upon the results of the
project, then the closing will be scheduled after the
various due diligences and on the tax and financial
building has been handed over.
structure of the transaction.
2.2.4. ASSETS DEALS NOTARIAL DEEDS
The structure of an SPA is generally the following:
A. The deed itself
Agreement on the sale of the shares;
From a legal point of view, a contract between parties is
Share purchase price and payment conditions; valid as soon as they have agreed on the object of the
deal and price. It is important to be prudent with regards
Conditions precedent (reimbursement of loans,
to preliminary contracts (compromis de vente) or
acquisition of a land etc.);
binding letters of intent as these could be considered by
Process until completion (construction, handing the court as a binding sale and purchase agreement
over and letting of the building); between parties.
Although private deeds will be binding between the

Process of closing (release of securities, change
parties, sales with regards to real estate assets require
of directors etc.);
the involvement of a public notary. The registered deed
Conditions subsequent (such as authorizations to will take the form of an authentic deed with respect to its
be obtained); date and contents and is valid between parties and fully
opposable to third parties.
Representations and warranties of the buyer and
the seller.
PICTURE: PIXEL BUILDING DEVELOPED BY ATENOR GROUP.

It is important to be prudent with regards

to preliminary contracts (compromis de
vente) or binding letters of intent.
Specific attention must be paid to the following B. Some explanations regarding warranties
provisions:
Warranty against eviction: The vendor warrants
1. Any termination provision linked to the vendors the purchaser against any direct and indirect
privilege (should the amount not be fully paid at the claims over the property, such as seeking eviction
date of signing); on the grounds of adverse possession or claiming
rights in rem over the building (such as usufruct or
2. Release of mortgages;
building rights droit de superficie). The warranty
3. Contractual limitation to the warranty against eviction also seeks to protect the purchaser against any
and any hidden defects; third party claiming ownership of the property.
This may extend to any charges on the property
4. Warranty on the surface area and on the lease
which were not declared at the time of the sale,
agreements signed;
such as easements, which may interfere with the
5. Warranty that the building has obtained all the purchasers enjoyment of the property.
administrative authorizations mentioned below;
Warranty covering hidden defects: After the sale,
6. Warranty that no pre-emption rights in favour of third the purchaser may discover that the building
parties and no risk of annulment of the sale exists; contains a hidden defect. This is defined by the Civil
Code as a defect which makes the building sold
7. In cases where a Special Urban Plan (plan unfit for the purpose intended by the purchaser,
damnagement particulier PAP) as defined or impairs it to an extent that the purchaser would
under point 2.3.1 (A) is delivered, this must not have acquired the property, or would have
be mentioned to avoid the nullity of the entire notarial offered a lower price, had he/she been aware of
deed (without having the obligation to prove this. The purchaser is then entitled to apply for an
special damages); annulment of the sale accompanied by a refund of
The notarial deed will be registered with the tax the price paid, or to receive a reduction in the sale
authorities within 10 to 15 days. The public notary will price. The purchaser must first prove that a defect
then inform the land register (cadastre). Thereafter, the was already there even though it was not visible,
notarial deed will be lodged at the mortgage register or at least not visible to a normal person.
(Conservation des Hypothques) within two months of
its former registration for transcription purposes.
R E A L E S TAT E
02 Luxembourgs
Real Estate market
In such cases, the intervention of an expert will be Double or Triple Net Rent: A net lease means that the
required to find the origin of the problem and to establish tenant will have to pay, in addition to the fixed rent,
the date when the defect was caused. Case law some or all of the property expenses. With a single net
considers that (i) if the purchaser could have discovered lease, the tenant must pay property taxes and fixed
the defects through careful examination even without rent. For double net leases, there will be supplementary
being a building expert or, (ii) if the purchaser fails to real estate taxes and building insurance in addition to
report the defect shortly after becoming aware of it, the the fixed rent. A triple net lease sees the tenant being
seller is released from his/her guarantee. responsible for all real estate taxes, building insurance
and maintenance costs on the property.
2.2.5. DETERMINING THE ACQUISITION PRICE
Investors dig deeper, incorporating risks and potential
The price of the targeted real estate object is normally for growth in what they call an all risks yield, the All Risk
linked to the profitability of the investment. Yield is a number, which shows the interest charges of
a real estate value under all risks (renting loss, change
Real estate investors regard this type of investment as
of the market surrounding field).
a financial one. Normal requirements, therefore, are to
receive double or triple net rent.
Evolution of the yield in Luxembourg
In the last quarter of 2010, the office prime yield was
stable and estimated 6.15% for the city of Luxembourg,
while the euro swap rate at 5 years dropped due to
turbulence in money markets to 2.8%. Below is a table
showing the changes in prime yields in Luxembourg.
It is worthwhile to note that the concept of site

incidence tends to replace the price per sq m standard
of building plots.
Source: BNP Paribas Real Estate Research
PICTURE: PANORAMA BOULEVARD DAVRANCHES

ARCHITECT Bureau dArchitectes Werner
The concept of site incidence tends

to replace the price per sq m standard of
estimation of building plots.
Site incidence or Incidence Terrain: in order to gain Investors are obviously concerned with any insolvency
value and be considered as a building plot, a site needs risks in respect of the tenants. There are several ways
to have a specific infrastructure (Special/General Urban to secure this risk:
Plan). The site incidence could be defined as the price
(i) Article 2102 of the Civil Code grants to the landlord
of the whole site divided by the surface of the building
a preferential right on the goods garnishing the
area in sq m. This has become an essential approach to
rented flat or office. This preferential right entitles
estimate a site, currently: the value of a building plot
the landlord who is not paid to seize these goods.
depends on the surface in sq m of its building area.
The preferential right is not limited to the rent, it also
secures the repairs incumbent upon the tenant, and
2.2.6. LEASE AGREEMENT
more generally anything related to the performance
New lease agreements are increasingly concluded of the lease agreement. The seized goods do not
for a six year period renewable with respect to have to be the tenants property;
office lease or on a 3/6/9 year basis with respect to
(ii) The promoter could be asked to give additional
commercial lease. The Luxembourg Civil Code
guarantees for tenants proposed by it, and
provides for both general rules applying to lease
agreements and some specific rules applying to (iii) The rental guarantee provided by the tenant could
commercial leases only. be increased up to one year.
A lease is considered as a commercial one only when

the let area is for commercial usage and involves
interaction with a clientele (retail areas are, of course,
included but case law has extended the notion to areas
necessary for commercial activities, such as offices
used for the management of hotels). It is not simply due
to the willingness of the parties or because commercial
entities have signed the agreement.
R E A L E S TAT E
02 Luxembourgs
Real Estate market
Below is a summary of the main differences between commercial and office leases (targeted tenants for investors).
COMMERCIAL LEASE OFFICE LEASE
Object Retail Offices
RENT Free setting and can be indexed and is submitted Free setting and can be indexed and is only
to VAT after fulfilment of a VAT option. submitted to VAT if the tenant is VAT registered
Market practice (free rental period at the beginning and after obtaining a specific option granted by
(3 to 6 months) and the fixtures and fittings are VAT administration.
paid by the tenant. M
arket practice (free rental period at the begin-
ning) and the fixtures and fittings costs tend to be
shared by landlord and tenant.
TERM Free. If more than 3 years and less than 16 years, Free. If more or equal to ten years, the lease
the tenant has a preferential right of renewal. This has to be recorded at the mortgage register and,
rule is imperative and cannot be contractually therefore, is made through a public notarial deed
waived by either party. (fixed duty of EUR 12.39).
If the term is for 10 years, the lease has to be M
arket practice 5 years (with renewal) to 10 years
recorded at the mortgage register. or 3/6/9 year period.
Market practice 3/6/9 years depending on the
quality of the tenants.
ASSIGNMENT AND SUBLETTING Cannot be prohibited if the lease is assigned with Can be forbidden.
the business.
REGISTRATION DUTY If the lease is submitted to VAT, there is only a If the lease is not submitted to VAT, there is a
fixed duty of EUR 12 and a stamp duty of EUR 2 proportional duty of 0.6% on the cumulated value
per page. of the rent on the total duration of the lease.
TERMS AND CONDITIONS All expenses, repairs and maintenance costs can All expenses, repairs and maintenance costs
be reinvoiced in full to the tenant - as the provi- can be fully invoiced back to the tenant as the
sions of the Civil Code for these specific items are provisions in the Civil Code for these specific items
not of public order. indicate they are not of public order.
If a PAP was delivered, it has to be mentioned If a PAP was delivered, it has to be mentioned
in the lease; otherwise the agreement shall be in the lease otherwise the agreement shall be
declared null and void. declared null and void.
RENTAL GUARANTEE Free. Market practice is 6 months. Free. Market practice is 6 months.
PICTURE: VERTIGO BUILDING DEVELOPED BY ALLFIN LUX

