A. Freehold ownership (droit de propriété) - emphytéose - superficie 35 B. Acquisition of real estate 35 C. Legal framework 37

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1 real estate

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3 real estate

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5 Table of contents Introduction 5 I. Existing forms of real estate investment structures 7 A. Main Luxembourg real estate vehicles 7 B Service providers and main features of the different forms of regulated real estate investment structures 23 II. Tax considerations 28 III. Pan-European regulated real estate investment structure 31 IV. Listing of real estate investment structures on the LuxSE 33 V. Real estate transactions 35 A. Freehold ownership (droit de propriété) - emphytéose - superficie 35 B. Acquisition of real estate 35 C. Legal framework 37 VI. Real estate finance documentation 45 A. Facility agreement - choice of law 45 B. Collateral 45 VII. Definitions 48 Real estate at Arendt & Medernach 51 Arendt & Medernach real estate team 52 About Arendt & Medernach

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7 Introduction Luxembourg has emerged as the leading domicile in Europe for vehicles investing directly or indirectly in internationally diversified real estate portfolios. Since the implementation of the European Directive governing UCITS in 1988, Luxembourg has built a very strong fund industry. Currently, assets managed by Luxembourg investment funds represent (i) 26.5% of the total assets managed by investment funds in the European Union, putting Luxembourg in first place and (ii) 8.9% of the total market share worldwide, ranking Luxembourg second after the United States. Being the first Member State of the European Union to offer the European passport for cross-border distribution to investment funds, Luxembourg has also constantly improved its legal and fiscal environment to attract international fund promoters. With the SIF Law in 2007, Luxembourg has also been able to cope with the great demand for alternative investment vehicles from investors around the world. This is reflected through the significant number of regulated funds investing in real estate assets which have been created under this regime. units 250 Growth in the number of Luxembourg real estate fund units (*) July 2012 Sources: ALFI / CSSF Part II (UCI Law) Institutional Funds / SIF (SIF Law) (*) The number of single funds plus the sub-funds of umbrella structures In addition to offering vehicles which are supervised by the CSSF, real estate investment vehicles may also be set up in Luxembourg as unregulated vehicles using a wide variety of legal forms. Luxembourg s flexible legal environment and favourable tax system enable each project to benefit from tailormade legal structures and tax-efficient solutions. 5

8 Introduction Notwithstanding the foregoing, by introducing a regulatory and supervisory framework for alternative investment fund managers and indirectly alternative investment funds, the Directive on Alternative Investment Fund Managers will have a significant impact on real estate investment vehicles and current business models. Please refer to our brochure on the Directive on Alternative Investment Fund Managers for more details in this respect. This brochure aims at giving its readers an overview of the most common vehicles used for setting up real estate investment funds as well as the main aspects of property finance and property acquisition from a Luxembourg civil and administrative law perspective. It does not address all legal and tax aspects in relation thereto and does not purport to set out all the opportunities offered by Luxembourg to the real estate community. For further information or specific questions, please contact the partners of our firm listed at the end of this document. 6

9 I. Existing forms of real estate investment structures Both unregulated and regulated structures are available for investment in the real estate sector. As you may read throughout this brochure, Luxembourg offers a wide range of legal forms along with a wide range of legal and regulatory regimes. The choice of the legal form and regime will depend notably on: The target investors The investment strategy pursued The tax components and The marketing strategy A. Main Luxembourg real estate vehicles Overview Among the Luxembourg investment vehicles subject to the supervision of the CSSF, the Luxembourg financial sector supervisory authority, two vehicles are of particular interest for the private equity community: the SICAR and the SIF. The UCI Part II being more scarcely used. SIF SICAR UCI Part II The institutional investor fund which dates back to 1991 was replaced by the SIF with the Law of 13 February 2007 relating to specialised investment funds (the SIF Law ). Unless the SIF Law specifically derogates therefrom, the SIF is also subject to the Law of Very flexible real estate vehicle Supervised The SICAR was introduced by the Law of 15 June 2004 relating to the investment company in risk capital, as amended (the SICAR Law ). Unless the SICAR Law specifically derogates therefrom, the SICAR is also subject to the Law of Designed for innovative strategies Regulated investment funds may be set up as an undertaking for collective investment under the Part II of the law of 10 December 2010 on undertaking for collective instruments (the UCI Law ). Unless the UCI Law specifically derogates therefrom, the UCI Part II is also subject to the Law of Open to retail investors Non-supervised SOPARFI The SOPARFI (société de participations financières) is a commercial corporate vehicle not subject to the supervision of the CSSF, the Luxembourg financial sector supervisory authority. It is governed by the Law of 10 August 1915 on commercial companies, as amended (the Law of 1915 ) and pertains to investments in qualifying financial participations. Real estate vehicle quickly set up Though not specifically designed for real estate, the SIF offers a great deal of flexibility which makes it a very appealing real estate investment vehicle. The SIF is not restricted to real estate investments. The SICAR aims at directly or indirectly contributing assets to innovative projects with value creation at the level of portfolio companies e.g. development projects, refurbishment, without being subject to riskspreading requirements. The UCI Part II is the sole regulated real estate vehicle which can be offered to retail investors, subject to the compliance with the UCI Law providing certain protections to investors in such a vehicle. Though not specifically designed for real estate, the time-efficiency of the SOPARFI makes it very suitable for real estate. It is not subject to riskspreading requirements nor is it restricted to any specific types of investments. 7

10 I. Existing forms of real estate investment structures Key features Supervised Non-supervised SIF/UCI Part II - Legal form: company, partnership or contractual forms (FCP); SICAR - Legal form: company or partnership forms only, no contractual form (FCP); SOPARFI - Legal form: company or partnership forms only, no contractual form (FCP); - No investment restrictions but riskspreading requirements; - Concerning SIFs, eligible investors only; - Prior authorisation of the CSSF; - Investments in risk capital only, no risk-spreading requirements; - Eligible investors only; - Prior authorisation of the CSSF; - No investment restrictions and no risk-spreading requirements; - No investor restrictions; - No authorisation of the CSSF; - Variable or fixed share capital with lightened requirements; - Flexible financing, distribution and exit policy; - Concerning SIFs, lightened accounting and publication requirements; - Supervision by the CSSF, the independent auditor and the depositary; - Variable or fixed share capital with lightened requirements; - Flexible financing, distribution and exit policy; - Lightened accounting and publication requirements; - Supervision by the CSSF, the independent auditor and the depositary; - Fixed share capital with some possible flexibility; - Flexible financing policy; - Lightened accounting and publication requirements; - Supervision by an auditor in specific circumstances; - Tax exempt status and entitlement to double tax treaties benefits (subject to recognition by the other contracting state) if established as a company. - Taxable status if established as a company, but exemption on profits derived from risk capital securities and entitlement to double tax treaty benefits (subject to recognition by the other contracting state). - Taxable status if established as a company, but conditional exemption of dividends, liquidation proceeds and capital gains derived from qualifying participations under the participation exemption as well as income and gains derived from qualifying IP rights, and entitlement to double tax treaty benefits. 8

11 I. Existing forms of real estate investment structures Legal forms The most common Luxembourg corporate forms used for real estate purposes are: - the société en commandite par actions (SCA) comparable to a corporate partnership limited by shares, - the société anonyme (SA) comparable to a public limited company, and - the société à responsabilité limitée (SARL) comparable to a private limited company. Another Luxembourg corporate form occasionally used to structure real estate transactions is: - the société en commandite simple (SCS) comparable to a limited partnership. Two other Luxembourg corporate forms that may be used to structure real estate transactions, although extremely rare, are: - the société en nom collectif (SNC) comparable to an unlimited partnership, - the société civile (SC) comparable to a civil partnership. The contractual form of the fonds commun de placement (FCP) or common fund may also be used as an alternative to the abovementioned corporate forms. However, only the SIF Law and the UCI Law provide for such possibility. Supervised Non-supervised SIF/UCI Part II The SIF/UCI Part II may be set up as an 1 - SCA 2 - SA - SARL 2 - SCS (with fixed share capital) - SNC (with fixed share capital) - SC (with fixed share capital) Alternatively, the SIF/UCI Part II may be structured as an FCP. SICAR The SICAR may be set up as an 1 - SCA - SA - SARL - SCS SOPARFI The SOPARFI may be set up as an 1 - SCA - SA - SARL - SCS - SNC - SC 9 1 A hybrid form of company, the société cooperative organised as société anonyme may also be used by the SOPARFI, SICAR or SIF but is, in fact, ignored by the market. 2 Concerning the UCI Part II, such legal forms are only available with fixed share capital.

12 I. Existing forms of real estate investment structures Basics on legal forms SCA SA SARL Key features Particularly convenient for fund initiators who want to retain total control of the management (see Management). Particularly suitable for joint venture structures as the corporate governance rules relating thereto are very flexible. Originally created for shareholders with a significant personal link among them (intuitu personae), as evidenced by specific rules still in force (see Transfers/Listing of shares, Amendment to articles of incorporation) although practice shows that this form is now widely used despite a lack of any sort of link among the shareholders. Shareholders One or more unlimited shareholders and several limited shareholders (no upper limit). One or more limited shareholders (no upper limit). One or more limited shareholders (no more than 40). Liability Unlimited shareholders are indefinitely, jointly and severally liable (but may be incorporated as limited liability companies or partnerships). Limited shareholders are only liable up to the amount committed. Shareholders are only liable up to the amount committed. Shareholders are only liable up to the amount committed. Contributions In cash or in kind: contributions in kind are subject to a valuation report from an independent auditor. In cash or in kind: contributions in kind are subject to a valuation report from an independent auditor. In cash or in kind: contributions in kind are not subject to a valuation report from an independent auditor The SIF Law requires a valuation report from an approved statutory auditor notwithstanding the legal form adopted by the SiF in question.

13 I. Existing forms of real estate investment structures Basics on legal forms SCS SNC/SC FCP Key features Particularly convenient for transactions where (i) tax transparency is required at the level of the company itself and (ii) fund initiators want to retain total control of the management (see Management). Partnership formed by written agreement of its partners, no need for a notarial deed. Partnership formed by written agreement of its partners. No need for a notarial deed. Very flexible to the extent that the law provides for very few overriding principles, leaving a lot of discretion to the partners for most of the corporate governance aspects. Undivided collection of assets, without legal personality unlike a company or partnership, managed by a Luxembourg management company subject to the UCI Law on behalf of joint owners whose rights are represented by units. Allows for total control of the management. The management company may be set up notably as a SA, SCA or SARL. Partners/ Unitholders One or more unlimited partners and one or more limited partners (no upper limit). Two or more unlimited partners (no upper limit). Several limited unitholders (no upper limit) at the level of the FCP. Liability Unlimited partners are indefinitely, jointly and severally liable (but may be incorporated as limited liability companies or partnerships). Limited partners are only liable up to the amount committed. SNC: all the partners are indefinitely, jointly and severally liable. SC: all the partners may be individually liable on an equal basis. Unitholders of the FCP are only liable up to the amount committed. Contributions In cash or in kind: contributions in kind are not subject to a valuation report from an independent auditor. 4 In cash or in kind: contributions in kind are not subject to a valuation report from an independent auditor. 4 In cash or in kind: contributions in kind to the FCP are subject to a valuation report from an independent auditor The SIF Law requires a valuation report from an approved statutory auditor notwithstanding the legal form adopted by the SiF in question.

