Austria and particularly its capital Vienna are facing a growth in population in the coming decades. According to recent statistics, Austria's population will grow from 8.34 million to 9.51 million in 2050, while Vienna's population will grow from 1.68 million to 2.1 million. It may be expected that this growth of population will not bypass Austria's and particularly Vienna's real estate market without a trace.

A good system

Austria has a well-developed land register system with uniform rules for all Austrian federal states. The land register (Grundbuch) is kept by the district court (Bezirksgericht) of the district in which the real property is located. It provides reliable information on ownership and other real rights related to a real property, such as the mortgage. The register's information is considered correct and complete with respect to a person who relies on it in good faith. The register is an electronic database to which everyone has access. To obtain the registration or cancellation of a real property right, an application for registration (Grundbuchsgesuch) has to be filed with the competent district court.

As another condition for registration, the Austrian Land Register Act provides that conveyance documents must be in the form required for the specific legal transaction. Furthermore, a valid legal ground has to be quoted and the documents should have no apparent defects. Finally, the parties must provide proof of identity with quotation of their birth data, to register in the land register. For registration, the contract has to be concluded in writing and the signatures have to be certified by a notary public or by court.

The agreement must contain the consent of the person registered in the land register to the cancellation of the right or, as the case may be, to the registration of the right (Aufsandungserklärung). If a foreigner buys real estate, a certificate or notification of the land transfer authority approving the registration must be submitted with the application. However, EU and EEA residents are treated like Austrian citizens and are therefore exempt from this requirement.

Preventing tax evasion

Furthermore, according to most of the laws on the transfer of land of the federal states (except Vienna), the acquisition of agricultural or forestry land requires the prior approval of the land transfer authority even if no foreigner is involved in the transaction. If ownership is transferred, it has to be formally stated that the land transfer tax was paid.

The acquisition of real property triggers land transfer tax of 3.5% based on the value of the sale; if the purchaser is a relative of the seller the land transfer tax is 2%. In an inheritance or gift of real property an inheritance or gift tax becomes due. The amount of the inheritance or gift tax depends on the standard value of the real property and the relationship between the decedent/donor and the beneficiary, and ranges between 2% and 60%, based on three times the assessed value of the real estate for tax purposes (which is customarily far below the market value of the real property).

Due to two recent judgments of the Austrian Constitutional Court, inheritance tax and gift tax will expire on July 31 2008. Instead of inheritance and gift tax, a recent government bill provides an obligation to notify gifts exceeding certain amounts to the financial authorities (Schenkungsmeldepflicht). This notification requirement will prevent malpractices and tax evasion, which might occur, for example, if taxable income (for example, salaries) were treated as tax-exempt gifts.

The registration in the land register triggers a registration fee that is 1% in case of registration of ownership and 1.2% in case of registration of a mortgage, based on the consideration of the sale or, as the case may be, on the amount of the mortgage. Usually it is agreed that the purchaser pays these fees, but both parties remain liable for payment towards the tax authority.

Federal laws

The laws on the transfer of land (Grundverkehrsgesetze) of the federal states of Austria provide for restrictions on the acquisition of real properties, of certain rights in rem (such as for example building rights, usufruct), and on the conclusion of lease agreements concerning real properties by a foreigner or by a company in which foreigners hold the majority of shares. Some federal states (for example, Vorarlberg) also restrict the transfer of shares or the increase of the share capital of an Austrian company or an Austrian partnership owning real estate in the relevant federal state.

For the transactions mentioned above, foreigners have to obtain the approval of the land transfer authorities. EU and EEA residents are treated like Austrian citizens and are therefore exempt from this requirement.

According to most of the laws on the transfer of land of the federal states (except for example, Vienna) the acquisition of agricultural or forestry land requires the prior approval of the land transfer authority, even if no foreigner is involved in the transaction.

Dealing with foreigners

According to the Austrian Foreign Currency Act 2004 (Devisengesetz 2004), the Austrian National Bank (OENB) can provide that certain disposals on real properties require the approval of the OENB. Furthermore, the OENB can interdict certain disposals of real properties.

So far, the OENB has not issued any regulation according to which approval for the above-mentioned transactions has to be obtained. However, the purchase of real estate in Austria by an Austrian citizen from a foreigner and the sale of real estate in Austria from an Austrian citizen to a foreigner have to be reported to the OENB. Furthermore, the repatriation of profits or the return of capital to foreigners has to be reported to the OENB.

Investment entities

The entities recognised in Austrian jurisdiction are the private partnership (Gesellschaft bürgerlichen Rechts, GesbR), the general partnership (Offene Gesellschaft, OG), the limited partnership (Kommanditgesellschaft, KG), the limited liability company (Gesellschaft mit beschränkter Haftung, GmbH), and the public company (Aktiengesellschaft, AG).

