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