14 I. Existing forms of real estate investment structures Basics on legal forms SCA SA SARL Transfers/ listing of shares No statutory restriction on transfers. Listing possible. No statutory restriction on transfers. Listing possible. Transfers to nonshareholders are subject to the prior approval of the shareholders representing three-quarters of the share capital. Listing not allowed. Management By the general partner. Unlimited shareholder(s) act as general partner(s) and cannot be dismissed without their own consent, unless otherwise provided by the articles of incorporation. One-tier SA: by a board of directors of three directors at least, if several shareholders. Two-tier SA: by a management board of two members at least, supervised by a supervisory board of three members at least, if several shareholders. By one or several managers. Amendment to articles of incorporation By a quorum representing at least half of the share capital 5 and a two-third majority of shareholders, including the general partner, in the presence of a Luxembourg notary. By a quorum representing at least half of the share capital 5 and a two-third majority of shareholders, in the presence of a Luxembourg notary. By a twofold majority (i) in number of the shareholders and (ii) such majority representing at least three-quarters of the share capital, in the presence of a Luxembourg notary. Tax transparency Not tax transparent (but check-the-box eligible). Not tax transparent. Not tax transparent (but check-the-box eligible). Marketability Increasingly common in real estate, the SCA is easy to market to potential investors used to Anglo-Saxon limited partnerships. The SA is extensively used for real estate transactions and is therefore very easy to market to potential investors. The SARL is extensively used for real estate transactions and is therefore very easy to market to potential investors This representation requirement is not applicable to the second meeting of shareholders which may be convened if it has not been fulfilled at the first meeting.

15 I. Existing forms of real estate investment structures Basics on legal forms SCS SNC/SC FCP Transfers/ listing of shares Transfers not allowed unless authorised by the partnership agreement or approved by all the partners. Listing not allowed. Transfers not allowed unless approved by all the partners and in accordance with the provisions of the Civil Code. Listing not allowed. No statutory restriction on transfers. Listing of units of FCP possible. By the general partner. Unlimited partners(s) act as general partner(s). To be agreed on by the partners. By the management company. Management Amendment to partnership agreement/ management regulations By all the partners, unless otherwise specified in the partnership agreement. By all the partners, unless otherwise specified in the partnership agreement. Management regulations of FCP may be amended by the management company, unless otherwise specified in the management regulations. Unitholders of FCP may be entitled to exit in case of amendment. Tax transparency Tax transparent. Tax transparent. Tax transparent. Marketability The SCS is particularly flexible as far as organisation and governance are concerned. Practice shows that this type of entity is mostly used for management participation in transactions. The FCP is very similar to the unit trust. 13

16 I. Existing forms of real estate investment structures Eligible investments SIF/UCI Part II SICAR SOPARFI No investment restrictions Risk-spreading requirement Fund of funds and cross investments possible Investments in risk capital only No risk-spreading requirement Fund of funds investments possible No restrictions SIF and UCI Part II are not subject to any restriction relating to the sector in which they invest their funds. SIF and UCI Part II may therefore focus their investments on real estate. They may also combine investments in real estate and in listed companies or derivatives for example. A SIF or a UCI Part II shall nevertheless aim at spreading the risks of its investments. If investing in real estate, a SIF or a UCI Part II shall therefore target several entities. The fulfillment of this requirement is assessed on a case-by-case basis. SIF and UCI Part II may invest directly in other investment vehicle(s) and indirectly through other entities, provided that they still comply with the risk-spreading requirement. Within an umbrella SIF, sub-funds may cross-invest in one another under certain conditions. A SICAR shall invest its funds in securities representing risk capital. Investment in risk capital is defined in the SICAR Law as the direct or indirect contribution of assets to entities in view of their launch, development or listing on a stock exchange. Two conditions shall be met: (i) the risk relating to the investments of the SICAR shall be high and (ii) the SICAR shall aim at contributing to the development of the entities in which it invests. The exit strategy of the SICAR is also another important factor as it shall aim at exiting its investments after a certain number of years (to be assessed on a case-by-case basis). Absent the risk-spreading requirement, a SICAR may limit its investment in one target entity or one specific area. A SICAR may invest directly in other investment vehicle(s) and indirectly through other entities, provided that it still complies with the investment in risk capital requirement. The SOPARFI s sole corporate purpose is to hold and manage financial participations in other undertakings. Apart from that, no investment restrictions or risk-spreading requirement applies to a SOPARFI (see however the tax section below). 14

17 I. Existing forms of real estate investment structures Eligible investors SIF SICAR UCI Part II SOPARFI Three categories of eligible investors 1. Institutional investors 2. Professional investors 3. Well-informed investors Exception for managing persons and other persons taking part in the management No restrictions No restrictions Only sophisticated investors may invest in a SICAR or a SIF. The three categories of eligible investors of a SICAR or SIF are identical: institutional investors, professional investors or wellinformed investors. SIF must have the necessary means to ensure compliance with the conditions of eligibility of the investors. Institutional investors may be defined as firms and organisations, the purpose of which leads them to the management of substantial funds and assets e.g. banks and other professionals of the financial sector, insurance and reinsurance undertakings, social security institutions, pension funds, large industrial and financial groups and dedicated structures set up by those entities. Professional investors are entities which are required to be authorised or regulated in order to operate in the financial markets e.g. credit institutions, insurance companies and commodity derivatives dealers, among others. Large undertakings which meet two of the following size criteria on a company basis qualify as professional investors: (i) balance sheet total of EUR 20,000,000; (ii) net turnover of EUR 40,000,000; and (iii) own funds of EUR 2,000,000. The category of professional investors also includes some state or international bodies or institutions and other institutional investors, the main activity of which is to invest in financial instruments, including entities dedicated to the securitisation of assets or other financing transactions. Well-informed investors are those who, although not qualifying as institutional or professional investors, may evidence that they are sufficiently sophisticated to understand and bear the risks associated with the nature of investments of the SICAR or the SIF. In addition to confirming in writing that he/she/it adheres to the status of well-informed investor, such an investor shall invest a minimum of EUR 125,000 in the SICAR or the SIF, or obtain an assessment made by one of the financial sector entities listed by the SICAR Law or the SIF Law, which certifies the investor s expertise, experience and knowledge in adequately appraising an investment in risk capital in case of a SICAR, or in a SIF. The eligible investor requirements do not apply to the managing persons (dirigeants) and other persons that take part in the management of a SICAR or a SIF. Units or shares of UCIs Part II may be offered to retail and institutional or professional investors without any restriction. The SOPARFI regime does not impose any restrictions on the eligibility of investors; therefore investors do not necessarily need to be sophisticated. 15

18 I. Existing forms of real estate investment structures Prior regulatory authorisation A SICAR, a SIF or a UCI Part II may not start its activities until it is authorised by the CSSF. Once authorised, the vehicle is registered on the relevant official list maintained by the CSSF. SIF/UCI Part II/ SICAR SOPARFI Prior authorisation 7 No authorisation at all Such authorisation is granted only if (i) the CSSF approves: - the constitutive documents (prospectus/placement memorandum, articles of incorporation/partnership agreement); - concerning UCI Part II, the promoter; - the directors or managers, as well as, concerning SIF, the persons entrusted with the management of the investment portfolio; - the choice of the depositary; - the choice of the auditor; - concerning SIF, the choice of the delegate to whom investment portfolio management will be delegated whenever such delegate is not subject to prudential supervision or cooperation between the CSSF and the supervisory authority of the delegate is not ensured 6 ; - the agreements with the service providers; - concerning SIF, the description of the risk management process and the conflict of interest policy; and (ii) the SICAR, the SIF or UCI Part II can demonstrate that its head office (administration centrale) is located in Luxembourg. Directors or managers of a SICAR/SIF/UCI Part II are the members of its statutory corporate organ (or of the management company of the SIF/UCI Part II structured as an FCP). They shall be of sufficiently good repute and have sufficient experience for performing their functions. Same requirement applies to the persons or delegate entrusted with the management of the investment portfolio concerning SIF. SOPARFIs are not subject to any prior authorisation from the CSSF, the Luxembourg financial sector supervisory authority. They may therefore be set up very quickly SIFs existing as of 1 April 2012 must be compliant with this requirement by 30 June The approval of the regulated vehicle is formalised by its inscription on the relevant official list of Luxembourg funds/sicars.this list is published in the Luxembourg Official Journal (i.e. the Mémorial) and is intended to inform the public. The marketing of units or shares is authorised as from the day of such inscription.