ARCHITECT ASSAR ARCHITECTS
Some institutional investors may be

interested in high-quality large scale
projects in the residential sector.
What about Residential Lease? Best practice is, however, to file a declaration of option
with the tax authorities should the buyer and/or the
Some institutional investors may be interested in high-
landlord use the property mainly for activities which
quality large scale projects in the residential sector.
allows them to deduct input VAT (retail and generally
However, there are some specificities for residential services except for certain financial activities).
lease agreements (bail loyer), such as the fact that
On a cash-flow basis, the VAT is paid on building costs
the rent is submitted to legal provisions, except for
during the construction period. As soon as the handing
luxury apartments, i.e. either rent > EUR 2,059 per
over has taken place and the agreement of the VAT
apartment, (linked to the consumer price index basis
authorities has been obtained, the buyer/landlord is
100 in 1948), or investment > EUR 4,194 per sq m,
allowed to recover all the VAT which was borne as
(linked to construction price index basis 100 in 1970),
investment costs (construction and renovation costs)
and if the lease agreement states that the apartment is
the first year when it has completed its VAT return. An
a luxury one. However, given the fact that Luxembourg
adjustment period of ten years applies in case of any
still faces a shortage of high quality residences in the
changes in the tenants VAT status (for example, if they
city of Luxembourg, landlords could request/draft the
no longer qualify as taxable persons or the deduction
agreement just like an office lease agreement. It is
pro-rata falls below 50%) by application of recapture of
worthwhile to mention that the top quality residential
10% per year for the remaining years of the VAT
sector is a lessor market contrary to the office market
recovered at the outset during the first year.
which is currently more a lessee one.
B. Residential Buildings
2.2.7. VAT IMPLICATIONS
According to the general VAT principle, the supply of
A. Office and commercial buildings
immovable properties including residential properties is
The VAT status of tenants is a major issue. Real estate exempt from VAT without credit. This exemption does
funds seeking top tier clients as well as the VAT not apply to the supplies of construction work pursuant
treatment of transactions are highly important issues to a construction agreement or of properties under
when dealing with the letting of new buildings or fully construction (VEFA) subject to 15% VAT unless reduced
refurbished buildings. The Luxembourg general rule is to the minimum 3% rate if the properties are to be sold
that the transfer and the letting of property are both to individuals who are non-liable persons for VAT
exempt from VAT. purposes and if the builder requests the reduction of the
rate to the VAT tax authorities.
R E A L E S TAT E
02 Luxembourgs
Real Estate market
Supplies of residential properties by individuals acting They will take into consideration a number of items
in the framework of their personal worth are exempt including the prime location of the building, the quality
from VAT provided the supply is not the result of a and longevity of either the investor or the promoter and
commercial building being converted into a residential also, if the building is at least 80% let by known
one. Individuals who have suffered a 15% VAT upon the tenants.
purchase of residential properties, the construction or
Banks are increasingly taking into account the rental
the renovation of their residential building may claim for
flows, such as the quality and type of tenants and any
the super-reduced rate of 3% to the VAT authorities
maturity or break clauses of the rental agreements. The
which (subject to the approval of the VAT authorities)
intrinsic value of the real estate is also important and
would lead to a reimbursement of VAT paid in excess
banks will look at items such as the energy performance
of the super-reduced 3% rate. A sale of a residential
and planned reservations, as these may be seen to
building eligible to the benefit of the super-reduced 3%
affect the competitive nature of the property.
VAT rate within the 10 years following the achievement
of the construction or the renovation may challenge the Directly linked to these various criteria, is the equity
3% VAT rate to the extent that the building is no longer level expected by banks (in the range of 35% to 40%).
used as a residential building by the buyer. It is
worthwhile to note that registration duties are due in Given the current situation with interest rates, this
addition to the VAT if applicable and that from 2011 can also lead to differentiated advantageous or
individuals may no longer prevail for the EUR 20,000 disadvantageous positions following the floating or fixed
allowance to compensate the registration duties. interest rate schemes chosen by the loan subscriber.
2.2.8. FINANCING AND GUARANTEES TO BE GIVEN With respect to mortgages, most banks financing the
transaction will require first ranking mortgages on the
The acquisition of assets or shares is generally made building. It will be done through a notarial deed lodged
through bank financing. In the context of a financial at the mortgage register under payment of (i) recording
crisis, banks are ever more reluctant to grant loans duty of 0.05% on the amount of the mortgage and, (ii)
without having been fully informed of the project. registration duty of 0.24% on the borrowed amount.
Picture: Dexia building (Esch-Belval)

Architect VASCONI ASSOCIES ARCHITECTES - Photographer Catherine Thiry
Banks are increasingly taking into account

the rental flows, such as the quality and type
of tenants and any maturity or break clauses
of the rental agreements.
Here below are the different types of securities that are

commonly used:
Mortgage over the building and/or the land;
Pledge over the shares or on bank accounts of

the target and of the mother company;
Assignment of VAT recoverable on investments

costs (normal rate 15%);
Assignment of rent, and
Assignment of insurance compensation.
2.3.1. AUTHORIZATIONS AND PERMITS

2.3. REAL ESTATE AND CONSTRUCTION
A. Zoning permits and building permits
MATTERS
A zoning permit or PAP must be obtained for the
Luxembourg has implemented at both national and
construction of new structures (several buildings or
regional levels zoning development plans. Moreover,
buildings plots) in accordance with the provisions of
for cities, the General Urban Plan (Plan damnagement
the PAG.
gnral PAG) also applies.
A PAP is delivered for a specific project. The procedure
The PAG, among others, defines the areas where
implies two levels of agreement: city (commune) and
different types of constructions can be erected
the Ministry in charge of the regional development. It
(residential, commercial, offices, parkland, mixed area).
may take about two years to obtain the final agreement
It is prepared by the Citys urban department and
on the proposed PAP.
adopted by the town council. Approval for the PAG must
be given by the ministry in charge of the regional A building permit is also required for new projects or an
development and also by the Ministry of Environment if extension of existing structures, or any activity which
the general urban plan modifies the delimitation of a constitutes an external change of a building.
green area.
R E A L E S TAT E
02 Luxembourgs
Real Estate market
The application form refers to the PAP and is examined This authorisation is intended to reduce the levels of
by the urban department of the city and is received after pollution emanating from such establishments and
a period of about 2 months. promotes safety, security and hygiene vis--vis the
public, the neighbours and the staff, and last but not
All these procedures are normally taken over by the
least, support sustainable development. Failing to
project developer who commercializes the project after
comply with this obligation could result in criminal
having obtained the PAP and building permit. The
sanctions or/and an interdiction to use the building.
building permit and also the demolition permit when
necessary are delivered by the mayor (bourgmestre). In certain scenarios, other authorizations may also be
required, such as an authorization linked to the public
It is important to mention that if a PAP is obtained for a
road network (permission de voirie). This authorization
plot of land of more than one hectare on which a
is issued by the Ministry of Public Works, who must
residential building will be erected, it will be compulsory
examine the building or the builders yard to ascertain
to have 10% of public housings (logements sociaux).
whether it represents a danger for road users. Most
B. Other authorizations common requests concern signs for brand names or
plantation of trees along the road.
Projects of a certain size (more than 1,200 sq m) require
a commercial and running authorization to ensure C. Energy performance certification of buildings
conformity to environmental regulations, especially the
Every new and existing residential building subject
commodo-incommodo authorization which is delivered
to major renovation must conform to certain
by the Ministry of Environment and the Ministry of
minimum standards. These standards relate to energy
Labour or by any companies or bodies approved by
performance and, therefore, an energy passport
them for this purpose (organismes agrs) after the
must be established by and obtained from an
appropriate procedure is completed. This authorization
authorized expert.
is equivalent to an operating permit and is required for
any industrial, commercial or craftsmanship
establishment (including office buildings), which could
present a risk or an inconvenience to others.
PICTURE: PlaZa building developed by CIP Luxembourg SA

