Applicable Changes in laws and regulations
Tax regime amendments
The Budget Law for the year 2021, voted on 19 December 2020 introduced several amendments to the current tax regime impacting the real estate sector:
(i) Real Estate Levy impacting certain real estate special purpose investment vehicles
A real estate levy (prélèvement immobilier) of 20% will be applied on real estate revenues derived by certain special purpose investment vehicles from Luxembourg-located properties. These revenues include the gross rents and the real estate capital gains realized by these vehicles, as well as capital gains resulting from the alienation of units in certain types of entities.
The entities falling within the scope of the real estate levy are the following: (i) alternative investment funds (AIFs) under Part II of the Law of 17 December 2010 on undertakings for collective investment (UCIs), as amended; (ii) specialised investment funds (SIFs) under the Law of 13 February 2007, as amended; and (iii) reserved alternative investment funds (RAIFs) under the Law of 23 July 2016, as amended (the “In Scope Vehicles”).
Tax transparent investment vehicles, such as limited partnerships (société en commandite simple), special limited partnerships (société en commandite spéciale) or funds under a contractual regime (fonds commun de placement), as well as investment vehicles holding real estate outside of Luxembourg are not within the scope of the real estate levy. However, if real estate revenues are perceived by such tax transparent entity held by an In Scope Vehicle, they will be subject to the real estate levy in the In Scope Vehicle.
The real estate levy is not deductible from the total taxable real estate revenue and cannot be used as a tax deduction or a tax credit by any corporate or individual investor.
(ii) Restriction on real estate investments by Luxembourg Private Wealth Management companies (SPF)
A Luxembourg private wealth management company (Société de Gestion de Patrimoine Familial, SPF) governed by the Law of 11 May 2007, as modified, will no longer be authorized to indirectly hold real estate assets through Luxembourg or foreign partnerships, mutual funds (Fonds Commun de Placement, FCP), or foreign undertakings subject to an equivalent tax and legal regime. It appears however that under certain conditions an SPF may indirectly hold real estate through joint-stock companies.
(iii) Reduction of amortization rate and accelerated amortization for investments in rental housing
The rate for accelerated amortization for new rental real estate investments acquired after 1 January 2021 is decreased from 6% to 4%, and the application period for this rate is decreased from 6 to 5 years. The 4% rate will also be applicable to renovation expenses, if such investment exceeds 20% of the building acquisition or cost price.
(iv) Amortization rate of 6 % for sustainable energy renovations to rental real property
As an incentive for owners of rental real property to perform sustainable energy renovations, an amortization rate of 6% is granted for the year of completion and the 9 following years for renovation investment expenses benefitting from “PRIMe House” financial assistance granted by the Environmental Administration.
Under certain conditions, a grandfathering rule would allow taxpayers who acquired or incorporated rental real property prior to 1 January 2021, or completed renovation of an old building prior to 1 January 2021, to take advantage of the new 6% accelerated depreciation rate.
(v) Application of super-reduced VAT rate of 3% on renovations of housing 10 years and older
As an incentive for housing owners to carry out sustainable energy renovations they can benefit from a super-reduced VAT rate of 3%, instead of the standard 17% VAT rate. Additionally, the minimum age for real estate to qualify for the super-reduced VAT rate of 3% is reduced from 20 to 10 years.
(vi) Threefold increase in transfer duty for contribution of a building to a company
Transfer duties levied when a property is transferred to a company will be tripled in order to reduce discrepancies between the tax treatment of a property contribution, and that of a sale of property.
For contributions of real estate assets to a civil or commercial company in exchange for shares or similar interests, the registration duties will increase from 0.6% (0.5% + 2/10) to 2.4% (2% +2/10) and the transcription tax will be increased from 0.5% to 1 %. Consequently, registration taxes applicable to such contributions will increase slightly over threefold (3.4% instead of 1.1%).
Regarding property located in Luxembourg-City, the 50% surcharge still apply on the registration duties. Hence, those will increase from 0.9% (0.6% + 0.3%) to 3.6% (2.4% + 1.2%). The overall rate will rise from 1.4% to 4.6%.