19 I. Existing forms of real estate investment structures Fixed or variable share capital SIF/UCI Part II/ SICAR SOPARFI Variable share capital possible Net asset value per share issue price 5% paid-up shares Only fixed share capital, but authorised capital possible Nominal or par value share issue price Payment of shares requirements depending on legal form A SICAR set up as an SA, SCA, SARL or SCS, or a SIF set up as an SA, SCA or SARL or a UCI Part II set up as an SA may have a variable share capital, i.e. a share capital the amount of which is equal to the net asset value of the company at all times. A SICAR/SIF/UCI Part II with variable share capital, as well as a SIF or UCI Part II structured as an FCP can issue new shares/units in accordance with the conditions and procedures set forth in its articles of incorporation/management regulations. New shares of SICAR or SIF may be issued on the basis of the net asset value per share or any other value, according to the method set forth in its articles of incorporation/management regulations. Each of the shares of a SICAR or SIF must be paid up up to at least 5%, except for a SICAR set up as an SCS and for a SIF set up as an SNC, SCS or a SC, in which case no such minimum applies. Shares of a UCI Part II must be fully paid-up. The share capital of a SOPARFI must be fixed to an amount set forth in the articles of incorporation/partnership agreement. As a result, any issue of new shares is subject to the formalities, quorum and majority requirements applicable to amendments of the articles of incorporation/partnership agreement (see p. 12 and 13). However, a SOPARFI set up as an SA or SCA may provide for an authorised share capital whereby the shareholders delegate to the management their power to increase the share capital within certain limits. New shares of a SOPARFI are usually issued at (and cannot be issued below) the nominal value, if any, or par value of existing shares, possibly with a share premium. Each of the shares of an SA or SCA must be paid up up to at least 25%. Each of the shares of a SARL must be entirely paid up. No requirement applies to the payment of shares in an SCS, SNC or SC. 17

20 I. Existing forms of real estate investment structures Financing SIF/UCI Part II/SICAR/ SOPARFI SIF/UCI Part II/SICAR SOPARFI Variety of equity, debt and hybrid financing instruments Minimum EUR 1m for SICARs and 1.25m for SIFs/ UCIs Part II after 6 to 12 months IPO conceivable Umbrella structure possible Minimum share capital amount depending on legal form IPO possible Tracking shares possible Depending on their legal form, SOPARFIs, SICARs, SIFs and UCIs Part II may be financed through a variety of equity, debt and hybrid instruments (including (convertible) preferred equity certificates, i.e. CPECs and PECs). Depending on their legal form, SOPARFIs, SICARs, SIFs and UCIs Part II may also issue beneficiary units, the rights of which are defined in the articles of incorporation. In addition to the minimum share capital requirements upon incorporation under the relevant corporate form (see below), the subscribed share capital of an SICAR, increased by any share premium, shall reach EUR 1 million and the subscribed share capital of a SIF/UCI Part II, increased by any share premium, shall reach EUR 1.25 million no later than 12 months following the authorisation of the CSSF (6 months concerning UCI Part II). By the same respective timeframes, the net assets of a SIF/ UCI Part II structured as an FCP shall reach EUR 1.25 million. Public trading of securities of SICARs, SIFs and UCIs Part II under the form of an SA or an SCA, as relevant, is conceivable provided that the requirements relating to eligible investors are fulfilled. A SICAR, SIF or a UCI Part II may be set up as an umbrella structure with segregated portfolios of assets and liabilities. An SA or an SCA must have a minimum share capital of EUR 31,000, while a SARL s minimum share capital is EUR 12,500. No minimum share capital applies to SCS, SNC and SC neither upon incorporation nor after incorporation. The securities of a SOPARFI under the form of an SA or an SCA may be publicly traded. Even though a SOPARFI cannot be set up as an umbrella structure, it may issue tracking shares reflecting the performance of its different investment programs. 18

21 I. Existing forms of real estate investment structures Distributions to investors SIF/UCI Part II SICAR SIF/UCI Part II/ SICAR SOPARFI Soft statutory formalities applicable to distributions by SIF/UCI Part II with variable share capital or in the contracted form (FCP) No statutory formality applicable to distributions No statutory reserve 10% statutory reserve Statutory formalities applicable to distributions depending on legal form Distributions are not subject to any restrictions other than those set forth in its articles of incorporation or management regulations to the extent that the minimum own funds of EUR 1.25m is respected. (Except for SIF/UCI Part II in the form of SICAFs where distributions are subject to the same restrictions and formalities as those set out below and applicable to a SOPARFI which therefore depend on the legal corporate form of such SIF/UCI Part II with fixed share capital). Distributions in a SICAR are not subject to any restrictions other than those set forth in its articles of incorporation, provided that the minimum own funds of EUR 1m is respected. SICARs, SIFs and UCI Part II (other than SIFs or UCI Part II in the form of SICAFs) are not required to set up a statutory reserve. A SOPARFI set up as an SA, SCA or SARL shall allocate 5% of its annual net profits to a statutory non-distributable reserve until such reserve amounts to 10% of its share capital. Distributions by way of annual dividends in a SOPARFI are subject to the approval of the shareholders/partners. Distributions by way of interim dividends throughout the year are possible in a SOPARFI set up as an SA, SCA or SARL if certain formalities are fulfilled. Distributions may only be made within the limit of the distributable profits, the statutory definition of which depends on the legal form adopted by the SOPARFI. 19

22 I. Existing forms of real estate investment structures Redemptions of shares/units SIF /UCI Part II/ SICAR SOPARFI Soft statutory requirements applicable to share/unit redemptions Statutory requirements applicable to share redemptions depending on legal form Redemptions of shares of a SICAR or SIF with variable share capital are not subject to any restrictions other than those set forth in their articles of incorporation, provided that the relevant minimum own funds (EUR 1m for a SICAR or of EUR 1.25m for a SIF/UCI Part II) is respected (if the redeemed shares are cancelled by way of a capital reduction). Redemptions of units of a SIF structured as an FCP are not subject to any restrictions other than those set forth in its management regulations, provided that the minimum net assets amount of EUR 1.25m is respected (if the redeemed units are cancelled). Redemptions of shares of a SIF/UCI Part II with fixed share capital are subject to the same restrictions as those set out below and applicable to a SOPARFI, which therefore depend on the legal form of the SIF/UCI Part II with fixed share capital. As a matter of principle, shares of a SOPARFI set up as an SA or SCA may not be redeemed without shareholders approval. Shares may be redeemed, and self-owned by the company if (i) they comply with specific restrictions or (ii) they were issued as redeemable shares in accordance with the legally imposed terms and conditions to be set forth in the articles of incorporation of the company. Shares may also be redeemed and cancelled by way of a capital reduction, or partial liquidation, under certain conditions (i.e. among other restrictions, approval of the shareholders under the requirements applicable to amendments of the articles of incorporation (see p.12) and protective measures in favour of creditors). Shares of a SOPARFI set up as an SARL may only be redeemed if they are immediately cancelled by way of a capital reduction approved by the shareholders under the requirements applicable to amendments of the articles of incorporation (see p.12). Shares of a SOPARFI set up as an SCS, SNC or SC may only be redeemed with the approval of all the partners, unless otherwise provided by the partnership agreement, and cancelled by way of a capital reduction. 20

23 I. Existing forms of real estate investment structures Asset valuation and publication requirements SIF UCI Part II SICAR SIF/UCI Part II/SICAR SOPARFI Fair value asset valuation but exception possible Estimated value applying the principle of prudence Fair value asset valuation Prospectus requirements Financial statements requirements Asset valuation at cost No prospectus and low financial statements requirements Unless otherwise provided for in its articles of incorporation/ management regulations, the assets of a SIF shall be valued on the basis of the fair value in accordance with its articles of incorporation/management regulations. Unless otherwise provided for in the articles of incorporation/ management regulations. The valuation of the assets of a UCI Part II shall be based on the probable realisation value, estimated with care and good faith. The assets of a SICAR shall be valued on the basis of the fair value in accordance with its articles of incorporation. SICARs, SIFs and UCI Part II shall provide a prospectus. Prospectuses of UCIs Part II must at least include the information provided for in schedule A of Annex I of the UCI Law (insofar as the relevant information are not already included in the articles of incorporation or the management regulations). There is no requirement in terms of minimum content or specific layout for SICARs and SIFs, other than the requirement applicable to all SICARs, SIFs and UCIs Part II to include the information necessary for investors to be able to make an informed assessment of the investment proposed to them and of the risks attached thereto. Essential elements of the prospectus shall be up to date when new securities are issued only. SICARs, SIFs and UCIs Part II shall issue an annual report for each financial year within 6 months (4 months for UCIs Part II) from the end of the financial year to which it relates. Contrary to UCIs Part II, SIFs and SICARs are not required to publish semiannual reports or prepare consolidated financial statements. The assets of a SOPARFI shall be valued at cost. They shall or may be written down depending on whether it is foreseeable that the loss in value is durable or not. They may not be written up. SOPARFIs are not required to publish a prospectus. SOPARFIs set up as an SA, SCA and SARL shall issue and submit to the shareholders for approval an annual report for each financial year within 6 months from the end of the financial year to which it relates. SOPARFIs set up as SCS, SNC and SC are not subject to reporting requirements. SOPARFIs are not required to publish semi-annual reports and may be exempt from having to prepare consolidated financial statements, provided that the necessary conditions are met. 21

24 I. Existing forms of real estate investment structures Supervision SIF SIF/UCI part II/ SICAR SOPARFI Risk Management Conflict of Interest Permanent supervision by the CSSF Depositary Audit No CSSF supervision, no depositary SA, SCA and SARL are subject to supervision by auditors Appropriate risk management systems must be implemented in order to detect measure, manage and monitor the risk of the position and its contribution to the overall risk profile of the portfolio. SIF must be structured and organised in such a way to minimize the risk of investors interests being prejudiced by conflicts of interest arising between the SIF and any person contributing to the business activity of the SIF or linked to the SIF. SICARs, SIFs and UCIs Part II remain subject to the permanent supervision of the CSSF until their liquidation. Any amendment to their constitutive documents (prospectus/ placement memorandum, articles of incorporation/partnership agreement), any appointment of new directors or managers and any change of the management company (of a SIF/UCI Part II structured as an FCP) or their depositary is subject to prior approval of the CSSF. A depositary located in Luxembourg and qualifying as a credit institution shall be entrusted with the oversight of the assets of SICARs, SIFs and UCIs Part II. A Luxembourg independent auditor shall audit the accounting information contained in the annual reports of SICARs, SIFs and UCIs Part II. The auditor s report and qualifications, if any, shall be included in full in the annual report of SICARs, SIFs and UCIs Part II. In addition, the auditor has some duties of notification to, and of extensive supervision at the request of, the CSSF in certain circumstances. SOPARFIs are not submitted to the supervision of the CSSF and are not required to entrust the custody of their assets with a depositary. However, the operations and the annual financial statements shall be supervised by one or more statutory auditor(s) in an SA, a supervisory board in an SCA and one or more statutory auditor(s) in an SARL, unless the SARL has less than 25 shareholders. No statutory auditor is required in SOPARFIs set up as SCS, SNC or SC. Alternatively, an independent auditor shall be appointed and replace the statutory auditor(s) in a SOPARFI set up as an SA, SCA or SARL if certain thresholds (on total balance sheet, turnover and/or number of employees) are exceeded. 22

25 I. Existing forms of real estate investment structures B. Service providers and main features of the different forms of regulated real estate investment structures There are a number of different independent service providers which may be involved in the daily business of a regulated real estate investment structure. FCP: AIFM Depositary Promoter Management Company Central Administration Agent Investment Manager FCP Property Manager Investors Independent valuer SICAV/SICAF/SICAR: AIFM Depositary Promoter Investors SICAV, SICAF, SICAR Central Administration Agent Investment Manager Property Manager Independent valuer Depending on their respective roles, these service providers will be either regulated entities subject to CSSF approval, or unregulated entities. 23