Architect Arlette Schneiders
The energy passport must also be established

for the office sector in case of change in ownership
of the building or change of tenant.
The energy passport has a validity of ten years and has For new functional buildings the energy consumption
a grading system whereby residential buildings are certificates are based on forecasted energy needs
ranked from A (best class for energy efficiency) to I whereas for the modification of existing buildings they
(building which is the least energy efficient), for are based on measured energy consumption.
example:
D. Co-ownership and division of the building
(i) Typical residential buildings: 275 kWh/sq m class G;
Before commercializing a building, usually a residential
(ii) New residential buildings from January 2008: one, promoters / investors divide the building in private
95 kWh/sq m class D; and common parts. Following the establishment of this
division known as cadastre vertical, it is compulsory to
(iii) Buildings with low energy consumption:
issue co-ownership rules applicable to the entire
70 kWh/sq m class B.
building (rglement de co-proprit).
Similar legislation applies to commercial and office
Cadastre vertical: It details and identifies the private
buildings called functional buildings, for the extension
shares/lots of the building in co-ownership in the form of
and modification of buildings or for new buildings as
a table with descriptive division plans permitting to
from 1 January 2011 and for existing buildings for major
identify, situate and allocate clearly and unequivocally
transformation as from 1 June 2011. The energy
the lots. This document is approved and agreed by the
passport must also be established for the office sector
land register.
in case of change in ownership of the building or change
of tenant.
R E A L E S TAT E
02 Luxembourgs
Real Estate market
2.3.2. PROJECT DEVELOPMENT AGREEMENT On the right a timeline summarizing these different
stages.
A. Purpose
Handing over is the completion of the building in
The developer is responsible for the construction and
accordance with the description of the project. It
development of buildings. The development process for
normally takes place when the building is occupied and
real estate varies from project to project and its relations
run according to its designated purpose. All equipment
are generally covered by a project development
will be in working order, with the exception of minor
agreement, signed by the company to be acquired in
conspicuous defects which do not reduce the stability or
the case of a share deal. This agreement will provide
safety of the structure, or do not render the building unfit
details of the project, the property acquisition steps, the
for use and which do not require substantial repair or
design and various specifications required to comply
renovation.
with the rules of the Art and also to comply with high
technical standards. A letting mandate is generally B. Specific guarantees to be given to the buyer in
granted to the developer to find top tier tenants before relation to the building
completion. Risks associated with the project are
It is common practice for the project developer and the
supported by the developer until the handing over.
seller to put in place a deficiency escrow agreement in
The entire process, starting from negotiations between order to cover any minor defects, lack of conformity and
the project developer and a potential investor until the poor workmanship that are acknowledged at the
signature of an SPA, could take between 3 to 6 months. handing over stage and which should be repaired
However, this is not the final part of the process, as the before final acceptance.
buildings erection will then take approximately two
They must also provide for a rental bank guarantee
further years and only thereafter will the real transfer of
agreement to cover the loss in relation to non rented
property and risks take place. A post completion period
areas. This guarantee generally covers a period of
begins at that time.
18 months.
PICTURE: AXENTO BUILDING DEVELOPED BY CIP LUXEMBOURG S.A.

ARCHITECT ARLETTE SCHNEIDERS PHOTOGRAPHER ANTOINE HUOT
Handing over is the completion of

the building in accordance with the
description of the project.
Timeline for a share deal with a property to be built and rented before the transfer of shares.
R E A L E S TAT E
02 Luxembourgs
Real Estate market
C. Legal guarantees of damages, should whole or partial destruction of the

building occur.
Biennial and decennial guarantees (Art 1792 and 2270
of the Civil Code) are the legal guarantees borne by If the contract is a project development agreement with
architects, builders and any entity that designs or a forward sale (vente terme), the ownership of the
constructs the building. building stays with the promoter until a formal handing
over, a signature or delivery of closing documentation.
Biennial: Damage to minor parts and equipment, which
Therefore, it is the promoter who will bear the risk.
could be separated from the elements constituting the
building (i.e. heating, windows, small fittings etc.), are If the contract is a sale for payment as work progresses
covered by a two-year period of liability starting at the VEFA, the ownership of the building, as well as the risk,
handing over. This includes a presumption of are transferred as and when work proceeds.
responsibility of those professionals that have performed
the construction works.
2.4. REAL ESTATE TAXATION
As a preliminary remark, worth tax and property tax are
Decennial: A presumption of responsibility of the
commonly determined by referring to the unitary value
professionals taking part in the design and execution of
of the property. In practice, the unitary value reflects the
the construction works, in case of a failure of these
theoretical value of the property as per 1 January 1941
works, can be searched over a ten-year period from the
and, therefore, is usually minimal (generally 5% to 10%
point of handing over. Only damages occurring to major
of the market value of the property).
parts of the construction fall within the scope of the
decennial responsibility (all defects affecting the solidity A. Income tax
of the building or compromising its normal use, as well
as all defects affecting the solidity of equipment that Luxembourg companies or non-residents acting through
cannot be separated from the building itself). a Luxembourg permanent establishment are liable to
Luxembourg corporate income tax (including municipal
D. Transfer of risks and ownership business tax) at the combined rate of 28.8% (for
companies or Luxembourg permanent establishments
One of the major issues with the sale of a project is the
in Luxembourg city) for 2011 on any rental income or
transfer of risk and ownership. During the construction
gains derived from real estate properties located in the
period, it is very important to know the true owner of the
Grand-Duchy of Luxembourg.
project as well as the individual who will bear the costs
PICTURE: PLAZA BUILDING DEVELOPED BY CIP LUXEMBOURG S.A.

ARCHITECT ARLETTE SCHNEIDERS
Worth tax and property tax are

commonly determined by referring
to the unitary value of the property.
Resident or non-resident individuals investing directly D. VAT and registration fees

in real estate properties in the Grand-Duchy of
The sale of buildings or buildings under construction is
Luxembourg are subject to Luxembourg personal
subject to transfer tax at the rate of 6% increased by
income tax at a progressive scale with a top marginal
transcription tax of 1% determined on the base of the
rate of 40.56% up to 41.34% (depending on the
value of the building. A municipal surcharge of 50% of
solidarity surcharge that is in a range of 4% up to 6%)
the transfer tax applies to any sale of buildings located
on the net rental income and capital gains (excluding
in Luxembourg City and affected to commercial use. In
those from the sale of the taxpayers principal residence
a nutshell, the aggregate registration fee pertaining to
which are tax exempt). Resident and non-resident
the sale of residential buildings in the Grand-Duchy of
individuals may benefit from a lump-sum deduction of
Luxembourg amounts to 7% whilst it is of 10% for
EUR 50,000 for a single person and EUR 100,000 for a
commercial buildings located in Luxembourg City. It is
married couple.
to note that the seller is liable to the payment of the
B. Property tax registration fees unless otherwise agreed between
the parties.
Property tax (impt foncier), is charged annually by
municipalities at varying rates which may not exceed As an exception to the above-mentioned rules, in case
7.5% of the unitary value of the property (depending on of the acquisition of buildings in view of a future sale
the location and nature of the property). For example, a transfer, tax is increased up to 7.2% resulting in an
property having a market value of EUR 27 million and a aggregate registration fee of 8.2%. A tax refund is
unitary value of EUR 400,000 will be liable to pay a available to the buyer if a re-sale occurs within 4 years
property tax of approximately EUR 30,000. following the acquisition. This tax refund amounts to 6%
for a re-sale within 2 years of the acquisition reduced to
C. Net worth tax
4.8% for a re-sale that takes place after the delay of 2
Real estate properties located in the Grand-Duchy of years without exceeding 4 years. Tax refund strictly
Luxembourg held by a Luxembourg company or by a applies to re-sale of buildings whereas the transfer by
non-resident through a Luxembourg permanent way of contribution or exchange of buildings is excluded.
establishment are subject to annual net worth tax levied Please refer to Section 2.2. for details on the applicable
at 0.5%. Real estate properties abroad are excluded registration fees for share deal vs. assets deal and to
from the net worth tax basis of Luxembourg companies/ section 2.2.7. for VAT implications.
Luxembourg permanent establishments.
R E A L E S TAT E
03 Unregulated
investment vehicles
The most widely used vehicle for unregulated Public Company Limited by Shares
1
structures and central to the structuring of cross (Socit Anonyme SA)
border transactions is the Luxembourg holding Private Limited Liability Company

