Buy-to-Let Schemes in Austria

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