26 I. Existing forms of real estate investment structures 1. Service providers The investment manager The management of assets may be delegated to one or more investment managers established in Luxembourg or abroad. The appointment of the investment manager will be effected by the management company in the case of an FCP or by the management body in the case of an investment company (being either the board of directors, the manager(s) or the general partner, depending on the legal form of the relevant company). The functions of the investment manager usually comprise the provision of recommendations regarding the acquisition and sale of property and the management of the portfolio of the investment structure. The property management may be undertaken by the investment manager itself or may be delegated to one or more local third party property manager(s) located in the jurisdictions of the relevant properties. The property managers may in certain cases also be in charge of the asset management, by virtue of a subdelegation granted by the investment manager or by the investment structure directly. However, the activity of property management can in no circumstances be considered as being part of the daily management of the real estate investment structure. After the implementation of the AIFMD into national legislation and no later than 22 July 2013, real estate investment funds falling within the scope of the AIFMD and not self-managed will have to designate an alternative investment fund manager compliant with the authorisation requirements contained therein. Such AIFM shall carry out at least the functions of portfolio management and risk management. AIFM may also provide additional functions such as: - Administration (i.e. legal and accounting services; customer inquiries; valuation and pricing including tax returns; maintenance of unit-/shareholders register; distribution of income; unit/share issues and redemptions; contract settlements; record keeping). - Marketing. - Activities related to the assets of the AIF. The depositary As a general rule, all Luxembourg investment funds and SICARs must appoint a depositary, which must be a bank established either as a Luxembourg corporation or as a Luxembourg branch of a foreign bank. In addition to the legal provisions set out in the laws applicable to such Luxembourg regulated investment vehicles, Chapter E of IML Circular 91/75 sets out the duties and liabilities of the depositary of a Luxembourg investment fund. The depositary is entrusted with the custody of the assets of the real estate investment structure. The concept of custody should not be interpreted in the sense of safekeeping, but in the sense of supervision. The depositary must know at all times where the assets of the structure have been invested and where and how the assets are available. The deposit of the assets may be made with the depositary itself or with a third party designated by the depositary. The depositary has thus a monitoring function regarding the properties of the real estate investment structure and the units/shares representing the holdings in the wholly-owned subsidiaries (see below). In practice, the depositary will hold a cash account where the subscription and redemption monies will flow through and where the monies to be distributed to investors will be held. 24 In addition, the depositary has various supervisory functions, the scope of which depends on the legal form of the investment structure concerned. The supervisory functions are less important for investment structures set up under the SIF Law or the SICAR Law than for structures subject to the UCI Law.

27 I. Existing forms of real estate investment structures The administrative agent Pursuant to applicable law, a number of administrative duties (duties of the central administration ) of a regulated real estate investment structure must be carried out in Luxembourg. Please note however that under AIFMD, administrative duties may be handled by the AIFM which may be either in Luxembourg or abroad; in which latter case, these function may be delegated to a Luxembourg agent. Duties of a central administration agent - Calculation of the net asset value - Keeping and making available the accounts - Processing of issues and redemptions of units/shares - Keeping the register of units or shares - Establishing the prospectus and financial reports - Dispatching notices and reports from Luxembourg The administrative agent undertakes the calculation of the net asset value. The net asset value of a real estate investment structure must be determined at least once a year, namely at the end of the financial year. The auditor Pursuant to applicable law, Luxembourg regulated real estate investment structures are required to have their accounts audited annually by an authorised independent auditor (réviseur d entreprises agréé), subject to the approval of the CSSF. The audit of the annual accounts has to be documented by a report on the annual accounts, and by a long form report, for UCIs Part II. 2. Main features of regulated real estate investment structures The obligation to have a promoter (for UCIs Part II) The promoter is considered to be the person who or the entity that initiates the creation of the real estate investment structure and that determines the nature of the structure. The promoter, who needs to be approved by the CSSF, must fulfill certain requirements in respect of background and experience as well as professional reputation. As it may be ultimately responsible for non-execution or errors in the execution of mandates by the board of directors or service providers, the promoter must also have sufficient financial means to cover possible indemnifications resulting from those errors, irregularities or omissions. The obligation to publish a prospectus All regulated real estate investment structures are obliged to publish a prospectus or an offering document which must include the information necessary for investors to be able to make an informed judgment of the investment proposed and in particular of the risks attached thereto. The prospectus of a UCI Part II must at least include the information provided for in Schedule A of Annex I of the UCI Law. The compliance of the prospectus or the offering document with applicable laws is checked by the CSSF. Investment restrictions (except for SICARs) In accordance with the principle of risk spreading, no more than 20% (for UCIs Part II) and 30% (for SIFs) of the net assets of the structure may be invested in a single property. This restriction is however not applicable during the start-up period of the investment structure, i.e. the first four years of existence of the structure. With regard to leverage, which is in practice one of the key elements of real estate financing, borrowings, as a general rule, cannot exceed an average of 50% of the valuation of all properties. However, this rule is subject to derogations granted by the CSSF on a case-by-case basis. The CSSF is more reluctant to depart from the general applicable rules in the case of retail funds than it would with respect to investment structures reserved to institutional, professional or well-informed investors who are deemed to be in a better position to assess the risks incurred by a higher leverage. In the past, the CSSF has already approved borrowings representing up to 75% of the valuation of all properties in institutional investment structures and up to 60% in retail funds. 25

28 I. Existing forms of real estate investment structures The specific rules for retail investment funds (UCIs Part II) investing in real estate are set out in Chapter I of Circular 91/75. Property valuation and independent appraiser Properties owned by the regulated real estate investment structure or by its affiliated real estate companies must be valued by an independent property appraiser with a specific experience in the field of property valuation. The valuation normally takes place at each year-end and at the time of purchase or sale of properties (this appraisal is not necessary for sales made within six months of the last valuation). In respect of real estate properties, the valuation made at year-end may be used throughout the following year unless there is a change in the general economic situation or in the condition of the properties which requires new valuations to be carried out under the same conditions as the annual valuation. Investment through wholly owned subsidiaries Regulated real estate investment structures 8 frequently utilise wholly owned Luxembourg subsidiaries. Such subsidiaries, in turn, may either hold subsidiaries, in Luxembourg or abroad, or hold directly real estate properties. Investments through wholly owned subsidiaries are accepted by the CSSF subject to certain conditions, the purpose of which is to ensure that investor protection is not reduced compared with direct investment. These conditions are as follows: - The investment structure must wholly own the share capital of the subsidiary; - The subsidiary may not carry on activities other than holding investments on behalf of the investment structure; - The shares of the subsidiary must remain in registered form; - A majority of the managers of the subsidiary must be managers of the investment company or, in the case of an FCP, of its management company; - In the investment structure s semi-annual and annual financial statements, the subsidiary must be regarded as transparent and the accounts of the investment structure must contain a list of final investments made through the subsidiary; - The accounts of the investment structure and of the subsidiary must be audited by the same auditor; - The depositary of the investment structure must be in a position to perform its legal duties in respect of the assets held by the subsidiary; - The use of a subsidiary must be specifically mentioned in the prospectus of the investment structure. - The investment restrictions applicable to the real estate investment structure will be regarded on a consolidated basis The subsidiary must comply with the investment restrictions of the investment structure. The overall external borrowings must be calculated on a consolidated basis. 8 SICARs are not permitted to directly own real estate properties.

29 I. Existing forms of real estate investment structures Consolidation requirements (for UCIs Part II) In addition to the general rules applicable as regards investments through wholly owned subsidiaries, Chapter I, paragraph III, of Circular 91/75, provides for consolidation requirements applicable specifically to real estate UCIs Part II. The accounts of the subsidiaries which are funded for more than 50% by the real estate fund either by way of equity or loans must be audited by the same auditor as the real estate fund. The accounts of these entities must in principle be drawn up at the same date and must be consolidated with the accounts of the real estate fund at the end of each half-year. 27

30 II. Tax considerations Basics on Luxembourg taxation - Taxation of the vehicle SIF UCI SICAR SA, SARL, SCA SCS Income tax: Corporate income tax (CIT) Max. 21%, but: 100% exemption for profits derived from (i) risk capital securities and (ii) funds to be invested within 12 months in risk capital securities Municipal business tax (MBT) 6.75% (in Luxembourg-city), but: 100% exemption for profits derived from (i) risk capital securities and (ii) funds to be invested within 12 months in risk capital securities Withholding Tax: Dividends Liquidation proceeds Interest 9 Royalties Net worth tax Subscription tax 0.01% on NAV with exemptions 0.05% on NAV with reduction to 0.01% and exemptions Registration duties EUR 75 on incorporation, share capital increase through contribution in cash against shares or other amendments of the articles of incorporation 28 VAT VAT exemption for management services 9 Assuming the beneficiary of the payments opts for the exchange of information procedure if interest payments fall within the scope of the EU Savings Directive 2003/48/EC, and is not a Luxembourg resident individual.

31 II. Tax considerations Basics on Luxembourg taxation - Taxation of the vehicle Income tax: SOPARFI SA, SARL, SCA SCS, SNC SC Corporate income tax (CIT) Max. 21% (with a minimum of EUR 1,500), but: (i) 100% exemption for dividends, liquidation proceeds and capital gains derived from qualifying participations (ii) 80% exemption on qualifying IP rights Municipal business tax (MBT) 6.75% (in Luxembourg-city), but: (i) 100% exemption for dividends, liquidation proceeds and capital gains derived from qualifying participations (ii) 80% exemption on qualifying IP rights 6.75% (in Luxembourg-city), but: (i) 100% exemption for dividends and liquidation proceeds derived from qualifying participations (ii) 80% exemption on qualifying IP rights Withholding Tax: Dividends 15% but exemption for qualifying parent companies and reduction under tax treaties Liquidation proceeds Interest 10 Royalties Net worth tax 0.5% p.a. on net asset value on 1 January, but: (i) 100% exemption on qualifying participations (ii) 100% exemption on qualifying IP rights (iii) possibility to avoid/reduce tax burden through a specific 5 year net worth tax reserve Subscription tax Registration duties VAT EUR 75 on incorporation, share capital increase through contribution in cash against shares or other amendments of the articles of incorporation No VAT exemption Assuming the beneficiary of the payments opts for the exchange of information procedure if interest payments fall within the scope of the EU Savings Directive 2003/48/EC, and is not a Luxembourg resident individual.