2
(Socit responsabilit limite SARL)
and finance company, the so-called socit
Partnership Limited by Shares
de participations financires (SOPARFI). The 3
(Socit en commandite par actions SCA)
SOPARFI regime is available to both sophisticated
and non-sophisticated investors. There are no All of the above companies benefit from a limited liability.
restrictions in this respect. The minimum subscribed share capital is EUR 12,500
(SARL) or EUR 31,000 (SA).
Foreign listed companies as well as regulated
Luxembourg vehicles structure their real estate All companies may have a share capital in Euro or in
investments through a SOPARFI. A typical structure another foreign currency. IFRS can be used for
chart can be seen on page 32. bookkeeping purposes upon option of the company.
Even on Lux GAAP, on option, the valuation of the real
3.1. LEGAL REGIME estate portfolio could be made at fair market value.
The SOPARFI is an ordinary holding and finance Shares can be issued with or without par value and no
company which is governed by the ordinary provisions minimum value is required. Luxembourg legislation
of the law dated 10 August 1915 on commercial offers a wide range of possibilities in order to
companies as amended (the Companies Act) and differentiate the shareholders and to repatriate cash
tax legislation. such as ordinary shares, non-voting shares, preference
shares, redeemable shares, profit shares, founder
3.2. INVESTMENT POLICY shares, tracking shares, alphabet shares, etc. Bonds,
convertible bonds, income or profit sharing instruments,
The SOPARFI is not subject to any risk spreading warrants and hybrid instruments can also be issued.
requirements and is not limited to any specific type of
investment. This explains why a SOPARFI is often used 3.4. MANAGEMENT & CORPORATE
for real estate investments throughout the EU. GOVERNANCE
3.3. CORPORATE FORMS AVAILABLE The management and supervision structure is different
for each of the legal forms. Some corporate forms such
The most common corporate forms available to the as the SA and the SCA can opt for a one-tier or two-tier
SOPARFI are the following: management structure combined with internal or
external supervision.
PICTURE: SOFITEL BUILDING
ARCHITECT BUREAU DARCHITECTES WERNER.
The SOPARFI is not regulated and has

no obligation to entrust the custody of its
assets with a depositary.
Management committees, advisory committees and It is to note that as from 1 January 2011, collective
managing directors may be appointed. entities with net assets made up of more than 90 % of
financial assets, securities and banking assets, and
Even though the Luxembourg Stock Exchange has
whose activity is not subject to the authorization or
established ten corporate governance rules for listed
license of a public authority, will be liable to a lump
companies, private entities are not subject to formal
sum taxation of EUR 1,500 to be increased with the
corporate governance rules other than those resulting
unemployment surcharge.
from the Companies Act, which may serve as useful
guidelines for companies and directors. In addition, the SOPARFI is liable to net wealth tax
payable annually as at 1 January of each year at the
The SOPARFI is not regulated and has no obligation to
rate of 0.5 % on its total net operating assets (total
entrust the custody of its assets with a depositary.
assets minus total liabilities), determined in accordance
with the Property and Securities Valuation Act of 19
3.5. TAXATION October 1934 as amended (the Valuation Act) and
3.5.1. GENERAL subject to specific allowances and exemptions (the
Unitary Value, which is generally set on the basis of
A fixed registration duty of EUR 75 is due (i) upon the the financial statements as at 31 December of the
incorporation of a SOPARFI, as well as upon any further previous financial year). Net Wealth Tax (NWT)
modification of its bylaws under Luxembourg law or (ii) exemptions are available under certain conditions and/
upon transfer to Luxembourg of foreign holding or for certain assets.
companies statutory seat or central management. No
other registration duties or other similar taxes are 3.5.2. PARTICIPATION EXEMPTION
payable in Luxembourg upon the issuance of shares by
Providing certain conditions are met, a SOPARFI can
a SOPARFI.
benefit from a total income tax exemption in connection
The SOPARFI is a fully taxable company subject to with dividends, liquidation proceeds received and
corporate income tax at a rate of 22.05% (including a capital gains realized on qualifying shareholdings held
5% surcharge for the unemployment fund) and by the company by virtue of the application of the
municipal business tax at a rate of 6.75% (Luxembourg participation-exemption regime.
City). The combined tax rate amounts to 28.8% for
companies established in Luxembourg City for 2011.
R E A L E S TAT E
03 Unregulated
investment vehicles
A qualifying shareholding is either a fully taxable Participations qualifying for the participation exemption
Luxembourg resident corporate entity, an EU resident regime are also exempt from net wealth tax under the
corporte entity which is covered by article 2 of the EU aforementioned conditions of the subsidiary tax status
Parent-Subsidiary Directive, or a corporate entity which and the level of participation (10% or EUR 1.2 million)
is subject in its country of residence to an income tax with the exception of the 12 months holding period
which is comparable with the Luxembourg corporate condition which is not applicable for NWT purposes.
income tax (i.e. a tax levied at a statutory rate of at least However, debts related to assets exempt from net
10.5 % on a comparable tax basis, comparable to the worth tax are not deductible up to the amount of the
basis determined under Luxembourg tax rules). exempt assets.
Moreover, the company must have held or must commit
Contrary to the SA, the SARL and the SCA are not per
itself to continue to hold for an interrupted period of at
se corporations for USA check-the-box rules and hence
least 12 months a direct participation of minimum 10%
can elect treatment as a corporation or pass-through
of the nominal paid-up capital of the subsidiary, or with
entity under such entity classification rules.
a historical acquisition value of EUR 1.2 million for
dividends (including liquidation proceeds) and EUR 6 USA check-the-box rules: Business entities which are
million for capital gains. not corporations, such as partnerships and limited
liability companies, may under certain conditions, elect
Operational business expenses including interest
to be treated for tax purposes as corporations (the entity
charges economically linked to a participation that
classification).
generates tax exempt income, will, however, not be
deductible for the relevant fiscal year up to the exempt 3.5.3. WITHHOLDING TAX
income realised on such participations in that tax year.
In addition, expenses linked to the alienated participation Dividends distributed by a SOPARFI are in principle
which have been deducted (because exceeding the subject to withholding tax at a rate of 15% (17.65% on
exempt dividend) will be subject to recapture or claw a gross-up basis), unless a tax treaty provides for a
back upon realisation of capital gains on such reduced rate or a full exemption is available under the
participation. EU Parent-Subsidiary Directive or domestic law.
PICTURE: UNICO BUILDING DEVELOPED BY CIP LUXEMBOURG S.A.

Liquidation proceeds or the proceeds of

a partial liquidation are distributable to the
shareholders free of withholding tax.
In principal, interest payments are not subject to Luxembourg on any capital gains with the exception of
Luxembourg withholding tax, unless interest is paid on limited cases where non-resident shareholders are not
profit-sharing bonds, silent partnership type protected by a tax treaty and under some conditions.
arrangements, or is not at arms length, which may be
3.5.5. THIN CAPITALISATION RULES
treated as constructive dividends subject to 15%
withholding tax (reduced or exempt under the above- Luxembourg tax law does not provide for formal thin
mentioned conditions of the participation exemption). capitalisation rules applicable to SOPARFIs. However,
Moreover, the law implementing the EU Savings the administrative practice has developed a default
Directive introduced a withholding tax (20% until 30 debt-equity ratio of 85/15 applicable to the financing of
June 2011 and 35% as of 1 July 2011) on all income fixed assets (including participations and real estate).
from savings, in the form of interest (as defined by the Debt financing in excess of the 85/15 ratio level may still
EU Savings Directive), paid or secured from 1 July be acceptable provided that the aggregate interest
2005 for the benefit of individuals resident in other EU charge is reduced so that the interest accrued or paid is
Member States (including in the associated or not in excess or remains at arms length or in case the
dependant territories) or paid to a residual entity (as taxpayer can demonstrate that a non-related party
defined in the Savings Directive and for the benefit of would have financed under the same ratio having as
individuals resident in other EU Member States). Such sole collateral the assets held by the SOPARFI.
withholding tax will be due unless the identity of the Excessive interest may be re-qualified as a constructive
beneficiary is disclosed. Interest paid to Luxembourg dividend and may, therefore, not be deductible for
resident individuals is subject to a 10% withholding tax corporate income tax purposes. In addition, such
representing their final tax liability if the interest is interest treated as constructive dividend may also be
earned within the management of ones private wealth. subject to the dividend withholding tax at the domestic
rate of 15%, which might however be reduced or exempt
3.5.4. LIQUIDATION PROCEEDS / TAXATION OF
as the case may be.
NON RESIDENT INVESTORS
Interest-free shareholder debt is considered as equity
Liquidation proceeds or the proceeds of a partial
for thin capitalisation purposes whilst borrowings for
liquidation are distributable to the shareholders free of
on-lending purposes are disregarded for the computation
withholding tax since they are treated as capital gains.
of the above debt-equity ratio.
Non-resident shareholders are not liable to tax in
R E A L E S TAT E
03 Unregulated
investment vehicles
PICTURE: ARCELOR BUILDING

ARCHITECT Bureau dArchitectes Werner
As at March 2011, Luxembourg

concluded 62 tax treaties which
are currently in effect.
3.5.6. DOUBLE TAX TREATIES For instance, the SIF, having no access to double tax
treaties, can circumvent the latter by interposing a
As at March 2011, Luxembourg concluded 62 tax
SOPARFI which would invest directly in real estate
treaties which are currently in effect. Another 25 are
assets or through a real estate company. Furthermore,
under negotiation.
a SICAR could invest through a SOPARFI as a SICAR
In most of tax treaties concluded by Luxembourg, the is not allowed to invest directly in real estate assets.
sale of shares in a company holding mainly real estate
assets is not assimilated to the sale of the real property
as provided for in the OECD Model Convention following
the 2003 update. As a result, capital gains realized by
SOPARFIs on shares held in foreign property companies
holding real estate are in most cases exempt from
Luxembourg Corporate Income Tax under the
participation exemption regime.
The chart on the right shows a structure whereby a

