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Editorial

Buy-to-Let Schemes in Austria

July 2017 - Real Estate & Property. Legal Developments by Dorda.

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Buy-to-let schemes reached the Austrian market several years ago and have gained increased popularity in the scenic alpine regions of Tyrol, Vorarlberg or Salzburg. Investors acquire condominium ownership in newly constructed hotel facilities and rent out the properties to hotel operators at – ideally – attractive rates. While buy-to-let-schemes can be very lucrative investments, they also raise complex legal and tax questions. With the economic and financial crisis falling into oblivion, investors, however, have become more and more willing to sail these waters.

Acquisition of Land

While the acquisition of land for buy-to-let schemes does not pose particular problems per se, developers need to assess the legal framework in the regions and towns before investing and developing the hotel project.

The regional zoning laws may restrict the use of real estate for particular purposes, in particular hotel projects (eg zoning may only allow private use, not letting or hotel operations). In addition, all 9 regions in Austria enacted to some extent restrictions (i) for the transfer of land to foreign (non-EU) nationals, (ii) for the transfer of agricultural land and (iii) for the creation of secondary homes. While the regions in the East of Austria are generally more liberal, the alpine regions (which are more attractive for buy-to-let schemes) restrict the acquisition more widely. Foreign (non-EU) developers may have to apply for a permit and secondary homes may be fully illegal, therefore making it impossible for the investors to use its on real estate. While EU citizens (currently still including British nationals and companies) are fully equal to Austrians, citizens from outside the EU are generally deemed foreigners. Exceptions apply to certain nationals due to bilateral treaties (in particular: Switzerland, Iran, United States, etc).

Renting Out

The Austrian Tenancy Act (Mietrechtsgesetz) contains mandatory restrictions for important aspects of leases, most of which are to the tenant's advantage. While buildings with a building permit dated before 30 June 1953 are fully protected under the Tenancy Act, there are exceptions for newer buildings. Refurbished old buildings may qualify as old or new buildings depending on the extent of the refurbishment.

Leases can only be terminated for important reasons, in particular default or grossly detrimental use of the leased premises. Landlords, hence, prefer to execute fixed-term leases as they may otherwise be bound forever. Pursuant to sec 29 of the Tenancy Act, a fixed term must be agreed in writing (ie signed by all parties; emails not sufficient); if the formal requirement is not met, the fixed term is void and the lease is deemed to be executed for an indefinite term.

Landlord and Tenant can agree on the distribution of service charge and the obligations to maintain, repair and renew the leased premises subject to general limitations under the Austrian Civil Code and mandatory additional limitations for buildings with permits dated before 30 June 1953. As there is no clear regime for these matters, it is very important to prepare the respective clauses with care in order to comply with the applicable laws and to prevent future disputes. Both parties need to be able to rely on the provisions of the leases as both parties invest money and rely on the calculated profitability.

Taxes

Acquisition (Developer/Investor): The acquisition of real estate is subject to land transfer tax of 3.5% and registration fee of 1.1%, both based on the purchase price (including VAT, see below).

Securitisation (Developer/Investor): The registration of a mortgage triggers an additional registration fee of 1.2% of the secured amount.

Value Added Tax (Developer/Investor): According to the Austrian VAT Act, the acquisition of real estate is generally exempted from VAT with the right to make an opt-in. Developers and investors generally acquire with VAT in buy-to-let schemes as they can reclaim their paid VAT by input tax deduction. Investors need to prove to the tax authorities that they will rent out the acquired premises, providing the lease agreement between investor and hotel operator.

Stamp Duty (Investor): sec 33 subsec 5 of the Austrian Fees and Duties Act imposes a fee of 1% upon execution of a written lease or equivalent written contract. In case of an indefinite term, the calculation base is the rent for the initial 3 years; in case of a definite term, the calculation base is the rent for the entire term capped with 18 years. While stamp duty is freely negotiable, it is usually the tenant to pay it. In case of buy-to-let schemes, very often investors (landlords) need to bear the burden. As stamp duty is only triggered by a written agreement, the parties may prefer to execute an oral agreement. However, pursuant to the Tenancy Act, a term would then not be legally binding.

In general, buy-to-let models have proven to be a highly profitable investment opportunity in the past despite the various limitations and tax issues. A truly successful project, for developer and investor, will require profound knowledge of the relevant federal and regional laws including taxes (in particular VAT).

Author: Klaus Pfeiffer

Attorney / Expert on Real Estate and Construction Law, DORDA Attorneys at Law

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