Note that the timeframe provided for by the anti-abuse measure applying in the event of the allocation of Luxembourg real estate, upon dissolution, liquidation, or share capital reduction of a civil or commercial company, to a shareholder/partner other than the contributor of that property, is increased from 5 to 10 years.
(vii) Abatement for commercial lease rent reductions granted during the 2020 crisis
In the context of the COVID-19 crisis, lessors who during the 2020 calendar year reduced companies’ commercial lease rents, will under certain conditions be entitled to a tax abatement equivalent to twice the amount of the rent reduction up to EUR 15.000 per building or part of a building, per commercial lease agreement.
Entering into force of the Sectoral Master Plans for land-use planning
By four grand-ducal regulations dated 10 February 2021, published in the Official Journal on 25 February 2021, the Sectoral Master Plans for land-use planning for ‘housing’, ‘landscape’, ‘transport’ and ‘economic activity zones’ (the “SMP”) were put into force with effect on 1 March 2021.
Previously, by circular of 22 February 2021 to the municipal administrations, the Minister of Interior and the Minister of Spatial Planning informed the municipalities of the entry into force of the SMP.
The SMs are based on the Law of 17 April 2018 on spatial planning and provide for written and graphic prescriptions imposing substantial restrictions on the municipal autonomy regarding communal planning and land use in these sectors, as well as the property rights of the owners of the land parcels impacted by the SMP.
A detailed review of the SMP’s and their impact on the Luxembourg real estate industry would go beyond the scope of this review. However it should be said that they represent the outcome of a long-standing effort of the Luxembourg government to impose centralized zoning and planning concepts on a supra-municipal scale that will have a substantial impact on the development of the impacted land parcels, and any plans for real estate development will have to be assessed with respect to their compliance with the SMP’s.
Law on professional payment guarantees (PPGs)
Luxembourg’s Law of 10 July 2020 on professional payment guarantees (the “PPG Law”) adds an additional tool to the toolbox for international financing transactions. Formerly, parties to such transactions could avail themselves of a Luxembourg law-governed surety (cautionnement) or autonomous guarantee (garantie autonome). The PPG Law now provides an alternative guarantee while ensuring legal security and enhanced contractual freedom to the parties.
Pursuant to the PPG Law, a PPG is “an undertaking by which a person, the guarantor, commits towards a beneficiary to pay, at the request of the beneficiary or an agreed third party, a sum determined in accordance with the agreed terms, in relation to a claim or claims or the risks associated with them”.
The PPG must be set forth in writing, which may be in electronic or any durable medium format. To avoid any risk of recharacterization of the PPG as a surety, the parties must expressly cite therein the PPG Law’s applicability to the guarantee agreement.
The main advantages of the PPG are that, first, it provides enhanced freedom of contract in that the parties may expressly refer to the guaranteed claims to determine the PPG’s terms, such as the amount and duration. Second, enforcement flexibility under the PPG Law means that a PPG can be enforced under any contractually agreed conditions, even when there is no guaranteed claim enforcement default. Third, a PPG can be given for the benefit of third parties, persons acting on behalf of beneficiaries, including trustees of fiduciaries, even for the purpose of providing a guarantee for determined or determinable present of future third-party beneficiaries.
Finally, unless the parties agree otherwise, a guarantor may not assert any defenses against the guaranteed claims or risks. Also, after payment under the PPG, a guarantor has a personal claim against the principal debtor and is subrogated to the rights of the beneficiary up to the amount of the claims paid under the PPG. However, a guarantor remains liable to the beneficiary for its obligations under the PPG, even if the original debtor of the guaranteed claims is subject to insolvency or other measures affecting the rights of creditors generally.
Pacte logement 2.0
On 8 August 2020, the Luxembourg Minister of Housing introduced a new bill “Pacte logement 2.0” the objective of which is to review the mechanisms established by the Law of 22 October 2008 for the promotion of housing and the creation of a housing pacte (“Pacte logement 1.0”).