SOPARFI, financed by debt, has a qualifying
participation in a property company located in a country
with which Luxembourg has concluded a suitable
double tax treaty. The sole asset of the property
company is the real estate asset.
The SOPARFI can also be used in combination with

Luxembourg regulated vehicles such as the venture
capital investment company (socit dinvestissement
en capital risque SICAR) or the specialized
investment fund (SIF) (further information available in
section 4) by serving as a financing company or as an
intermediate holding company to take benefit of tax
treaties or EU Directives to which such regulated
vehicles potentially would not be entitled.
R E A L E S TAT E
04 Regulated
investment vehicles
Structuring an investment fund which will appeal to In Europe, applying private equity principles to real
investors requires not only tax efficiency, but also estate as an asset class has been a recent and growing
demands a degree of flexibility for tailor-made trend. This concept originated in the USA some time
structuring and marketability. Over recent years, ago. Typical real estate private equity funds are
Luxembourg has been a highly favourable opportunistic funds following a six to ten year cycle and
jurisdiction in this respect and has produced are more hands on than other mainstream real estate
a number of competitive structures including structures. They also involve a higher leverage than
attractive real estate investment funds (REIF), the core real estate funds and adopt a pan-European
SICAR and more recently, the SIF. These structures investment strategy.
complement the range of existing private investment
As at December 2009, the number of Undertakings for
vehicles and also the SOPARFI.
Collective Investment (UCIs) investing principally in
real estate funds amounted to EUR 18.97 billion.
Luxembourg investment funds: evolution
of net assets vs number of funds
Luxembourg is a popular domicile for real estate
investment vehicles.
Proportion
Proportion ofof fund
fund typestypes byyear
by launch launch
(*) year (*) Source: ALFI Survey 2010
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
Source: Property Partners Research
0%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: ALFI Survey 2010

In Europe, applying private equity

principles to real estate as an asset class
has been a recent and growing trend.
4.1. THE REAL ESTATE UCI The new regime will continue to allow the formation of
real estate UCIs as regulated entities. Prior application
The Undertakings for Collective Investments in to the supervisory authority, the CSSF, will require filing
Transferable Securities (UCITS) brand celebrates its of an offering document, including disclosure of the
25th anniversary in 2010, as the first UCITS directive promoter of the scheme, appointment of a custodian
was formally adopted on 20 December 1985. Four days bank and an independent auditor. Once the fund is
before the exact anniversary date, on 16 December authorised and operational, it will be subject to the
2010, the Luxembourg Parliament ratified the law ongoing supervision of the CSSF.
transposing UCITS IV in Luxembourg.
Real estate funds often adopt the UCI structure when
Camille Thommes, Director General of the Association shares or units of the fund are distributed in the general
of the Luxembourg Fund Industry (ALFI) quoted on a public, and investments are made in compliance with
press release dated 19 December 2010, UCITS have the risk diversification principle (flexibility is allowed
proved to be a pioneer passporting device for funds. during the start-up period). Yet, real estate as a primary
We are working to get it right, but believe it will be asset class is not part of eligible assets for coordinated
possible to replicate the success of UCITS when the UCITS, and therefore UCI real estate funds do not
AIFM Directive comes into effect. We also expect to see benefit from the European passport.
growth and consolidation within Luxembourgs fund
industry. Earlier this year, a study by Lipper FMI ALFI fifth edition of its annual survey on Luxembourg
estimated that Luxembourgs fund industry will grow at REIF, looking at the Luxembourg market at the end of
a rate of 10.4% over the next five years, resulting in the year 2009, briefly reports:
assets of EUR 2.6 trillion by 2014.
In terms of geographical investment strategy, of
The new law of 16 December 2010 implementing the 158 funds surveyed 24% have a single country
UCITS IV (the UCI Act) has been effective since investment focus, while 82% of the funds invest
1 January 2011. It phases out the previous law of only in Europe.
20 December 2002 on undertakings for collective
investments, which will be ultimately repealed on 67% of the funds surveyed are closed-ended,
1 July 2012. 15% are semi-open ended with only 6% being fully
open-ended with no restrictions on redemptions.
R E A L E S TAT E
04 Regulated
investment vehicles
44% of the funds surveyed are value-added funds, FCP (fonds commun de placement), i.e. the
37% core and 19% opportunistic funds. Luxembourg equivalent to mutual funds, an
unincorporated pool of assets operated by
Assets under management (AUM) have grown a Luxembourg management company; the
from EUR 15.4 billion at 31 December 2007 to management company may delegate part or all of its
EUR 19 billion as at 31 December 2009. In July duties, subject to certain requirements; unitholders
2010, AUM reached EUR 20 billion, approaching of the FCP are not entitled to shareholder rights,
the AUM as at 31 December 2008 of just short of but their liability to the FCP is limited to the amount
EUR 21 billion. they contributed to the fund and they are entitled to
4.1.1. LEGAL REGIME a pro rata share of the assets of the FCP.
Real estate UCIs may be set up by either using 4.1.2. COMPARTMENTS

corporate or contractual forms. The majority of real Under any of the legal forms above, UCIs may use
estate UCIs are organised as: compartments to segregate various portfolio investments
within the same vehicle. Each sub-fund is responsible
SICAFs, i.e. fixed capital investment companies
for its particular assets and liabilities, but the umbrella
(socit dinvestissement capital fixe); these are
structure is legally considered a single entity.
usually set up as an SA or an SARL. Capital may
only vary subject to legal requirements. 4.1.3. RESTRICTIONS
SICAVs, i.e. variable capital investment Minimum capital of EUR 1,250,000 must be reached
companies (socit dinvestissement capital within six months of the UCI receiving its license from
variable), whose share capital is increased with the CSSF. No distribution shall be made which would
each subscription and decreased with each bring the capital of the UCI to fall below such minimum
redemption and is, therefore, at all times equal to amount.
the net asset value of the fund vehicle. SICAVs
Risk diversification is a requirement for any UCI. Real
under the UCI Act are organised as an SA.
estate UCIs may in principle not invest more than 20%
of their net assets in the same property, provided that
this rule shall not apply for the initial four-year period
following the closing of the initial subscription period.

In the recent years, the SICAR regime has

gained ground to become more popular for
real estate investments than the UCI regime.
Real estate UCIs are also subject to borrowing EU Savings Directive: The Directive aims to make
restrictions: they should not borrow more than 50% of savings income, in the form of interest payments made
the value of their properties. by a paying agent in one member state of the EU to
beneficial owners who are individuals resident in
The UCI must calculate a net asset value at least once
another member state, subject to effective taxation.
a year. Valuation of all underlying properties must be
performed by an independent surveyor.
4.2. THE SICAR
4.1.4. TAXATION
The SICAR was an instant success when it was
As for other UCIs, real estate UCIs are generally tax launched (under the SICAR Act of 15 June 2004 as
exempt in Luxembourg, except for a fixed, one-off amended). The law was updated in 2008 to allow for
registration duty (EUR 75) and an annual subscription increased flexibility, e.g. with segregated sub-funds
tax (taxe dabonnement) of 0.05% payable quarterly within the same corporate structure and inclusion of the
and calculated on the total net asset value of the UCI on share premium in the computation of minimum capital
the last valuation day of each quarter. The subscription requirements. In the recent years, the SICAR regime
tax rate may be as low as 0.01% p.a. or exempt from has gained ground to become more popular for real
subscription tax for funds / sub-funds distributed to estate investments than the UCI regime.
institutional investors only (i.e., money market and
4.2.1. LEGAL REGIME
pension funds).
The SICAR is a regulated regime that applies to
Distributions made by a real estate UCI to its investors
corporate vehicles, generally governed by the
are not subject to Luxembourg withholding tax, but may
Companies Act unless otherwise specifically provided
be subject to application of the provisions of the EU
for in the SICAR Act in an effort to make the vehicle
Savings Directive when the recipient investor is resident
more adaptable to its specific purposes. Certain
in a member state of the European Union.
provisions of the Companies Act are derogated from or
Generally, while FCP UCIs cannot claim for the benefit made optional. Certain tax exemptions have been
of double taxation treaties as they are transparent for made available, while some others are widened.
tax purposes, the provisions of certain tax treaties which
explicitly cover UCIs may be available to corporate real
estate investment funds.
R E A L E S TAT E
04 Regulated
investment vehicles
The five different corporate forms available within the Each compartment may have a different investment
SICAR regime, combined with adaptable solutions for policy, different share classes, and distinct distribution
issuance and redemption of shares, repayments, rules, fee structures, etc. Individual compartments may
dividend distribution, or liquidation, make the SICAR a be liquidated without triggering the liquidation of other
highly flexible investment solution. compartments. However, liquidation of the last
compartment in the SICAR leads to liquidation of the
Permitted corporate forms include:
vehicle.
1 Public Company Limited by Shares (SA) 4.2.3. INVESTMENT POLICY