The private partnership, the general partnership and the limited partnership are pass-through entities for tax purposes. Limited liability companies and public companies provide the best shield for owners from liability, considering that Austrian Company Law does not provide for a breakthrough liability. For liability reasons investors therefore generally use the form of incorporated companies, for example, a limited liability company (GmbH) or a public company (AG), as vehicles for acquiring real properties.

Private partnerships are created by contract between the partners. General partnerships and limited partnerships are created by contract between the partners and a constitutive registration into the Austrian Commercial Register. To obtain a registration certain formal requirements have to be observed (for example, a written application must be signed by all partners, with the signatures authorised by a notary public or by court) and certain documents have to be attached to the application (for example, specimen signatures of the partners representing the partnership with the signatures authorised by a notary public or by court). Incorporated companies are also created by contract (articles of association) or declaration concerning the constitution and a constitutive registration in the Austrian Commercial Register. The minimum share capital of a limited liability company is €35,000 ($54,000). At least half of the share capital shall be paid-in in cash (exemptions for contributions in kind apply).

To obtain a registration certain formal requirements have to be observed (Articles of Association created or a declaration concerning the constitution, which are both subject to formal requirements) and certain documents have to be attached to the application (for example, specimen signatures authorised by a notary public or by court). Tax consequences depend on the type of entity. In general, foreign investors prefer limited liability companies (sometimes also public companies), for tax reasons. For details the investor is recommended to seek legal and tax advice.

Provisions protecting tenants

The lease agreement has to designate the lease object and the rent. Concerning the rent, lease agreements customarily have an indexation clause. Usually it is also provided that the lessee must bear the proportionate operating costs and certain maintenance costs regarding the lease object.

However, the Austrian Rental Act (Mietrechtsgesetz) has a complex set of stringent provisions designed to protect tenants. For lease agreements to which the Austrian Rental Act fully applies it provides for maximum rents, including any changes to them, limitations on charging operating costs to tenants, and lessors' obligations to maintain and improve the properties. Regarding leases for non-residential purposes, such as business, office or retail premises, the maximum rent has to be appropriate for the size, type, quality, location and building condition of the real estate.

Lessees may claim back any rent payments exceeding the statutory maximum amount within three years for indefinite period leases and within 10 years of payment for definite period leases. Regarding operating costs, the Austrian Rental Act contains a conclusive list of costs, which may be charged to the lessee. The lessee can claim back any payments exceeding the legally permissible operating costs within three years of payment. Furthermore, according to the Austrian Rental Act, a lessor has to perform necessary maintenance and refurbishment works as well as useful improvements of the real estate.

The lease agreement should contain clauses concerning the lease period, which may be for a definite or an indefinite period of time. For leases for non-residential purposes, it is customary to stipulate a definite period of time. According to the Austrian Rental Act lease agreements can only be terminated for good reason, such as the lessee's failure to pay the rent.

The lease agreement should specify the handover date and the state in which the lease object must be returned to the lessor upon termination of the lease agreement. Furthermore, it is customary to provide for a deposit or a bank guaranty (amounting between three and six months' rent) to secure the claims of the lessor arising from the lease against the lessee.

Lease agreements often prohibit subletting and assignment. If the Austrian Rental Act applies, the clause can only be enforced if the lessee sublets the entire lease object or if the sub-rent disproportionately exceeds the rent to be paid by the lessee. Brokerage agreements are often concluded directly between the lessor and/or the lessee and the broker in a separate document. The brokerage fees are usually paid directly by the lessor and/or the lessee to the broker.

Cross-border securities

Claims may be secured by providing personal securities (for example, a guarantee) or by providing securities in rem (for example, liens on movable goods, mortgages on real property). The creation of a mortgage (on real properties) requires a written contract (the signatures of the parties have to be certified by a notary public or by court) and the registration of the mortgage into the land register to become effective. Liens on movable objects require a contract (an oral contract is basically sufficient) and the handover of the lien to the pledgee.

For most personal securities the written form is required (for example, guarantee, surety). The creation of liens on claims requires a contract – an oral contract is sufficient – and the notification of the debtor or, as the case may be, an entry into the open item accounts of the creditor. A commercial lender from another jurisdiction can only make loans secured by collateral in Austria if the lender has obtained a licence from the financial market authority (Finanzmarktaufsichtsbehörde, FMA) according to the Austrian Banking Act (Bankwesengesetz).

If the lender is admitted for banking businesses in another member state of the EEA, no further licence is required in Austria. However, in this case, as a precondition to be entitled to provide financial services in Austria, a notification procedure between the responsible authority of the home member state and the Austrian FMA has to be performed; the authorisation for the provision of financial services cross-border within the EEA is known as the European Passport.