This new bill essentially maintains the same objectives as those that were at the root of the first version of the Pacte Logement, i.e.:
- Increase the offer of affordable and sustainable housing at the municipal level;
- Promote a fast servicing of lands able to receive new housing constructions; and
- Improve residential quality.
The new text aims to achieve these objectives by asserting better control of the financial resources to be allocated to the municipalities, as only 2,2% of the 380 million euros allocated by the state to the municipalities under the Pacte logement 1.0 directly supported the creation of new housing.
In practice, the municipalities will first have to conclude an initial agreement with the state and to elaborate a local housing action program with the help of a housing advisor paid by the state.
Once a local housing action program consistent with the goals of the Pacte logement 2.0 is adopted by the municipal council, the municipality will be able to conclude an implementation agreement with the state to benefit from separate financing for the projects to be developed.
The bill also proposes to increase the mandatory share of affordable housing to be built under a PAP NQ up to a maximum of 30%, depending on circumstances, and that the property of this new affordable residences will be transferred to the municipality or to the state.
Amendment of the « Baulandvertrag » (building land contract) bill
The Luxembourg government presented on 9 November 2020 some new amendments regarding the « Baulandvertrag » bill.
This bill, introduced in 2017, aims to improve the effectiveness of measures relating to the implementation of urban development plans (“PAG”) to cope with the chronic lack of housing in Luxembourg.
The bill has been fundamentally reviewed by the amendments, and now revolves around three new measures:
(i) Introduction of new easements
The bill as amended introduces new easements, the purpose of which is to limit the mode and degree of land use over time in accordance with the urban development plan (“PAG”) implementation concept.
More specifically, the new easements are divided in two categories: the easements determining a limited servicing period (“CTV”) and the easements determining a limited construction period (“CTL”).
The implementation of CTV is mandatory each time a municipality is willing to reclassify a plot of land that was not primarily intended for housing into a housing zone or into a mixed zone subject to the elaboration of a specific development plan “new development” (“PAP NQ”).
As from the entry into force of the PAG, the owners of the lands subject to the CTV have a maximum of 12 years to significantly begin the servicing works, failing which the land will be automatically reclassified into its prior classification, or into an agricultural zone if it was primarily classified into a housing/mixed zone.
The implementation of CTL is mandatory each time a municipality is willing to reclassify a plot of land that was not primarily intended for housing into a housing zone or into a mixed zone subject to the elaboration of a PAP NQ or “existing development” (“PAP QE”).
The owners of the lands have maximum of 4 years as from the entry into force of the PAG (PAP QE) or as from the expiry of the servicing delay (PAP NQ) to significantly begin the construction works, failing which they will only be allowed to build “constructions that correspond to a mission of general interest in terms of housing and accommodation”.
(ii) Introduction of a simplified modification procedure of the PAG
The bill as amended allows the municipalities to use a simplified procedure to amend their PAG, which is supposed to shorten the timeframe from 12 to 7 months.
However, this simplified procedure will only be open for minor adjustments of the PAG which do not affect its intrinsic logic and coherence.
(iii) Amendment of the urban reparcelling procedure
Finally, the bill as amended introduces a new procedure regarding urban reparcelling which should allow that the lands owned by recalcitrant landlords who refuse to cooperate in the servicing of the PAP NQ but vital for its development are exchanged with plots within the PAP NQ that can be developed at a later stage.
Amendment of the Law of 21 September 2006 on residential leases
A bill tabled on 31 July 2020 by the Luxembourg Minister of housing plans to reform the Law of 21 September 2006 on the residential lease.
The explanatory memorandum of the bill points out that the continuous rise of the residential rents in Luxembourg makes it more and more necessary to establish new protective measures for tenants and to find new mechanisms to fight housing shortage in Luxembourg.
Four main “key elements” are proposed to face this challenge.
