G U I D E T O B U Y I N G C O M M E R C I A L R E A L E S TAT E I N L U X E M B O U R G

G U I D E T O B U Y I N G C O M M E R C I A L R E A L E S TAT E I N L U X E M B O U R G

C O N T E N T S Introduction... 2 Preliminary Matters... 3 Procedure - Real Estate Transactions... 4 I. Freehold Ownership... 4 1. Private Agreement 2. Notarial Deed of Sale and Purchase II. Lease Agreements... 6 1. Common Leases 2. Commercial Leases Tax Advantages... 7 A. Income Tax B. Property Tax C. Net Worth Tax What We Offer You Thanks to our Experience in Real Estate... 9 Disclaimer About FELTEN & Associés... 10 A Broad Range of Practice Areas... 11

I N T R O D U C T I O N Luxembourg is a leading domicile in Europe where companies appreciate, notably for the reasons mentioned in this guide, to invest directly or indirectly in real estate. There are several key factors to the success of Luxembourg, including: ongoing political support for the development of the financial services industry; increasing investor awareness of Luxembourg funds; a high level of investor protection; a flexible onshore regime for setting up highly sophisticated and tax efficient real estate vehicles investing internationally; the presence of experienced service providers. Our law firm is specialized in any kind of advice relating to the advantages thereof, as explained in more details in the last sections ( What we offer you - About FELTEN & Associés ). G U I D E T O B U Y I N G C O M M E R C I A L R E A L E S TAT E I N L U X E M B O U R G 2

P R E L I M I N A R Y M AT T E R S The following guide is an overview of Luxembourg real estate investment funds, the legal and regulatory framework of Luxembourg, and the tax specificities of this kind of transactions. Luxembourg law mentions two types of different existing investment structures: supervised vehicles and non-supervised vehicles. The first one is supervised by the Luxembourg financial sector supervisory authority ( Commission d e S u r v e illance d u S e c t e u r F inancier ). Among the supervised vehicles, the most known structures are the SIF and the SICAR. The second one, not supervised, is the SOPARFI. This kind of company is a commercial corporate vehicle and is aimed at investments in qualifying financial participations. Both kinds of vehicles were introduced, without being limited to this purpose, for real estate reasons. Luxembourg is one of the leading European domiciles for vehicles investing in international real estate. Indeed, in accordance with the law of 10 August 1915 on commercial companies, as amended, companies may be incorporated in Luxembourg, as a: public limited company; private limited company; limited partnership; partnership limited by shares; cooperative company; special limited partnership. In practice, the legal form of a public limited company (Société Anonyme or SA) or a private limited company (Société à Responsabilité Limitée or Sarl) is most commonly chosen for companies investing in real estate. One of the main features of these two forms of companies is the limited liability of each shareholder to the amount of their participation in the company (this also applies to the partnership limited by shares). G U I D E T O B U Y I N G C O M M E R C I A L R E A L E S TAT E I N L U X E M B O U R G 3

I. FREEHOLD OWNERSHIP P R O C E D U R E R E A L E S TAT E T R A N S A C T I O N S Ownership is the right, mentioned in the Luxembourg Civil Code, to enjoy and dispose of assets absolutely. Different kinds of rights relating to the ownership of a real estate exist according to the Luxembourg Civil Code. First, at the top of the scale, the ownership grants the entire right of the real estate. Apart from that kind of absolute right, it may take the form of long-term leases, between 27 years and 99 years (the so-called d r o i t d e m p h y téose ), or rights with a maximum of 99 years (the so-called d r o i t d e s u p e r ficie ), usufructs or easements. In those cases, the beneficiary of the real estate is bound to the owner with a lease agreement, and the lessor has the guarantee of incomes over a long period. The Luxembourg Civil Code does not mention any specific rules concerning the kind of agreement to be signed: a sales agreement is the agreement that shall mention the agreement of any party to the transfer of the ownership of the building. As soon as the mutual consent between the vendor and the purchaser as to the specific asset and the price is accepted, the contract may be considered as being entered into. In order to ensure the transaction, most of the purchasers contact Luxembourg lawyers in order to conduct due diligences on the property. If a building belongs to a company, and the shareholder of the company wants to sell their shares, the agreement shall be made in accordance with a share purchase agreement ( SPA ). Thereafter, an SPA is drawn up to secure the sale. The content is conditional upon the results of the various due diligences and on the tax and financial structure of the transaction. G U I D E T O B U Y I N G C O M M E R C I A L R E A L E S TAT E I N L U X E M B O U R G 4