32 II. Tax considerations Basics on Luxembourg taxation - Taxation of investors Taxation of Luxembourg residents: Companies and individuals acting in the course of their business undertaking SIF/UCI SICAR SOPARFI Dividends, liquidation proceeds, capital gains and interest are taxable as ordinary profits SA, SARL, SCA SCS SA, SARL, SCA SCS, SNC Dividends, liquidation proceeds and capital gains from qualifying participations may be exempt, otherwise a 50% exemption applies on dividends Interest is taxable as ordinary profit Tax transparent: Profits and wealth directly taxable in the hands of the shareholders, irrespective of any actual distribution Dividends, liquidation proceeds and capital gains from qualifying participations may be exempt, otherwise a 50% exemption applies on dividends Interest is taxable as ordinary profit Tax transparent (exc. MBT): Profits and wealth directly taxable in the hands of the shareholders, irrespective of any actual distribution Individuals acting in the course of the management of their private wealth Dividends are taxable as ordinary income Capital gains and liquidation proceeds are exempt unless i) realised within the first 6 months following the acquisition, or ii) in case of substantial participation (>10%) Interest is generally subject to a final 10% withholding tax A 50% exemption applies on dividends Capital gains and liquidation proceeds are exempt unless i) realised within the first 6 months following the acquisition, or ii) in case of substantial participation (>10%) Interest is generally subject to a final 10% withholding tax Tax transparent: Profits and wealth directly taxable in the hands of the shareholders, irrespective of any actual distribution A 50% exemption applies on dividends Capital gains and liquidation proceeds are exempt unless i) realised within the first 6 months following the acquisition, or ii) in case of substantial participation (>10%) Interest is generally subject to a final 10% withholding tax Tax transparent (exc. MBT): Profits and wealth directly taxable in the hands of the shareholders, irrespective of any actual distribution 30 Taxation of Luxembourg nonresidents 11 Not taxable in Luxembourg unless investment is held in a Luxembourg permanent establishment or permanent representative Not taxable in Luxembourg unless investment is held in a Luxembourg permanent establishment or permanent representative Not taxable in Luxembourg unless investment is held in a Luxembourg permanent establishment or permanent representative Not taxable in Luxembourg unless: (i) investment is held in a Luxembourg permanent establishment or permanent representative, or (ii) capital gains realised on a substantial participation (>10%) within 6 months Not taxable in Luxembourg unless: (i) investment is held in a Luxembourg permanent establishment or permanent representative, or (ii) SCS, SNC qualifies as Luxembourg permanent establishment or permanent representative 11 Subject to tax treaties concluded by Luxembourg.

33 III. Pan-European regulated real estate investment structure Even though Luxembourg does not have a specific REIT legislation, its existing investment vehicles - whether regulated or not - offer the flexibility required to favourably structure real estate investments for a variety of investors in a plurality of target countries. It is often the combination of the different vehicles already presented which offers flexible and tax efficient investment structures for pan-european real estate investments. Common structures used for pan-european regulated real estate investment are illustrated below. Investor Investor Investor Feeder Master FinCo Dutch SVP Spanish PropCo French PropCo Portugal PropCo Swiss PropCo Equity Bank debt Depending on the nature of the investments as well as the status of investors, the Luxembourg feeder or holding entity of a pan-european regulated real estate investment structure, is often a SICAV, SICAF, FCP or a SICAR (the Feeder ), in which investors invest through equity. Profits received by the Feeder are not subject to corporate taxation in Luxembourg, and outbound dividend payments can be made without triggering any withholding taxes in Luxembourg. 31 The equity financing required to acquire real estate by a Luxembourg or local special purpose vehicles ( SPVs ) will be provided through an intermediary SOPARFI (the Master ). Profits derived from the SPVs (dividends

34 III. Pan-European regulated real estate investment structure and capital gains) are generally tax exempt at the level of the Master under the Luxembourg participation exemption regime. Depending on the legal nature of the Feeder, the repatriation of profits may be structured as interest payments, dividend payments or partial liquidations, which should not result in any taxable income at the level of the Feeder. On the basis of local thin capitalisation rules and Luxembourg debt-to-equity ratio rules, equity financing will be provided by the Master to the SPVs. This generally ensures the full deductibility of interest payments in the country of the real estate investment. Income derived from real estate will generally only be taxable, according to the Luxembourg double tax treaties, in the country where the real estate is located. Furthermore, dividends as well as interest payments to the Master can generally benefit from low double tax treaty rates as well as preferential rates under the EU Parent Subsidiary Directive and the EU Directive on Interest and Royalty Payments. Debt financing generally provided by investors or the Feeder is often structured through a separate Luxembourg finance company ( FinCo ). The FinCo would on-lend the funds received to the SPVs in compliance with the applicable thin capitalisation rules for the SPVs. Interest payments by the FinCo are generally considered deductible expenses of the FinCo, to the extent that the FinCo realises an arm s length margin on its financing activity, which would be subject to corporate income tax and municipal business tax at standard rates. Interest payments to the Feeder can generally be made free of any withholding taxes in Luxembourg. If additional debt financing is required, this may be provided through third-party bank debt directly to the SPVs. Finally, the possibility of carried interest structures (e.g. through golden shares and preferential dividends), as well as the lowest VAT rate in the European Union make Luxembourg a preferred location for structuring and setting-up real estate associated management structures. 32

35 IV. Listing of real estate investment structures on the LuxSE The LuxSE, which lists the widest range of securities in Europe, including shares, units, warrants, global depositary receipts, certificates or debt securities, offers an attractive trading platform for real estate investment structures. It provides a strong regulatory framework in line with the EU Directives on securities markets allowing access to a fast, flexible and secure listing process as well as to timely and transparent information thereby building strong foundations on which to raise funds and build investor confidence. The LuxSE offers broad listing options through its two markets, the regulated market and the Euro MTF, both of which are compliant with official listing legislation. The regulated market is listed as an EU-regulated market within the meaning of MiFID and is an attractive and accessible market for both international issuers and investors, offering certainty and security. Issuers of securities (with the exception of a listing of equity securities by an open-ended fund) listed and admitted to trading thereon are subject to EU harmonisation rules and, most notably, subject to the requirements of the EU Prospectus and Transparency Directives. The Euro MTF, which is a Multilateral Trading Facility, is an exchange regulated market which is organised and supervised by the LuxSE. Issuers of securities listed and admitted to trading thereon fall outside the scope of the EU Prospectus and Transparency Directives as well as the IFRS or equivalent accounting standards. An application for the admission to trading of securities on one of the markets operated by the LuxSE is simultaneously deemed to be an application for admission to the Official List. Listing in Luxembourg is relatively straightforward and flexible. A listing agent is not mandatory. There are two main phases in the process: the file submission and application phase, and the approval phase. The file submission and application phase New applicants are required to inform the LuxSE of their intention to list a security. A file must be submitted to the LuxSE containing the relevant application forms (available on the website of the LuxSE: and the necessary supporting documents including the prospectus. With regard to the prospectus that is required to be drawn up for purposes of the listing and admission to trading of securities on the LuxSE, the content thereof will vary according to the type of security to be listed, the market (regulated market or Euro MTF) on which the security is to be listed and the structure of the transaction underlying the issue thereof. For the purposes of listing and admission to trading on the EU regulated market of the LuxSE, it is generally necessary to draw up and to publish a prospectus that is compliant with the provisions of Commission regulation (EC) No 809/2004 of 29 April 2004, as amended, implementing the Prospectus Directive as regards information contained in prospectuses as well as the format, incorporation by reference and publication of such prospectuses and dissemination of advertisements and which needs to be approved by the competent authority of the issuer s home Member State (the CSSF, if Luxembourg is the home Member State) 12. Subject to its particular characteristics (this is applicable to equity securities only), an FCP, SICAV or SICAF which qualifies as an open-ended fund 13 for the purposes of the Prospectus Law would not be required to draw up its prospectus in accordance with the requirements described above The Prospectus Directive offers a passporting facility for issuers wishing to publicly offer securities or admit securities to trading on a regulated market in a Member State other than their home Member State. Thus an issuer who has had a Prospectus Directive prospectus approved by the competent authority of its home Member State may, subject to specific notification and publication procedures, offer securities to the public or seek admission to trading on a regulated market in other Member States of the EEA, without having the prospectus approved by the competent authorities of the other Member States. 13 In the case of an open-ended FCP, SICAV or SICAF, application for listing on both the regulated market and the Euro MTF can be made on the basis of the CSSF-approved fund prospectus.

36 IV. Listing of real estate investment structures on the LuxSE For the purposes of a listing and admission to trading on the Euro MTF, the prospectus will be required to be drawn up in accordance with the LuxSE requirements and will also be approved by the LuxSE (except in the case of an equity listing by an open-ended FCP, SICAV or SICAF 14 ) and which, compared to the requirements set out by the Prospectus Directive, generally provide for less stringent requirements with regard to the content of the prospectus. Application for listing may be submitted by to bolide@bourse.lu. The approval phase A team of experts at the LuxSE is dedicated to the review of the listing application files and ensures compliance with listing requirements. Approvals are arranged on a daily basis which shortens the turn-around time in respect of processing applications, which is essential for issuers for whom time is a key decision factor In the case of an open-ended FCP, SICAV or SICAF, application for listing on both the regulated market and the Euro MTF can be made on the basis of the CSSF-approved fund prospectus.

37 V. Real estate transactions A. Freehold ownership (droit de propriété) - emphytéose - superficie The droit de propriété (freehold ownership) is a fundamental right defined by the Civil Code as the right to enjoy and dispose of assets absolutely, provided the exercise of this right does not interfere with a legal provision or a third party s right. There are no domestic restrictions on who may hold land. Both individuals and corporate bodies may hold and use land for themselves or for the purposes of letting the land to another party. Specific laws complement the general provisions contained in the Civil Code with respect to, in particular, residential leases (law of 21 September 2006), planning regulations (law of 19 July 2004, as amended) and registration (law of 25 September 1905, as amended). Aside from ownership as such, other rights in rem can be granted with regard to real estate. They may take the form of long-term leases between 27 and 99 years (the droit d emphytéose ), building rights lasting up to 99 years (the droit de superficie ), usufructs or easements. They are separate from ownership rights and are granted to persons other than the owner. For the beneficiary, these rights in rem procure more stability than a mere lease agreement as well as more extensive rights, and for the lessor they guarantee income over a longer period of time. B. Acquisition of real estate A purchase of property is made by the conclusion of a sale agreement subject to the law of contract in general and the specific rules applicable to sales. As soon as there is mutual consent between vendor and purchaser as to the specific asset and as to the price, a sale agreement is concluded even if the asset does not exist yet. Given the absence of further strict formalities, and depending on the size of the transaction, the buyer will usually instruct lawyers and surveyors to conduct legal, technical and environmental due diligence on the property. The aim of this process is to verify the different issues listed below. 1. Asset deal From a legal point of view, the acquisition of real estate is most often carried out in two distinct phases: A private agreement between parties; A notarial deed. 35