(i) Agency fees and rental guarantee
The first proposal put forward by the bill is to introduce an obligation for the landlord to bear at least 50% of the real estate agency fees.
It is also proposed to reduce the maximum amount of the rental guarantee from 3 to 2 months of rent and to introduce binding time limits regarding the restitution of the guarantee by the landlord at the end of the lease.
(ii) Introduction of a flatsharing legal regime
Contrary to its neighboring countries, Luxembourg does not yet have a specific legal regime regarding flatsharing.
As flatsharing is however relatively common in Luxembourg, it is proposed to introduce a new chapter into the Law of 21 September 2006 that would remedy this deficiency.
Broadly speaking, the system would be based on a single contract between all the roommates and the landlord, rather than having a separate contract for each roommate. The relationship between roommates would be established in a separate “pact” to which the lessor would not be a party.
(iii) Precisions regarding invested capital
In Luxembourg, the maximum rent that a landlord can charge to his tenants is fixed at 5% of the capital he invested to build or to purchase the building.
In practice, the calculation or exact scope of the invested capital is often a source of conflict between lessors and lessees, and the bill proposes to bring some clarifications to the matter, as well as to set up new procedural guarantees to avoid any further difference of interpretation.
(iv) End of the “luxury housing” notion
There is a proposal to abolish the concept of “luxury housing” that concerns accommodations with “modern and non-standard comfort” that are currently excluded from the limitations applicable to the other housing regarding the maximum rent and the maximum rental guarantee that the landlord can require.
Recent case law
Impact of COVID-19 on existing contracts, in particular commercial leases
On 13 and 14 January 2021, the Luxembourg Justice of the Peace rendered two judgments which attracted quite a bit of interest among commercial lease lessors and lessees in Luxembourg.
In both cases, the lessees, exercising the commercial activities of café owner and textile seller, were sued for back payment of rent by the lessors, to which they responded by requesting a waiver or alternatively a reduction of the rent.
In support of their request, the lessees asserted that because of the legal and regulatory provisions adopted in the context of the fight against the COVID-19 pandemic, they were deprived of the enjoyment of the leased property and thus were not liable for payment of rent, or alternatively for payment of the entirety of the rent.
The court granted their requests by completely exonerating the textile seller commercial lessee from liability for payment of the rent and by granting a rent reduction 50% to the café owner lessee for the periods of required closure of businesses imposed by the Luxembourg authorities.
To accommodate the request of the lessees, the court applied in a particular way a legal concept specific to synallagmatic contracts: “risk theory “.
These judgments are not final and an appeal is probable in light of the enormous financial implications that a lasting recognition of this jurisprudence could have in Luxembourg.
For the time being, this jurisprudence seems however to convince at the lower courts level, as the Luxembourg Justice of the Peace rendered on 4 February 2021 a new judgment that identically reproduces the reasoning and the conclusions of the aforementioned judgments.
New jurisprudence of the administrative Court regarding preemption right
Pursuant to Article 3 of the Pacte logement 1.0, in the event of disposition in return for payment, municipalities benefit from a right of preemption, particularly on all unbuilt parcels in developed zones or zones to be developed in the municipality.
Under the same article, the preemption right can only be exercised with a view to the realisation of housing for low-income persons or the realisation of works on public roads or equipment, or work aimed at constructing municipal equipment.
In its 5 January 2021 landmark case, the Administrative Court specified that municipalities’ right to exercise such a preemption right obligatorily includes the obligation for the preempting municipality to indicate clearly and specifically the concrete objective by including at least one of the three above-mentioned reasons under the law.
This information must appear as soon as the municipality gives notice of its decision to exercise its right of preemption, failing which such a decision risks being invalidated by an administrative court.
According to the Administrative Court, such information should include the municipality’s commitment to realising the indicated objective, thus avoiding a municipality’s preemption right being turned into a mechanism for allowing them to expand their reserves of land available.
However, also according to the Administrative Court, municipalities are not obligated to cite a specific project, nor one in the process of being realized, it being sufficient that specific information be given on the future assignment of the preempted property.