In Luxembourg the acquisition of a building will be carried out in two steps: The sales agreement; The notarial deed. 1. Private Agreement According to the Luxembourg Civil Code, such an agreement has to meet some legal requirements in order to be considered as being an agreement. The contract has to contain an offer, i.e. an undertaking to sell. In practice, this first private agreement takes the form of a preliminary sale and purchase agreement. On account of the fact that this agreement is a private agreement, the parties are free to negotiate the terms and conditions. Such an agreement can take any form, being written in any language. Because this agreement is based on the common wish and on the agreement of both parties on its content, this first agreement will bind the parties and the transfer of ownership. Moreover, this agreement is entered into between the parties in order to fix all the terms and conditions relating to the purchase o f t h e a s s e t b e f o r e t h e p u r c h a s e r o b t a i n s t h e n e c e s s a r y f u n d i n g o r a d m i - n i s t r a tive authorizations. Most of the time, this agreement contains a penalty clause in order to prevent any fault of the purchaser, and resolutive and/or suspensive conditions in case, for instance, the purchaser does not receive the funding or administrative authorization. 2. Notarial Deed of Sale and Purchase The transfer of ownership and enforceability against third parties is given by the notarial deed. Therefore, after the private agreement, the notarial deed shall have taken place in order to give to the private agreement, the enforceability to third parties necessary for the purchase of the asset. It is important to note that the transfer of title has to be recorded with the mortgage register. In practice, the purchaser will pay the purchase price, duties and taxes to the notary, who will ensure that the necessary duties are paid and release the amount to the seller. G U I D E T O B U Y I N G C O M M E R C I A L R E A L E S TAT E I N L U X E M B O U R G 5

II. LEASE AGREEMENTS The Luxembourg Civil Code provides for that a lease agreement can be verbal. However, for reasons of proof, all lease agreements are in practice in writing. The most common kinds of leases are the common leases and the commercial leases. 1. Common Leases The Luxembourg Civil Code mentions some special leases, which undertake special rules in the Luxembourg Civil Code. Therefore, any lease which is not qualified as a commercial, residential or farm lease, is considered as a common lease and is subject to the general provisions of the Civil Code. Common leases can be fixed for a determined (maximum 99 years) or undetermined period. Leases with a determined period shall terminate at the end of the term, except for specific provisions mentioned in the agreement, such as mutual agreement. The Luxembourg Civil Code provides for that unless otherwise stated in the agreement, leases with an undetermined period may be terminated by either party according to a six-month notice period. The price given for leases is a rent, generally paid to the lender each month. 2. Commercial Leases A commercial lease may be used for a commercial activity. The law of August, 10 t h, 1915 relating to commercial companies and other special laws lists people considered as having a commercial activity. These kinds of agreements are governed by the general civil law. In practice, parties enter into a commercial lease for a duration of 3-6-9 years. This means that the first term of the commercial lease is three years, but the agreement can automatically be renewed for three years when not provided for in the contract, respectively for three new years after termination of the period of six years, if no party asks for the termination of the contract before the expiration of the terms. G U I D E T O B U Y I N G C O M M E R C I A L R E A L E S TAT E I N L U X E M B O U R G 6

TA X A D V A N TA G E S According to the lex rei sitæ principle, i.e. the law of the land where the asset is located, income derived from real estate is generally taxed in the country where the real estate is located. The registration duty in case of an asset deal amounts to 6%, and a municipal surcharge of 50% is added on the amount of the registration duties due when the asset is located in Luxembourg-City. If the real estate is held through a company, the sale of the shares is, according to the ordinary rules of double taxation treaties, taxed in the country of residence of the seller. A contribution of real estate situated in Luxembourg to a corporation or partnership benefits from reduced registration duties and reduced transcription duties provided that such a contribution is remunerated by shares. Dividends and gains from qualifying shareholdings in property companies are usually also exempt under the Luxembourg domestic participation exemption. In addition, there is normally no net worth tax due on directly held foreign real estate or shareholdings in foreign property companies as a result of tax treaties and domestic law exemptions. If the income is not exempt under a tax treaty, all investment expenses (property tax, interest on loans, etc.) and costs associated with real estate management are deductible from taxable income. G U I D E T O B U Y I N G C O M M E R C I A L R E A L E S TAT E I N L U X E M B O U R G 7