38 V. Real estate transactions a. Private agreement The private agreement may be constituted by a number of legal mechanisms such as an offer letter ( offre d achat ), an undertaking to sell ( promesse de vente ) or most often by a preliminary sale and purchase agreement ( compromis de vente ). Parties are free to negotiate the terms and conditions of such agreements, in any language, and no standard forms are imposed. The effect of preliminary sale and purchase agreements is to bind the parties, and the transfer of ownership documented in such contracts is perfectly valid. However, these agreements are not enforceable against third parties. Frequently, preliminary sale and purchase agreements contain conditions precedent related to the buyer obtaining the necessary funding or administrative authorisations 15, and also often contain an obligation for the parties to go before a civil law notary within a certain time. Such conditions precedent are then often coupled with a penalty clause. As the effect of such agreements is significant, it is usual for lawyers to intervene for negotiation and drafting. Depending on the zoning of the real estate asset under the municipal land use plan (see hereafter), a right of pre-emption by the State, the municipality or the Fund for housing development ( Fonds pour le développement du logement et de l habitat ) may apply. In order to become enforceable against third parties, a notarial deed is required. b. Deed of sale and purchase before a civil law notary To have the transfer of ownership registered and to confer rights against third parties, the transfer of title needs to be recorded at the mortgage register ( Bureau des hypothèques ). Only notarial deeds, administrative deeds established by a State administration or a municipality acting either as seller or purchaser, or judgments may be recorded on the mortgage register. The fees of the notary are calculated according to a tariff and are normally borne by the purchaser. The purchase price, duties and taxes will be paid to the notary, who will ensure that the necessary duties are paid and release the amount to the seller. c. Tax considerations The transfer of real estate located in Luxembourg is subject to a registration duty assessed on the higher of the purchase price and the effective value of the property. The registration duty amounts to 6%, and a municipal surcharge of 50% is added on the amount of the registration duties due when the property is located in Luxembourg-City. A 1% transcription duty ( droit de transcription ) applies in every case. The registration duty is payable upon registration of the transfer of property with the register of mortgages. A contribution of real estate situated in Luxembourg to a corporation or partnership benefits from a reduced registration duty of 0.6% (plus a municipal surcharge of 50%, if applicable) and a reduced transcription duty of 0.5%, provided that such contribution is remunerated by shares. 36 Considering article 44 1 of the Luxembourg VAT law, transfers of real estate are exempt from VAT; as a result no VAT is due when a transfer takes place and, accordingly, no input VAT deduction is granted. There are two main exceptions to this: the transfer of ownership of a property before construction is started is always subject to VAT, and other transfers of property are subject to VAT if a VAT option form is filed with the VAT authorities. The advantage of this second exception is that the seller has the right to deduct its input VAT on overheads and investment costs. 15 See section C. here below.

39 V. Real estate transactions If the seller is a company, capital gains realised on the sale of a property are subject to corporate income taxes at the same rate as other revenue. At the same time, article 54 of the Luxembourg Income Tax Code stipulates that capital gains are not taxable on disposals if the sale price is reinvested within two years into another eligible property or if they relate to assets forming part of a company s net assets for at least five years prior to disposal. 2. Acquisition vehicles (share deal) Instead of the direct acquisition of real estate, quite often special purpose vehicles ( SPV ) are set up for tax reasons, whereby the company holding the real estate can be acquired/sold. If the property is located in Luxembourg, from a legal point of view, the real estate does not change owner and thus no registration or transcription duty would be due, as the object of the sale is shares of a company and not real estate. In order to avoid any requalification issues with regard to a share deal as a fraud, careful review of the legal documentation is required. According to Luxembourg case law, such requalification would require a fraudulent act, which is not the case if the parties to the contract have the choice between two viable possibilities and, in a legitimate way, decide to proceed with the more tax efficient option. Purchase agreements with regard to interests in partnerships will systematically trigger registration duty and transcription duty if these partnerships hold real estate situated in Luxembourg as assets. The disposal of the shares of an SPV is not subject to any Luxembourg registration tax or stamp duty, if such disposal not recorded in a Luxembourg notarial deed. If the share purchase agreement is voluntarily registered, a fixed registration of EUR 12 would apply. Should the SPV holding the real estate property be a Luxembourg resident company and be held by a Luxembourg resident company, the capital gains realised by the parent company on the sale of the SPV s shares may be exempt from Luxembourg corporate income tax and municipal business tax under the Luxembourg participation exemption on capital gains. Generally, the parent company may then be liquidated and the sales proceeds may be distributed to the investors free of any withholding taxes. Should the SPV holding the real estate property be a Luxembourg resident company held by a non-resident investor, the capital gains realised by the investor will generally only be taxable if the investor holds more than 10% in the share capital of the Luxembourg resident SPV and sells the participation within the first six months following its acquisition. C. Legal framework 1. Planning law and building permits a. Planning system The planning system is regulated by the Law of 2004, which repealed a law of 12 June 1937 on the planning of cities and other significant agglomerations. The zoning process comprises a number of different phases beginning with a consultative opinion by a national advisory commission. After a first vote by the municipal council, the plans are made available for public inspection and a public hearing. Any interested party may introduce observations and must be heard by the council of mayor and aldermen. The municipal council then proceeds with a second vote, either maintaining the initial project, adapting it in order to take account of the observations, or rejecting the project. 37

40 V. Real estate transactions Unless rejected, after the second vote the plans are again made available to the public with the opportunity to submit a complaint to the Minister of the Interior and Spatial Planning. The general land use plan only becomes final and fully effective once it has been approved by the Minister. During this process strict time limits established by the Law of 2004 must be respected. At least every six years, the municipal council must decide whether the general land use plan is to be modified. In addition to this general land use plan, each municipality has a municipal construction regulation ( règlement sur les bâtisses ), and some specific areas of a municipal territory may be subject to a specific land-use plan ( plan d aménagement particulier or PAP ), adopted by the municipality following an application by the owner. In some instances, the government has adopted land use plans or guiding plans through grand-ducal regulations. These governmental plans supplement the general land use plans of the relevant municipality and override contrary municipal provisions. Whereas guiding plans relate more to political goals to be achieved, such as the location of future secondary schools for example, governmental land use plans ( plan d occupation du sol ), due to the detailed provisions they contain, may have a direct impact on private developments. Such governmental land use plans currently exist for certain industrial estates of national importance, the airport and its surroundings, and areas susceptible to flooding. b. Municipal building permits What is building permission needed for? A municipal building permit is required for any construction, transformation or demolition of a building. Municipal construction regulations may extend the necessity for a building permit to other works such as change of use or change of the ground s topography. Application process The application must always be addressed to the mayor of the municipality where the building is/will be located. Each municipal construction regulation contains a list of documents that must be submitted with the application and each municipality has its own tariffs. The application must, in general, contain construction plans on a scale of 1/100 or 1/50 established by an architect and cadastral plans. The mayor must grant a building permit if the application complies with the general land use plan, the specific land use plan (if it exists) and the municipal construction regulations. If the applied permit does not comply with these regulations, the mayor must refuse the permit. There is no fixed time limit during which the mayor must respond, but in the absence of a reply within three months, the applicant can legally consider that his application has been rejected. A building permit lapses if the applicant does not significantly begin construction works within one year, with a possible extension for a further one year period. Appeals 38 A refusal of a building permit or a lack of response may be challenged before the Administrative Tribunal ( Tribunal administratif ) in first instance with an appeal before the Administrative Court ( Cour administrative ). Any interested party may challenge the delivery of a permit and request the suspension of the effects of a permit by a separate application before the President of the Administrative Tribunal pending final decision on the legality of the permit. The zoning documents, such as the general land use plan, the special land use plan, the guiding plan or the governmental land use plan may also be challenged before the administrative courts.

41 V. Real estate transactions 2. Operating permits (commodo - incommodo) a. General remarks Certain types of building (offices, shopping malls, industrial premises) require an operating permit (so-called commodo-incommodo permit under the law of 10 June 1999 on classified establishments), which must be obtained before construction begins. A bill intending to streamline the procedural requirements of this law is currently pending with Parliament. The object of the law is to: Ensure the integrated prevention and reduction of pollution from establishments; Protect the safety, salubrity or comfort of the public, the neighbourhood or the staff of establishments, the occupational health and safety of workers and the human and natural environment; and Promote sustainable development. According to the accompanying grand-ducal regulation of 16 July 1999 (as modified) listing such classified establishments, more than 360 different installations and processes are subject to a prior authorisation. These establishments are divided into 4 classes depending on the nature of their influence to the public, the neighbourhood, the working conditions and the environment. The procedures and the authorities involved vary according to the classes. Class 1 Minister for Environment and Minister for Labour Public enquiry Class 2 Mayor Public enquiry Class 3 Minister for Environment and Minister for Labour No public enquiry Class 3A Minister for Labour No public enquiry Class 3B Minister for Environment No public enquiry Class 4 No permit, but subject to provisions of specific grand-ducal regulation Where different establishments would be united in a single installation, the highest class determines the procedure. Thus in most cases the class 1 procedure has to be followed. Non-compliance with the law and the operating conditions is subject to administrative closure of the establishment and criminal sanctions (fines, imprisonment and judicial closure of the establishment). b. Procedure of commodo - incommodo For a class 1 establishment, the file is first introduced with the Environment Administration ( Administration de l Environnement ). The Administration de l Environnement will conduct a first appraisal of the application and request additional information. Such information must be handed over within 180 days, failing which the application is regarded as void. Once the administration has informed the applicant that the file is complete, it is sent to the municipal authorities of the municipality where the establishment is to be located for the purposes of the public enquiry. A notice is posted at the municipal offices, at the location where the establishment is planned and published in at least four daily newspapers. 39

42 V. Real estate transactions The public has at least 15 days to inspect the application file and make written and oral comments. The file is then transferred back to the Administration de l Environnement who will, together with the Labour Inspectorate ( Inspection du Travail et des Mines ) establish the operating conditions of the permits. Both the Minister for Environment and the Minister for Labour deliver a separate permit. The permits must be obtained prior to the construction and the operation of the establishment. A period up to twelve months may lapse between the application and the delivery of the permit. c. Operating conditions The permit will establish the operating conditions deemed necessary to protect the objectives of the law, taking into account the best available technology. The permit by the Environment Minister will determine conditions with regard to the protection of air, water, soil, fauna and flora, noise, the rational use of energy and the prevention and management of waste. The permit thus adopts an integrated approach to environmental protection. The permit by the Labour Minister will determine conditions with regard to the safety of the public and the neighbourhood and the security, health and safety of the workplace. The permits usually provide that before the start of operation, the establishment is inspected and approved by a control office reporting to the administration. 3. Further required permits Under Luxembourg law, a number of additional administrative permits may be required prior to construction works, depending on the location of the land, its classification under zoning laws and the nature of the works. For example, the proximity of a construction site to a state road, a waterway or a forest triggers the necessity to obtain permits from the Minister of Public Works, the Minister of the Interior and Spatial Planning and the Environment Minister respectively. 4. Land register All land in Luxembourg comes parcelled into plots which are recorded in the land register (the cadastre ). The land register provides public information on the ownership of land throughout the Grand Duchy. The information contained in the land register may however not be up to date at a given time. 5. Mortgages and easements a. Mortgages The mortgage register ( Bureau de conservation des hypothèques ) contains information on all deeds transferring rights in rem in relation to real estate property located in Luxembourg 16. Each person holding such rights will have a dedicated box on the register ( case des inscriptions et transcriptions ) showing all deeds transferring ownership, constituting easements or mortgages and allowing research to be made on all these deeds. Such deeds can only be binding against third parties if they are registered in the mortgage register Luxembourg has three local offices of mortgages dealing with the registration of the transfer of real estate rights.