2 Private Limited Liability Company (SARL)
The SICAR regime requires that investments be made
3 Cooperative Company (SCSA) organised as an SA in securities representing risk capital, i.e. investments
4 Partnership Limited by Shares (SCA) made with the aim to reward investors risk on the result
Ordinary Partnership of the management of the underlying asset. A SICAR
5
(Socit en commandite simple SCS) must generally invest with a view to selling its
investments at a profit.
The minimum subscribed share capital is EUR
Although a SICAR may not invest directly in real estate,
1,000,000 (including share premium) and must be
CSSF guidelines clarify that it may do so indirectly
reached within twelve months following CSSF approval
through a special purpose vehicle that would in turn
of the SICAR (but only 5% of each share must be
invest in real estate assets. Yet, a SICAR must invest in
effectively paid-in). Variable capital is possible in all
assets that have risk capital / venture capital features,
eligible corporate forms.
e.g. volatility, lack of stable returns due to country risk,
4.2.2. COMPARTMENTS etc., and this also applies to real estate investments.
However, there is no risk diversification requirement so
Further to an update to the SICAR Act in 2008,
that a SICAR may (indirectly) hold one real estate
compartments have been available under the regime.
property investment.
Assets and liabilities of the SICAR may be split into
segregated portfolios, with investors and creditors
rights limited to each relevant compartment or sub-fund.

The SICAR regime requires that

investments be made in securities
representing risk capital.
4.2.4. QUALIFIED INVESTORS 4.2.6. INFORMATION AND REPORTING
Investment into the SICAR vehicle is restricted to The information package to be provided to investors as
qualified investors including (i) institutional, (ii) required by the SICAR Act includes a prospectus or
professional or (iii) expert investors. The latter must (a) private placement memorandum and an audited annual
declare they are sophisticated investors and (b) report published within six months of the period
subscribe for at least EUR 125,000 or obtain professional which it relates to. Assets valuation should be based on
assessment that they are expert investors. Directors fair value.
and other persons involved in the management of the
4.2.7. TAXATION
SICAR are however not subject to this limitation.
With the exception of SICARs in the legal form of SCS,
4.2.5. REGULATION AND SUPERVISION
treated as tax transparent entities, SICARs under the
A SICAR may commence activities only when it has legal form of a corporation are fully taxable entities
obtained authorisation from the CSSF, or provided subject to corporate income and municipal business
application to the CSSF is filed within one month of the taxes at the combined rate of 28.8% (for companies
incorporation of the vehicle. However, in order to seize located in Luxembourg City). As a tax resident the
investment opportunities without the time constraints SICAR is entitled to the benefit of the EU Parent
linked to the authorisation process, investments may be Subsidiary Directive, the Luxembourg participation
warehoused in an ad hoc legal vehicle, e.g. a SOPARFI, exemption and the tax treaties (unless restricted or
and later transferred to the SICAR once authorised. excluded as under the Luxembourg-US tax treaty).
SICARS are however exempt from net wealth tax. The
CSSF pre-approval includes directors, the auditor and
SICAR is in addition subject to a fixed, one-off
the custodian of the SICAR. However, the promoter and
registration duty (EUR 75) due on incorporation.
investment manager are not subject to such vetting.
For the purposes of the determination of its taxable
The CSSF registers authorised SICARs on an official
basis income and capital gains realised on transferable
list. Operations of the SICAR are then subject to ongoing
securities (i.e. equity and debt securities), and income
supervision of the CSSF.
from cash held for less than 12 months pending
investment are tax exempt.
R E A L E S TAT E
04 Regulated
investment vehicles
No withholding tax is levied on dividends distributed or Optional tax consolidation is not allowed to the SICAR.
interest paid by the SICAR (save for the purposes of the Both the SICAR and its management company may
EU Savings Directive and related agreements with register for VAT purposes under standard VAT rules.
dependent territories of certain EU member states). However, management and advisory services provided
to the SICAR or its management company are
Tax-transparent SICARs are exempt from corporate
VAT exempt.
income and municipal business taxes, and from withholding
tax on distributions made by the SICAR. Income received Legal regime
by investors is then taxed in accordance with the rules
applicable in their country of tax residence.
Non-resident investors are not taxed on capital gains in

Luxembourg as far as they are protected by a tax treaty
and under some conditions.
Basic structure
Source: ALFI Survey 2010. Data as of 31 December 2009.
4.3. THE SIF

The SIF is governed by the SIF law dated 13 February
2007 (the SIF Act as subsequently amended) and
applies to investment schemes whose securities are
not offered to the general public.
Source: ALFI Survey 2010. Data as of 31 December 2009.
Picture: CIPA Haaptmanns Schlass (Berbourg)

Architect witry & witry SA PHOTOGRAPHER Michel Feinen.
The SIF regime, with light-touch regulation,

great investment and operational flexibility
and efficient tax features, is a popular
regulated solution to real estate funds.
The range of assets eligible under the SIF regime is In addition to this wide choice of corporate forms, the
unlimited, and hence includes real estate. The SIF SIF regime allows to opt for variable share capital (if
regime, with light-touch regulation, great investment organised as a SA, SARL, SCA or SCSA) so that the
and operational flexibility and efficient tax features, is a amount of the share capital is ipso jure equal to the
popular regulated solution to real estate funds. About value of the net assets. Otherwise, the regime offers
1,200 SIF have been authorised in Luxembourg since flexibility comparable to that of the SICAR with regards
the new regime was launched, and approximately 15% to the issuance and redemption of shares, repayments
of these vehicles are real estate funds. and distributions, etc.
4.3.1. LEGAL REGIME The minimum subscribed share capital is EUR

1,250,000 (including share premium) and must be
SIFs may be organised under a corporate or contractual
reached within twelve months following CSSF approval
form (FCP). Corporate forms are subject to the
of the SIF (but only 5% of each share must be effectively
Companies Act unless otherwise provided for in the SIF
paid-in).
Act. All corporate forms available under Luxembourg
law are eligible, including: 4.3.2. INVESTMENT POLICY
A SIF may invest in any values and is not subject to

1 Public Company Limited by Shares (SA) any sector-based restriction. It may therefore invest
2 Private Limited Liability Company (SARL) directly or indirectly in real estate assets, and combine
such investments with other asset classes, e.g. listed
3 Ordinary Partnership (SCS)
companies, other UCIs or derivative instruments.
4 Partnership Limited by Shares (SCA)
The SIF is subject to risk diversification requirements. A
5 Cooperative Company (SCSA) organised as an SA
minimum of four real estate investments is required by
Civil Law Partnership
6
(Socit civile SC)
the CSSF (30% NAV maximum in one investment),
General Partnership
subject however to case-by-case assessment. Other
7
(Socit en nom collectif SNC) investment limits are defined by the SIF and agreed
with the CSSF.
R E A L E S TAT E
04 Regulated
investment vehicles
4.3.3. QUALIFIED INVESTORS 4.3.5. INFORMATION AND REPORTING
As for the SICAR, investment into a SIF vehicle is As for the SICAR, the information package to be
restricted to qualified investors including (i) institutional, provided to investors as required by the SIF Act includes
(ii) professional or (iii) expert investors. The latter must a prospectus or private placement memorandum and
(a) declare they are sophisticated investors and (b) an audited annual report published within six months of
subscribe for at least EUR 125,000 or obtain professional the period which it relates to. Assets valuation should
assessment that they are expert investors. Directors be based on fair value. There is no requirement to
and other persons involved in the management of the publish semi-annual reports, or to prepare consolidated
SIF are however not subject to this limitation. financial statements.
4.3.4. REGULATION AND SUPERVISION There is no requirement regarding minimum contents

