An extract from The Real Estate M&A and Private Equity Review, 5th Edition
Transactionsi Legal frameworks and deal structures
As in other jurisdictions, real estate acquisitions in Austria may differ both in the structuring of the sale process and in the deal structure itself.
The structuring of an investment for the acquisition of property is based on various economic, fiscal and legal considerations, whereby investments may generally be structured as asset or share deals. The advantage of an asset deal is that the investor may be better aware of the transaction scope (particularly in relation to the potential tax or other liabilities of a pre-existing company), whereas a share deal is generally tax advantageous as, with the correct structuring, real estate transfer tax can be avoided. This is possible, as an asset deal generally triggers Austrian real estate transfer tax at a rate of 3.5 per cent of the consideration, whereas only a transfer of at least 95 per cent of the shares in a company holding Austrian real estate is subject to real estate transfer tax. In light of this, it has become common practice to implement a share deal structure with two acquiring entities that must each acquire more than 5 per cent in the target company (e.g., a 94 per cent/6 per cent structure). Furthermore, a share deal will not result in a change in the ownership of the property itself, which means that registration fees of 1.1 per cent of the market value of the real estate may also be avoided.
Real estate acquisitions through asset or share deals are not subject to a special legislation regime, but rather to various civil, corporate, tax, stock exchange and antitrust laws. The relevant provisions on asset deals can be found in the Austrian Commercial Code, as well as the Austrian General Civil Code. Mergers, demergers and transformations, on the other hand, are regulated in the Stock Corporation Act, the Act on Limited Liability Companies as well as specific laws. Listed companies, as well as the transactions in listed companies, are additionally regulated by the Austrian capital market laws. Acquisitions by foreigners are often subject to approvals by regional land authorities (see Section IV.v).
The following legal forms are typically used as real estate holding entities and acquisition vehicles (if an Austrian entity is chosen at all):
- Limited liability companies (GmbH) offer flexibility and can be established by legal entities or by one or more individuals, who are generally not personally liable for the company's liabilities. The minimum share capital amount is €35,000, of which at least €17,500 must be paid in. Since 2014, there is an option to limit share capital to €10,000 (of which at least €5,000 must be contributed) for up to 10 years.
- Joint-stock corporations (AG) are legally liable entities, the shareholders of which participate in the share capital divided into shares by means of contributions, without being personally liable for the company's liabilities. The minimum capital stock is €70,000. The ongoing legal structure costs of an AG are higher than for a GmbH. In addition, they offer less flexibility – except in relation to share transfers.
- Partnerships can be incorporated by at least two parties as a general partnership (OG) or a limited partnership (KG). The difference between an OG and a KG is that in a KG at least one partner has limited liability, whereas all partners of an OG are personally fully liable. In addition to the flexibility of partnerships (which is even greater than that of a limited liability company), their main advantage is tax transparency, which allows the direct allocation of profits and losses to partners for tax purposes.
In Austria, there are statutory rules on warranties and damages as well as indemnities. In general, a purchaser is entitled to remediation or exchange of the deficient object in the first instance. In the second instance, the purchaser has the right to request a price reduction or to rescind the contract. Unless otherwise agreed by the parties, the warranty period is two years for movables and three years for real estate (with a period of up to 30 years applying for legal defects). The tort regime for damages arising from negligence on the part of the seller applies in parallel.
The contractual regime will seek to replace these statutory rules to the greatest extent possible and will usually exclude rescission of the agreement and limit the buyer to claiming damages, which are contractually defined and limited in scope and amount. Certain mandatory provisions may still apply and override contractual limitations and exclusions of claims, such as claims based on deceit or collusion. Caps, floors and baskets defining and limiting the amount of damage claims are generally consistent with international practice and usually determined by the bargaining power of the buyer and the seller.
Conditions precedent to closing regularly involve regulatory approvals such as merger control and the approval of regional land authorities, particularly in the case of non-EU purchasers (see Section IV.vi). Additionally, conditions precedent may relate to contractual partners waiving termination rights in the event of change of control. Material adverse changes clauses are heavily negotiated but frequently incorporated into the transaction documentation.