43 V. Real estate transactions Under Luxembourg law, mortgages can be established by law (statutory mortgage), by a specific court order (judicial mortgage) or by agreement (conventional mortgage). Statutory and judicial mortgages do not require any formalities to be enforceable and binding against third parties. Conventional mortgages must be executed in the presence of a Luxembourg notary who will have to verify whether the debtor legally owns the real estate and whether he has the legal capacity to mortgage it. For the mortgage to be enforceable and opposable to third parties, the executed deed must be registered with the mortgage register. In case of any future conflict between competing claims on the land, priority will be determined by reference to the date of registration. The mortgage will follow the land irrespective of whose hands it might be in. By virtue of the mortgage, the creditor acquires a right of pursuit and a right of preference. The right of pursuit enables him to enforce the mortgage even if the real estate is transferred to someone else. The right of preference means that if the land is sold to pay the debt, the mortgage lender will be paid in preference to anybody else. In case of a transfer of ownership, it is thus important to ensure that the mortgage is discharged. The creditor only has a right to the value of the mortgaged property. If the debtor does not pay, the creditor may not simply appropriate the debtor s property. The creditor must either launch a seizure procedure ( saisie immobilière ) in order to put the property on public auction through a complex procedure controlled by the courts, or put it directly on sale via a notary (if the mortgage deed allows the creditor to do so by way of a clause called clause de voie parée contained in article 879 of the New Code of civil procedure) and if the mortgage ranks first. The Luxembourg Tax and Social Security authorities are entitled to a general statutory mortgage on any real estate located in Luxembourg, which is a so-called hidden mortgage ( hypothèque occulte ). It is called hidden because for a certain period of time the mortgage exists and, for example, guarantees tax debts, without being inscribed on the register, and takes rank from the date of the debt itself. This mortgage must be registered after a 3-year period in order to remain valid. b. Easements Easements ( servitudes ) create an obligation that benefits one parcel of land and burdens another. The rights and duties of an easement run with the land parcel in question, so that any transfer passes them on to the new titleholder. They cannot be transferred separately from the land they affect. Such obligation may require the landowner to permit certain activities on its land or to refrain from certain activities. In addition to the above duties, it is also possible to provide personal duties pertaining to the establishment or maintenance of specified facilities. In certain circumstances, the beneficiary may also be required to pay for the privilege. Easements may be created: Naturally, arising automatically from the location of the two parcels of land; By statute, to protect such things as rights of way, common walls, drains or distances between trees and plants; Voluntarily, by contract: these easements are only enforceable against third parties if they are registered with the mortgage register; For the benefit of public utility organisations such as gas and electricity companies or the post office. 41

44 V. Real estate transactions 6. Construction warranties Luxembourg law contains special - and rather complicated - provisions on the liability of the different parties involved in the construction process by way of a contract for hire of services (e.g. architects, engineers, works contractors, etc.). To engage the liability of these parties, the owner does not need to prove a positive fault on their part as they are required to give a warranty on their works. Such warranty is, however, strictly limited in time. According to articles 1792 and 2270 of the Civil code, the liability of these parties towards the owner of the construction varies according to whether major or minor works are concerned. If the deficiency lies in minor works ( menus ouvrages ) the liability runs for two years ( garantie biennale ). Where the defect concerns major works afflicting the stability of the building ( gros ouvrages ), the guarantee lasts ten years ( garantie décennale ). According to case-law, in order to define the concept of major works, one has to look not only at the function of the work for the stability and safety of the building, but also take into consideration the usefulness of the work, so as to consider those deficiencies that render the building improper for its destined use as being major works. Furthermore, one has to analyse the volume of the repairs that the defect entails, as well as the cost and the nature of long-term investment that the work in question represents. The warranty periods are considered to be of public policy ( ordre public ) and may therefore not be excluded or reduced through contract. The period starts at the moment of delivery of the building evidenced either by an acceptance report between the owner and the contracting party or by tacit acceptance of the building, i.e. by moving in or complete payment of the price. It is generally admitted that the warranty period has two consequences: The defect must reveal itself within the two/ten years; The owner must act against the contracting party within the same two/ten year period. Insurance contracts might be entered into to cover any liability incurred under these special regimes. Certain work contractors might also be eligible to apply the general civil liability regime. 7. Lease agreements Luxembourg law distinguishes between common leases for office or industrial premises ( common leases or professional leases ), commercial leases, residential leases and farm leases. A lease agreement can be verbal, but for reasons of proof, practically all contracts are in writing. However, a lease having a duration of more than nine years is subject to transcription on the mortgage register and needs therefore to be concluded as a notarial deed. Luxembourg law provides a fairly rigid system for farm leases and residential leases, but only a few imperative provisions for commercial lease contracts or ordinary leases (e.g. offices), which may therefore be freely negotiated among the parties. a. Common leases (professional leases) 42 Any lease which does not qualify as a commercial, residential or farm lease is considered as a common lease and thus underlies the sole general provisions of the Civil Code. Professional leases qualify as common

45 V. Real estate transactions leases since the premises are not used for a commercial activity as described hereafter. Common leases may run for a fixed or undetermined duration, subject to agreement between the parties. For leases with a fixed duration, the duration may not exceed 99 years. Such leases may not be terminated before the expiration of the period, except by mutual agreement. Leases with an undetermined duration may be terminated by either party in compliance with the notice period stipulated in the lease agreement. If the lease agreement does not contain a relevant provision, the notice period will be 6 months. The rent will be a matter of agreement. Once agreed, the rent will, in principle, stay constant, except if the parties have agreed on adjustments in line with the cost of living (mostly related to the official index of living costs). Tenants can, unless otherwise provided in the lease agreement, assign the lease or sublet the premises to a third party, but the consent of the landlord is usually required. b. Commercial leases By definition a commercial lease relates to premises used for a commercial activity. That purpose must result either from a contractual provision or from the nature of the premises themselves. If the premises are openly accessible to customers, case law considers that a commercial activity is exercised. There is no minimum duration for commercial leases in Luxembourg although most often the parties conclude such leases for a duration of years, meaning that the contract may only be terminated at the three year anniversary or the six year anniversary or at the end of nine years. However, the parties are completely free to agree on a different duration and mechanism of termination. According to law, commercial tenants benefit from two special protection mechanisms: Right of preferential renewal With the aim of protecting businesses Luxembourg law organises a special procedure for preferential renewal of a commercial lease contract, meaning that when the term comes to an end the tenant has the right to obtain a new lease. Such right exists once the tenant has run a business in the leased premises for at least three years and lasts up to the fifteenth year of his stay. Article of the Civil Code provides that the demand for preferential renewal must be made to the landlord at least six months prior to the term, and that the landlord must make its decision known within three months of notification. In order to refuse such renewal, the landlord may only invoke the grounds provided for by article of the Civil Code: Serious grievances against the tenant; Personal occupation by the landlord; Withdrawal from all renting activity; Transformation of the premises. A further ground for refusal may be an existing and genuine offer by a third party to become tenant, indicating a rent higher than the amount of the, then current, rent. Nonetheless, the tenant may stay in the premises if it agrees to pay such higher rent. 43

46 V. Real estate transactions Postponement of termination or temporary extension of the existing lease ( sursis commercial ) Luxembourg law provides for the possibility to request a postponement of the termination of a lease with the aim of allowing the tenant, under a commercial lease, to be in a better position to organise its departure. Thus the tenant, whose term has come to an end, may request two successive terms of a maximum of 6 months each from the court. Such postponement may only be refused if the landlord proves that he needs the premises to exploit them himself or by his family, or for serious and legitimate grounds. c. Residential leases A residential lease is defined by the lessee s use of the premises as his main residence. Such leases are subject to a special regime as to their termination, rent or recourse. d. Registration of lease agreements According to the law dated 22 frimaire an VII, private and commercial lease contracts must be registered and are as such subject to registration duties. Lease agreements have to be registered within three months of their execution and the transfer taxes due have to be discharged prior to the registration. The absence of registration does not affect the validity of the agreement between the parties from a civil law point of view, but it is only from the date of its registration that the lease contract is binding against third parties (in particular a third party buying the building). As a general rule, the registration of the lease contract is subject to a proportional registration duty of 0.6%, calculated on the aggregate rental price for the term of the contract. In the case of a tacit renewal of the lease agreement, the registration duty is calculated on the basis of total duration. The registration duties which have been paid may not be reimbursed, even if the parties agree to terminate the lease agreement before the expiry of its term. Tenants and landlords are jointly liable to the competent tax administration ( Administration de l Enregistrement et des Domaines ) for payment of registration duties. e. VAT option As a general rule, the sale or lease of immovable property is not subject to VAT 17. However, under certain conditions, the parties may opt to make the transaction subject to VAT 18. Basically, the following conditions have to be fulfilled 18 : All parties are VAT registered persons; The subject of the transaction is immovable property; The immovable property has to be used for the purpose of an activity which gives the buyer or the tenant the right to recover at least 50% of the input VAT; The transaction has to be formally agreed to by the tax authorities who will verify that all conditions are fulfilled. 44 The tax authorities usually decide on whether the conditions are fulfilled within a month and VAT is applicable the first day following the month during which the option has been agreed by the tax authorities. Where the parties have opted to make the lease contract subject to VAT, and insofar as the said option has been agreed to by the tax authorities, the registration of the lease agreement is subject to a flat rate of EUR 12. VAT is levied on the rent at the rate of 15%. 17 Article 44-1 (f) and (g) VAT Law. 18 Article 45 VAT Law. 19 The conditions which have to be fulfilled are set out by the grand-ducal decree dated 7 March 1980.