or specific layout for the private placement
The SIF is subject to prior authorisation and ongoing
memorandum, provided that all information relevant to
supervision of the CSSF. Application to the CSSF must
investors making an informed assessment of proposed
be filed within one month of the incorporation of the SIF.
investment in the SIF and related risks is available.
Upon authorisation, the SIF is registered on an official
list maintained by the CSSF. 4.3.6. TAXATION
The supervision regime is comparable to the Taxation of SIFs follows the rules applicable to fully
one applicable to the SICAR. A custodian and an regulated investment funds: exemption of corporate
independent auditor approved by the CSSF must be income tax and net worth tax, but submission to an
appointed. CSSF vetting does apply to directors of the annual subscription tax (taxe dabonnement) of 0.01%
investment scheme, but not to its investment manager payable quarterly and assessed on the total NAV on the
or promoter. Changes to the statutory documents of the last valuation day of each quarter. Some exemptions
SIF (articles of incorporation and private placement apply to the subscription tax, e.g. for assets held through
memorandum, management regulations for a SIF UCITS, institutional cash funds, pension funds and
structured as an FCP), appointment of new directors, pension pooling funds.
auditors or custodian bank are subject to CSSFs
The SIF is also subject to a fixed, one-off registration
prior approval.
duty (EUR 75).
The CSSF Circular 91/75 foresees that investment

properties must be valued at least on an annual
basis by an external independent valuer.
No withholding tax is levied on distributions made by 4.4. ACCOUNTING AND VALUATION

a SIF, including dividend distributions, liquidation ISSUES
proceeds, interest payments except (i) in limited cases
when the SIF is structured as an FCP or (ii) for payments The Working Group on Real Estate Investment Funds
falling within the scope of the EU Savings Directive or of the ALFI regularly publishes guidelines on common
the domestic law applying a withholding tax to interest practice within the real estate industry. It covers issues
payments to Luxembourg resident individuals. such as accounting and valuation issues, calculation of
NAV and the content of financial statements as well
Tax-transparent SIFs have no access to double tax as specific issues arising in respect of the SICAR
treaties, but their investors may claim benefit of the tax and SIF.
treaties applicable between their country of residence
and the country of the source of income. 4.4.1. PROPERTY VALUATION
The chart below illustrates the taxation elements of a The CSSF Circular 91/75 foresees that investment
typical investment structure: properties must be valued at least on an annual basis
by an external independent valuer.
ALFI has recommended five acceptable valuation

methods:
The actual cost of a recent acquisition;
Estimations based on the cost of comparable

transactions in a similar location and condition,
often using a unitized method (e.g. value per
sq m), or of a dissimilar property adjusted to reflect
the differences;
R E A L E S TAT E
04 Regulated
investment vehicles
Discounted cash flow of future income and accounts would not represent adequately the funds
expenses; activities (e.g. profits from rental activities, borrowing
money at a subsidiary level) to the investors.
Multiples of annual rental income (rental yields);
This would be especially true for funds which have a
Any other method recognized by applicable core or core plus strategy where income yields, funds
valuation standards, e.g. depreciated replacement form operations etc, are critical performance measures
cost, profits method. for investors.
4.5. TYPICAL LUXEMBOURG REIF

4.4.2. ACCOUNTING PRINCIPLES AND
CONSOLIDATION Given the different interests involved and the wide
variety of solutions available, it is not possible to
Luxembourg GAAP and IFRS are appropriate and can describe all available structures here. The chart below
be used for the financial statements of a Luxembourg shows one structure commonly used by REIF.
REIF.
Under Luxembourg GAAP, property being developed

as an investment property should be carried at fair
value similar to properties being developed for trading
purposes. Under IFRS, development properties are
generally held at the lower of cost or net realizable
value pending transfer into investment properties held
at fair value.
Under the SICAR and SIF legal framework, there is no

obligation to prepare consolidated accounts. However,
accounts prepared in accordance with IFRS would
always need to be consolidated.
Practically, most funds will opt to prepare consolidated

accounts, as in most circumstances, non-consolidated

05 Real estate investment

through securitisation vehicles
Thanks to a large spectrum, the law of 22 March 5.1. LEGAL REGIME

2004 on securitisation as amended (the
Securitisation Law) allows the securitisation of Luxembourg securitisation vehicles which do not issue
all types of risks linked to movable or immovable securities to the public on a continuous basis (more
assets, tangible or intangible assets, claims, as well than three times per year) are not regulated. In case of
as risks linked to undertakings and activities issuance of securities to the public on a continuous
performed by third parties. Real estate investments basis, securitisation vehicles will be subject to the
performed through Luxembourg securitisation supervision and regulation of the CSSF.
vehicles are mainly used to securitise risks linked Obviously, an offer of securities made to institutional
to portfolios of mortgage loans, rents as well as to investors as well as private placements does not
transfer the ownership of a building together with constitute an offer made to the public.
the potential income which may be generated by
the latter, through the issuance of bearer securities 5.2. THE SECURITISATION VEHICLE
to the investors.
A Securitisation vehicle may be set up under the form of
The securitisation can be realised either through the (i) a securitisation fund (as a FCP, as a co-ownership of
transfer of ownership of the assets from the originator to assets or as a fiduciary estate managed by a
the securitisation vehicle (true securitisation), or through management company incorporated in Luxembourg
the transfer of the risks linked to the assets from the under the legal form of a commercial company), or (ii) a
originator to the securitisation vehicle (synthetic securitisation company incorporated under one of the
securitisation). following legal forms:
Securitisation transactions may be structured either (i)

1 Public Company Limited by Shares (SA)
through a sole securitisation undertaking that shall carry
out the securitisation in full, or (ii) through an acquisition
2 Private Limited Liability Company (SARL)
vehicle which shall acquire or assume the securitised
risks, such vehicle being financed in its turn by
3 Cooperative Company (SCSA) organised as an SA
an issuing vehicle which shall issue securities
to investors.
4 Partnership Limited by Shares (SCA)
L U X E M B O U R G L O N D O N Picture: Dexia building (Esch-Belval)

Architect VASCONI ASSOCIES ARCHITECTES - Photographer Catherine Thiry
R E A L E S TAT E
05 Real estate investment

through securitisation vehicles
5.3. COMPARTMENTS its assets for guarantee purposes, except to secure the
undertakings it has assumed for their securitisation or in
The Securitisation Law expressly recognises the favour of its investors, their fiduciary-representative or
possibility for a securitisation vehicle to create multiple the issuing vehicle participating in the securitisation.
compartments with strict segregation of assets and Security interests or guarantees given in breach of the
liabilities between compartments. above mentioned rules will be void by operation of law.
In such case, the assets of a given compartment are 5.5. A BANKRUPTCY PROOF VEHICLE
exclusively available to satisfy the rights of investors in
relation to that compartment and the rights of creditors Article 64 of the Securitisation Law allows to structure
whose claims have arisen in connection with the securitisation undertakings as fully bankruptcy proof
creation, operation or liquidation of that compartment. vehicles.
In addition, thanks to the segregation technique, it is Indeed, the articles of incorporation, the management
always possible to liquidate a compartment without regulations of a securitisation undertaking as well as
triggering the liquidation of the other compartments. any agreement entered into by the securitisation
undertaking may validly contain provisions by which
5.4. ISSUANCE OF SECURITIES AND investors and creditors accept (i) to subordinate the
GRANTING OF SECURITY INTERESTS maturity or the enforcement of their rights to the payment
of other investors or creditors, or (ii) to undertake not to
A securitisation vehicle may issue all types of debt/
seize the assets of the securitisation undertaking, and
equity securities to investors without restriction (no
last but not least (iii) not to petition for bankruptcy or
debt/equity ratio applies). It may also be accessorily
request the opening of any other collective or
financed by bank financing in the context of the
reorganisation proceedings against the securitisation
acquisition of risks to be securitized or to facilitate the
undertaking. Therefore, any proceedings initiated in
securitisation of acquired risks.
breach of such provisions shall be declared inadmissible
In order to safeguard the rights of the investors, the by the Luxembourg commercial court.
Securitisation Law provides that a securitization vehicle
cannot grant security interests over its assets or transfer
PICTURE: MONTIMMO
LEASINVEST REAL ESTATE
A high degree of tax neutrality of

a securitisation vehicle may hence
be fully achieved.
5.6. TAXATION In addition, since securitisation companies are

Luxembourg resident entities fully liable to Luxembourg
To the extent a securitisation vehicle is set up as a income tax they should benefit from the tax treaty
corporation, it is subject to corporate income tax and protection. The interpretation of the tax treaty may
municipal business tax levied at the aggregate standard however vary from one country to the other.
rate of 28.8% as of 1 January 2011. For the purposes of
determining its taxable base, a securitisation vehicle is From a Luxembourg VAT perspective, the exemption as
nonetheless allowed to deduct any commitments set forth in the VAT Directive 2006/112/EC as further
towards its investors. amended applies to management services rendered to a
securitisation vehicle located in Luxembourg within the
Commitments are not restricted to interest or other type meaning of article 44, 1, d) of the Luxembourg VAT law.
of return payable on debt obligations but normally
include any obligation to pay as dividends, profit
distributions and liquidation bonuses in connection with
shares subject to certain conditions. As a consequence,
any transfer pricing issues are set aside and, for
instance, securitisation vehicles involved in the holding
of receivables will not have to report a taxable margin.
A securitisation vehicle is neither subject to net wealth
tax nor withholding tax (with the exception of withholding
tax that applies on payments that fall under the scope of
the EU Savings Directive 2003/48/EC as amended and
implemented under the Luxembourg law).
A high degree of tax neutrality of a securitisation vehicle

may hence be fully achieved.
R E A L E S TAT E
06 Our expertise
6.1. REAL ESTATE EXPERTISE 6.2. REAL ESTATE KNOW HOW