In line with international practice, covenants between signing and closing will usually relate to limitations on the conduct of business until closing (ordinary course) and information obligations on the buyer as to business development, and usually also provide for a prohibition of dividend or other payments to the seller by the target between signing and closing.
In the event of a portfolio sale (potentially also involving multiple jurisdictions) in the form of an asset deal, typically a framework agreement governing the legal terms is negotiated. Short transfer deeds relating to each individual land plot will then have to be executed at the closing of the transaction allowing the purchaser to register the ownership with the applicable land register. These documents generally need to be notarised.iii Hostile transactions
A hostile takeover of a public real estate company in Austria has not occurred yet.iv Financing considerations
Generally, real estate financing is provided by banks via loans. Restrictions on who may provide financing in relation to real estate transactions mainly stem from banking regulations that restrictively regulate the commercial granting of loans (including within groups). Typically, mortgages serve as collateral for real estate financings. In the case of share deals, pledges over the shares of the borrower, pledge of movables, accounts pledges, assignments of receivables or rights under any major contracts are also considered. To create a mortgage, pledgor and pledgee must execute a mortgage agreement in writing, with the signatures being notarised. Generally, both fixed-amount mortgages (securing a specific amount) as well as maximum amount mortgages (which may be recurrently used under a specific relationship) are possible under Austrian law. The mortgage is only established upon its registration with the land register, which triggers a registration fee (see below).v Tax considerations
In the event of a sale or acquisition of real estate in Austria, the following taxes need to be taken into consideration.Real estate transfer tax
The following are subject to Austrian real estate transfer tax:
- the acquisition of Austrian real estate; and
- the consolidation in the hand of a single shareholder of more than 95 per cent of the shares in a company owning Austrian real estate.
The taxable base for the determination is the value of the consideration. As a rule, this is the purchase price or at least the market value of the real estate (if the purchase price is lower).
Real estate transfer tax generally amounts to:
- 3.5 per cent in the case of an asset deal; and
- 0.5 per cent in the case of a consolidation of more than 95 per cent of the shares in a company.
Further, transfers without consideration (i.e., donations) are subject to real estate transfer tax at a progressive tax rate ranging from 0.5 per cent to 3.5 per cent.Real estate profit tax
The profits from the sale of real estate are subject to a real estate profit tax, which is generally subject to a flat tax of 30 per cent, provided that a flat tax rate of 25 per cent applies to all profits generated by profits from corporate entities (including from the sale of real estate).General corporate income tax
Profits from the sale of real estate by a corporate entity are subject to corporate income tax at a flat rate of 25 per cent (see above).Registration fee
In addition to real estate transfer tax, a registration fee amounting to 1.1 per cent of the market value of the property applies for entering the right of ownership in the land register. For the registration of mortgages, an additional 1.2 per cent of the mortgage amount must be paid.Stamp duty
The execution of a purchase agreement and the contemplated acquisition of real estate does not generally trigger stamp duties.VAT
Real estate transactions are generally not subject to VAT. However, if the selling party is an entrepreneur, they may opt to treat the sale of real estate as VAT taxable at a rate of 20 per cent. Entrepreneurs typically take this option into consideration if they have reclaimed input tax regarding the real estate (which would otherwise have to be refunded) within the past 10 years for real estate acquired prior to 1 April 2012 or the past 20 years for real estate acquired after such date.vi Cross-border complications and solutions
Under the land transfer regulations, the transfer of property rights to non-Austrian resident investors may require an approval. In this respect, each Austrian federal province has its own legal framework defining the applicable restrictions and approval process. If the necessary approval is not obtained, a transfer of ownership cannot be registered in the relevant land register and the contemplated transaction cannot be carried out (as real estate ownership is generally obtained only through registration of the new owner in the land register). Persons and corporate bodies of EU Member States or signatory parties to the European Economic Area agreement have the same status as domestic persons and corporate bodies. For certain federal provinces, the creation of an Austrian holding structure is sufficient for fulfilling the requirements of the applicable land transfer regulations.