47 VI. Real estate finance documentation A. Facility agreement - choice of law In the financing of real estate the parties are free to choose the applicable law and jurisdiction in the loan agreement but it may be observed that, at least for local deals, the loan documentation is increasingly governed by Luxembourg law. Additionally, Luxembourg laws and regulations are very progressive in so far as they permit a high level of flexibility for lenders and borrowers as there are no restrictions on the choice of currency, and deferred payments and limited recourse clauses are permitted. B. Collateral Traditionally, financial institutions require collateral to secure credit facilities granted to borrowers who intend to acquire real estate assets. Typically, loans are secured by a mortgage over the financed property (see V.C.5.a.). In addition to a mortgage over the assets, fixed and floating charges (subject to certain conditions) are permitted as well as the following personal guarantees and in rem securities which are common under Luxembourg law: The parent or group entities of the borrower may be required to grant personal guarantees to secure the obligations of the borrower under the loan. Other collateral may be given by way of pledges, assignments of rights and claims, delegation or transfer of title for security purposes. Luxembourg has taken the opportunity to use the enactment of the Collateral Directive to further modernise its already advanced laws on collateral arrangements. On 12 July 2005 the Parliament approved the Collateral Law which goes far beyond the minimum harmonisation requirements of the Collateral Directive, one of the most important measures of the European Financial Services Action Plan. In order to enhance the readability and clarity of existing legislation, which was spread over a number of different laws, and to create a level playing field between various types of collateral arrangements, all arrangements covered by the Collateral Directive were brought together under one single comprehensive law. Pledges, transfers of title for security purposes, repos and netting are now governed by the Collateral Law which also provides for a special insolvency regime for these collateral arrangements, offering unprecedented protection to collateral takers (see below). 45 The Collateral Law applies to a broad range of financial instruments, including securities and warrants, and to all types of claims including, in particular, monetary claims.

48 VI. Real estate finance documentation 1. Personal scope Whilst the scope of the Collateral Directive is essentially confined to dealings among financial institutions and corporate entities, the Collateral Law applies to all natural or legal persons. This constitutes a major change to previous legislation as the laws on transfer of title for security purposes, repos and netting required that at least one of the parties be a professional active in the financial sector. A further major innovation under the Collateral Law is that collateral may not only be granted to the actual creditor but also in favour of a third party, such as a security trustee. This considerably facilitates the granting of securities in the context of secured financing operations and renders the complex recourse to parallel debt provisions unnecessary. 2. Pledges The most common form of security arrangement used in Luxembourg, the pledge, which had already been substantially modernised in 1994, is further broadened by the Collateral Law and clarified with respect to a number of important points. The pledge may extend to both present and future assets of the pledgor without any need to specifically designate such assets, and may secure present and future obligations of the pledgor to the pledgee. Pledges on cash are perfected by the mere entering into the pledge agreement by the pledgor and the pledgee. However, the debtor of the claim may validly discharge its payment obligations to the pledgor until it has knowledge of the creation of the pledge. Pledges on book entry financial instruments are perfected by (i) the mere entry into the pledge agreement where the pledgee is also the custodian of such financial instruments or when the custodian also enters into the pledge agreement, (ii) the transfer thereof to an account of the pledgee, (iii) the recording of the instruments in a special pledge account, (iv) the earmarking of the instruments in the account or (v) simply giving notice of the pledge to the depositary. The Collateral Law further introduces a comprehensive regime for junior ranking pledges in terms of perfection and enforcement procedures. Bona fide pledgees who are granted a pledge over assets that do not belong to the pledgor are protected unless put on actual notice of the lack of ownership of the pledgor. Pledgees are equally protected in cases where they are on notice of the fact that the pledgor is not the owner of the pledged assets but where the pledgor confirms to the pledgee that it has obtained the consent of the actual owner to the pledge. The traditional rule, according to which voting rights attaching to pledged securities remain with the pledgor, has been loosened in that such rights can now contractually be granted to the pledgee as well as other rights attached to the pledged securities such as, in case of shares, the right to convene general meetings of shareholders. The parties to a pledge may also agree that the pledgee has the right to use the pledged assets subject only to the duty of the pledgee to return such assets, or equivalent assets, to the pledgor upon the termination of the pledge agreement. The requirement that the pledgee give notice to the pledgor before initiating the enforcement of the collateral has been abolished. In addition, the parties to the pledge agreement may freely determine the event or list of events which will trigger the enforcement of the pledge by the pledgee and therefore dissociate such enforcement from a payment default under the loan documentation. 46 Finally, the enforcement procedures for pledges have been considerably simplified, especially with respect to unlisted securities, which traditionally either had to be auctioned or subject to a court allocation procedure. Such securities can now be appropriated or privately sold on such conditions as the parties to the pledge agreement may determine including in particular, the possibility to (i) proceed with the appropriation of the

49 VI. Real estate finance documentation pledged securities before the price thereof has been determined in accordance with the agreed valuation method and (ii) designate a nominee who may appropriate the pledged securities in lieu of the pledgee. 3. Transfers of title for security purposes The right to have recourse to title transfer for security purposes was first introduced in 2001 into Luxembourg law. The transfer may extend to both present and future assets of the transferee and may secure present and future obligations of the transferor to the transferee. Such transfers of title are perfected upon the execution of the transfer agreement, even if the assigned debtor has not yet been given notice of the transfer. The debtor may obviously, in such case, continue to validly pay the transferor until it is informed of the transfer. The parties may, without changing the nature of the security interest, restrict the ownership rights of the transferee. 4. Insolvency insulation The most interesting feature of the Collateral Law is the exceptional protection it provides to collateral takers in the case of insolvency of their collateral provider. By not applying national and foreign insolvency law rules, the Collateral Law ringfences collateral held in Luxembourg from the insolvency estate and rules of the collateral provider. In practice this means that zero hours rules, stay of action requirements and voidance rules (e.g. hardening period rules) will be without effect on collateral held in Luxembourg, thus enabling the collateral taker to realise its collateral notwithstanding the insolvency of the collateral provider. Luxembourg thus avails itself of some of the rules laid down in the EU Insolvency Regulation and similar provisions contained in the Winding Up Directives for credit and insurance undertakings and offers credit providers a safe and predictable legal environment. All the above-mentioned flexibility in the choice of law of the loan documentation and the safe and predictable legal environment regarding collateral, characterise Luxembourg as an attractive hub for real estate financing in or outside Luxembourg. 47

50 VII. Definitions 48 AIFMD Circular 06/241 Circular 07/309 AIFM Directive of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC CSSF Circular 06/241 of 5 April 2006 concerning the concept of risk capital as used in the SICAR Law CSSF Circular 07/309 of 3 August 2007 concerning risk spreading in the context of SIFs Circular 91/75 CSSF Circular 91/75 of 21 January 1991 Collateral Directive Collateral Law CSSF EEA EU Directive on Interest and Royalty Payments EU Parent-Subsidiary Directive EU Savings Directive Income Tax Law Law of 1915 Law of 2004 Luxembourg VAT Law LuxSE Prospectus Directive Prospectus Law SICAF SICAR Law SICAV Directive 2002/47/EC of the European Parliament and of the Council of 6 June 2002 on financial collateral arrangements Law of 5 August 2005 on financial collateral agreements Commission de Surveillance du Secteur Financier, the Luxembourg financial sector supervisory authority European Economic Area Council Directive 2003/49/EC of 3 June 2003 on a common system of taxation applicable to interest and royalty payments made between associated companies of different Member States Council Directive 2011/96/EU of 30 November 2011 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States Council Directive 2003/48/EC of 3 June 2003 on taxation of savings income in the form of interest payments Law of 4 December 1967 on income taxes, as amended Law of 10 August 1915 on commercial companies, as amended Law of 19 July 2004 on municipal planning and local development Law of 12 February 1979, as amended, transposing the EU Directives on value added tax (VAT) including Directive 2006/112/EC of 28 November 2006 on the common system of value added tax Luxembourg Stock Exchange Directive 2003/71/EC of the European Parliament and of the Council of 4 November 2003 on the prospectus to be published when securities are offered to the public or admitted to trading and amending Directive 2001/34/EC, as amended Law of 10 July 2005 on prospectuses for securities and implementing the Prospectus Directive Investment company with fixed share capital, available either under the UCI Law or the SIF Law regimes Law of 15 June 2004 on the investment company in risk capital, as amended Investment company with variable share capital, available either under the UCI Law or the SIF Law regimes

51 VII. Definitions SIF SIF Law Transparency Directive UCI UCI Law UCI Part II UCITS Specialised investment fund Law of 13 February 2007 on specialised investment funds, as amended Directive 2004/109/EC of the European Parliament and of the Council of 15 December 2004 on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market and amending Directive 2001/34/EC Undertaking for collective investment Law of 17 December 2010 on undertakings for collective investment which repealed the law of 20 December 2002 on undertakings for collective investment with effect on 1 July Existing and newly created UCIs Part II shall be immediately governed by the UCI Law UCI governed by the provisions of the Part II of the UCI Law Undertaking for collective investment in transferable securities governed by the Part I of the UCI Law 49

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53 Real estate at Arendt & Medernach We provide a complete range of services to both domestic and international real estate clients, including real estate promoters, public institutions, real estate managers and advisors, as well as institutional and private investors. Our services cover the whole extent of property-related matters, namely the structuring of investment vehicles, debt financing, property transactions, planning and environmental issues and property litigation. We provide advice on a broad range of asset classes, such as office properties, retail and industrial properties, hotels and resorts. Our real estate experts are regularly involved in the organisation and structuring of a large variety of real estate structures, whether regulated or unregulated. With regard to the setting-up of regulated real estate investment structures, we are able to offer a broad spectrum of services, including the development of tax-optimised structures, the drafting of the sales and contractual documentation, the regulatory approval process and the provision of legal advice during the lifetime of the fund. We also represent clients in their ongoing investment activities, such as the entering into joint ventures or the undertaking of strategic investments. Our lawyers understand the issues and commercial implications of cross-border transactions which are often complex in nature. We often advise on the secured and unsecured financing and purchase of real estate assets. We also have extensive knowledge and experience in all areas of property management, promotion, planning, construction and environmental issues. Our well-established corporate expertise sees us regularly involved in large and sophisticated high-profile real estate transactions. We also advise on resolving disputes which may arise from real estate transactions. The combination of expertise of our various practice areas serving the real estate industry allows us to serve our clients with first-rate legal advice. 51

54 Catherine Martougi n, Partner Investment Funds Tel: (352)