A. Income Tax Luxembourg companies or non-residents acting through a Luxembourg permanent establishment are liable to Luxembourg corporate income tax (including municipal business tax) at the combined rate of 29.22% (for companies or Luxembourg permanent establishments in Luxembourg-City) on any rental income or gains derived from real estate properties located in the Grand-Duchy of Luxembourg. B. Property Tax Property tax is charged annually by municipalities at varying rates which may not exceed 7.5% of the unitary value of the property (depending on the location and nature of the property). C. Net Worth Tax Real estate properties located in the Grand-Duchy of Luxembourg held by a Luxembourg company or by a non-resident through a Luxembourg permanent establishment are subject to annual net worth tax levied at 0.5%. Real estate properties abroad are excluded from the net worth tax basis of Luxembourg companies/luxembourg permanent establishments.

W H AT W E O F F E R Y O U T H A N K S T O O U R E X P E R I E N C E (INDUSTRIAL, RETAIL I N R E A L E S TAT E OR OFFICE PROPERTIES) FELTEN & Associés provides a comprehensive range of services to both domestic and international real estate clients such as private and institutional investors, public institutions, real estate promoters and managers. Our law firm has developed networks and relationships with key players and parties not only in the Grand-Duchy of Luxembourg, but also in Europe and around the world. Thanks to our experience we advise our clients on sophisticated real estate transactions, property management and planning, as well as construction and environmental issues. We can be of assistance regarding any property-related issues including debt financing, property litigation, property transactions, structuring of investment vehicles, etc. Furthermore, we share knowledge and experience to negotiate favourable real estate transactions, draft the contractual documentation, obtain governmental approval of a pending transaction, develop tax-optimised structures or secure project financing, among others. We ensure any transaction is managed by highly qualified professionals and are sensitive to the time and cost concerns for our clients. Through our Dispute Resolution/Litigation Department, we also assist and represent our clients in case disputes arise from real estate transactions. If you have any question or would like to obtain further information do not hesitate to contact our property team: M e Bernard FELTEN, FELTEN & ASSOCIES, Partner bfelten@feltenlawyers.com - www.feltenlawyers.com/team/?people=4 M e Figen GÖKCE, FELTEN & ASSOCIES, Senior Associate fgokce@feltenlawyers.com - www.feltenlawyers.com/team/?people=27 M. Frédéric COLLOT, FELTEN & ASSOCIES, Senior Advisor fcollot@feltenlawyers.com - www.feltenlawyers.com/team/?people=25 M e Isabelle GIRAULT, FELTEN & ASSOCIES, Partner - Litigation Department igirault@feltenlawyers.com - www.feltenlawyers.com/team/?people=3 DISCLAIMER This document is for information purposes only and does not constitute nor can 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. G U I D E T O B U Y I N G C O M M E R C I A L R E A L E S TAT E I N L U X E M B O U R G 9

A B O U T F E LT E N & A s s o c i é s With more than 20 years of service, FELTEN & Associés is a full service corporate law firm located in Luxembourg, one of the most important banking centres worldwide. FELTEN & Associés is a human-sized firm with a multilingual team in which partners and associate lawyers with substantial experience, tax experts, paralegal assistants and officers co-operate closely. The firm provides independent, legal and tax services including litigation to private and institutional clients in daily operations as well as in complex business transactions, both domestic and international, thanks to the resources of international co-operation networks. We have in-depth experience in the following key areas: Banking & Finance; Corporate and Commercial Law; Dispute Resolution; Employment and Social Security Law; IP; Real Estate; Tax. Our leitmotivs are Availability - Competence - Long-Term Relationship - Responsiveness. For further information on FELTEN & Associés, visit www.feltenlawyers.com LUXEMBOURG: 2 rue Jean-Pierre Brasseur, L-1258 Luxembourg. Tel.: +352 45 77 45-1 - Fax: +352 45 75 05 - bfelten@feltenlawyers.com GENEVA: 27 rue de la Cité, CH-1204 Geneva. Tel.: +41 225 520 775 - Fax: +41 225 520 776 - home@feltenlawyers.ch

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