Our firm has extensive experience representing and Whether intended as a long-term investment vehicle or
advising a broad array of institutional investors as well as a means of addressing short-term needs, most real
as promoters and sellers. We encompass a strong estate transactions follow a natural lifecycle, from
commercial real estate practice and regularly advise identification of requirements and issues, through
clients in connection with all facets of the acquisition, acquisition or leasing of land and buildings, to sale or
disposition, financing, development, leasing and disposition when the real estate assets have served
operation of all types of real property. Our team regularly their intended purpose. At Oostvogels Pfister Feyten,
advises clients on land use, zoning, permitting and we combine this lifecycle perspective with an
related matters and has extensive experience in understanding of our clients history and goals.
handling international transactions.
Our real estate lawyers work with clients to maximize
We can assist with a broad range of portfolio and asset opportunities and minimize expenses, taxes and
management issues, including leasing, environmental, risks by identifying current objectives and integrating
building renovations, landlord/tenant and construction them into our clients long-term financial and
disputes, property management and leasing business strategies.
agreements, emphytheutic leases, mechanics lien
claims, and mortgages. 6.3. OUR REAL ESTATE TEAM
Our lawyers understand specific concerns of institutional Our lawyers appreciate the difference between real
investors and the relationships among their investment estate as a primary business and real estate as an
staff, consultants, advisors, and outside counsel. asset and will develop solutions accordingly.
We distinguish ourselves by our ability to handle all
Whether negotiating a single retail lease, managing
aspects of a project from acquisition of the land to
deals involving several thousands of square meters of
development and construction of the project right
office or retail space, or coordinating a multi-property
through to project disposition.
transaction involving assets and shares deals, our team
offers exacting legal analysis, business insight and
meticulous attention to detail.
Our lawyers appreciate the difference between

real estate as a primary business and real estate as
an asset and will develop solutions accordingly.
We have developed networks and relationships with 6.4. OUR FUND FORMATION TEAM
key industry players and parties around the country
including developers, architects, due diligence and land Our team regularly advises on a number of diverse and
use consultants, regulators, lawyers, real estate complicated fund structures.
brokers, agents, advisors, lenders and investors. We We have a long history of structuring investment funds
share knowledge and experience to negotiate (both regulated and unregulated), providing advice on
favourable real estate transactions, obtain governmental regulatory and tax aspects as well as structuring
approval of a pending transaction, or secure project underlying assets.
financing, amongst other undertakings.
Our team undergoes activities ranging from drafting
We ensure each transaction is managed by highly issuing documents and management agreements
qualified professionals in the field and are sensitive to through to handling UCIs, SICAR and SIF registration.
the time and cost concerns involved to our clients.
We will negotiate service providers contracts with
We have the depth of knowledge and experience custodian banks whilst also dealing with all central
to handle routine as well as unusual and complex administrations and compliance issues. We work with
transactions in a timely, thorough and effective manner. major clients across the world on a multitude of
innovative investment fund vehicles.
R E A L E S TAT E
07 Contact information
Real Estate Tax
Martine Gerber-Lemaire, Partner, Head of Practice Frdric Feyten, Managing Partner, Head of Practice
mgerber@oostvogels.com ffeyten@oostvogels.com
Christel Dumont, Counsel Chokri Bouzidi, Principal

cdumont@oostvogels.com cbouzidi@oostvogels.com
Investment Funds Banking & Finance
Franois Pfister, Senior Partner, Head of Practice Stphane Hadet, Partner, Head of Practice
fpfister@oostvogels.com shadet@oostvogels.com
Harold Parize, Partner, Co-Head of Practice Yann Hilpert, Principal

hparize@oostvogels.com yhilpert@oostvogels.com
Private Equity/Corporate RESTRUCTURING AND INSOLVENCY
Grard Matrejean, Partner, Head of Practice Martine Gerber-Lemaire, Partner, Head of Practice
gmaitrejean@oostvogels.com mgerber@oostvogels.com
Stef Oostvogels, Senior Partner Stphane Hadet, Partner

soostvogels@oostvogels.com shadet@oostvogels.com
Delphine Temp, Partner Delphine Temp, Partner

dtempe@oostvogels.com dtempe@oostvogels.com
Isabelle Lentz, Partner Christel Dumont, Counsel

ilentz@oostvogels.com cdumont@oostvogels.com
LITIGATION
Christel Dumont, Counsel, Head of Practice

cdumont@oostvogels.com
08 Our offices
LUXEMBOURG LONDON
291, Route dArlon 10, Dominion Street

BP 603 L-2016 Luxembourg EC2M 2EF London
Tel: +352 46 83 83 Tel: +44 (0)20 7330 1111

Fax: +352 46 84 84 Fax: +44 (0)20 7330 1112
www.oostvogels.com www.oostvogels.com
R E A L E S TAT E
www.oostvogels.com

OPF Real Estate in Lux 2011

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OPF Real Estate in Lux 2011

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Real Estate

02 Luxembourgs Real Estate market PAGE 8

2.1 Market Activity PAGE 8

2.2 Real Estate Transactions PAGE 12

2.3 Real Estate and Construction Matters PAGE 21

2.4 Real Estate Taxation PAGE 26

03 Unregulated investment vehicles PAGE 28

3.1 Legal Regime PAGE 28

3.2 Investment Policy PAGE 28

3.3 Corporate Forms Available PAGE 28

3.4 Management and Corporate Governance PAGE 28

3.5 Taxation PAGE 29

04 Regulated investment vehicles PAGE 34

4.1 The Real Estate UCI PAGE 35

4.2 The SICAR PAGE 37

4.3 The SIF PAGE 40

4.4 Accounting and Valuation Issues PAGE 43

4.5 Typical Luxembourg REIF PAGE 44

05 Real Estate Investment through securitisation vehicles PAGE 45

5.1 Legal Regime PAGE 45

5.2 The Securitisation Vehicle PAGE 45

5.3 Compartments PAGE 46

5.4 Issuance of Securities and Granting of Security Interests PAGE 46

5.5 A Bankruptcy Proof Vehicle PAGE 46

5.6 Taxation PAGE 47

06 OUR EXPERTISE PAGE 48

6.1 Real Estate Expertise PAGE 48

6.2 Real Estate Know How PAGE 48

6.3 Our Real Estate Team PAGE 48

6.4 Our Fund Formation Team PAGE 49

07 ContAct INFORMATION PAGE 50

08 OUR OFFICES PAGE 51

Using weather forecast wording, we can say

PICTURE: LUXEMBOURG AIRPORT

L U X E M B O U R G L O N D O N PICTURE: Unico building developed by CIP Luxembourg S.A.

2.1. Market activity According to Jones Lang LaSalle in 2010, all

PICTURE: Serenity building developed by CLI

The Central Business District (CBD)

2.1.1. TAKE-UP Vacancy rate versus take-up evolution

According to Property Partners research (Q4 2010),

Prime office properties are traded at 6% yield in 2.1.3. RESIDENTIAL MARKET

As quoted by Property Partners Residential in its recent

2.1.4. TO BE OR NOT TO BE GREEN!

Real Corp Luxembourg reported on 22 January

PICTURE: Serenity building developed by CLI

Tenants and buyers have at the same time

Reduction of energy consumption, BREEAM (Building Research Establishment

In addition, a good management of waste could Sale-and-leaseback: is a financial transaction, where

PICTURE: Plaza building developed by CIP Luxembourg S.A.

Comparative table: share deal vs asset deal.

SHARE DEAL ASSET DEAL

TAX No registration fees. R

VAT VAT not applicable on the transfer of shares. U

LEGAL Signing of a Share Purchase Agreement with schedules such S

Although private deeds will be binding between the

PICTURE: PIXEL BUILDING DEVELOPED BY ATENOR GROUP.

It is important to be prudent with regards

It is worthwhile to note that the concept of site

Source: BNP Paribas Real Estate Research

PICTURE: PANORAMA BOULEVARD DAVRANCHES

The concept of site incidence tends

A lease is considered as a commercial one only when

COMMERCIAL LEASE OFFICE LEASE

LEGAL Signing of a Share Purchase Agreement with schedules such S