Foreclosures

If the lender provides financial services in Austria the lender might be subject to taxes in Austria. For details the applicable Double Taxation Treaty has to be observed. For registration in the land register, lien documents (Pfandbestellungsverträge) have to be concluded in writing and the signatures of the parties have to be authorised by a notary public or by court. According to the Austrian Stamp Duty Act (Gebührengesetz), loan agreements are subject to a stamp duty assessed as a percentage of the loan amount. Depending on the type of loan agreement a stamp duty between 0.8% and 1.5% is triggered. Mortgage agreements are subject to a 1% stamp duty assessed on the basis of the loan value. Austrian stamp duty can be avoided under certain conditions.

Furthermore, the required registration of a mortgage in the land register triggers a registration fee of 1.2% of the secured amount. Under restrictive conditions mortgages can be assigned without payment of additional stamp duty. However, the registration fee of 1.2% for the registration of the new mortgagee cannot be avoided.

Movable collaterals can be realised by non-judicial sale. In this case the pledgee has to observe a special procedure. For immovable collaterals the mortgagee must file an action and obtain a judgment against the mortgagor. Afterwards the mortgagee can commence foreclosure proceedings against the mortgagor regarding the mortgage. It is only possible to realise all types of collateral with one action if the same person granted the collateral.

The timeframe for foreclosure proceedings, starting from the time the lender has obtained an enforceable judgment, is between one and two years. Foreclosure proceedings are only provided for monetary claims. The Distraint Act outlines three different ways to realise real estate properties in distraint proceedings: coercive creation of a mortgage, receivership and foreclosure.

Coercive creation of a mortgage does not provide satisfaction to the creditor but secures the creditor's enforceable claims by having a mortgage registered on the debtor's real property in the land register. Upon application for receivership, a court appoints an administrative receiver. The creditor can seek satisfaction from the proceeds of the receivership (for example, coercive lease) of the real estate.

Upon application of foreclosure, the court sells the debtor's real estate and the proceeds from the sale are distributed among the creditors. The surplus exceeding the secured debts is disbursed to the debtor.

Bankruptcy

The Austrian Insolvency Law distinguishes between bankruptcy proceedings (Konkurs) and composition proceedings (Ausgleich, Zwangsausgleich). In bankruptcy proceedings, a bankruptcy trustee appointed by the insolvency court liquidates the debtor's assets and the proceeds are distributed among the creditors on a pro rata basis. The debtor is obliged to apply for bankruptcy proceedings in the case of insolvency. At least one creditor may apply for bankruptcy proceedings in a debtor's insolvency.

In bankruptcy proceedings certain claims are privileged, such as claims for the costs of the proceedings and costs of maintaining and administering the bankruptcy estates, including claims of employees becoming due after the institution of the bankruptcy proceedings. Secured creditors have priority in the settlement with respect to assets secured by a mortgage or pledge. Bankruptcy proceedings do not free debtors from their obligations.

In the course of bankruptcy proceedings, the debtor may apply for compulsory composition proceedings (Zwangsausgleich) resulting in the debtor's partial liberation from the debts. To obtain a composition the debtor must offer to pay the creditors at least 20% of the claims within two years and to meet further conditions. If the debtor fails to fulfil the conditions of the composition, the claims are revived and the court may commence bankruptcy proceedings.

Special provisions apply in insolvencies of physical persons. As long as the insolvency court has not decided on an application for bankruptcy, the debtor may file an application for composition proceedings (Ausgleich) to avoid bankruptcy and obtain partial liberation from the debts. To obtain composition the debtor must offer the creditors a payment of at least 40% of the claims within two years and to meet further conditions. The time of the payment may be extended to a maximum of two years. If the debtor fails to fulfil the conditions of the composition, the claims are revived and the court may commence bankruptcy proceedings.

Author biographies

Peter Vcelouch CHSH Cerha Hempel Spiegelfeld Hlawati Peter Vcelouch is a partner of Cerha Hempel Spiegelfeld Hlawati and has been with the firm since 1997. His main areas of practice are real estate and construction, commercial litigation, arbitration and European Community Law. He advises national and international clients in real estate and construction law matters as well as in commercial litigation and arbitration issues, in particular with respect to large construction projects. Vcelouch graduated from the University of Vienna (Mag iur, 1994, Dr iur, 1996). He worked as an academic assistant at the University of Vienna, Institute for Constitutional and Administrative Law (1995 to 1997). He has authored numerous publications in his areas of expertise. Manfred Ton Cerha Hempel Spiegelfeld Hlawati Manfred Ton is an attorney at law. He was admitted to the Bar in Austria in 2003. He is specialised in the field of real estate transactions and developments. He was assistant to the head of the tax department at Arthur Andersen, Vienna, from 1998 to 2000. He obtained his Master of Jurisprudence degree from the University of Vienna in 1996 and his Juris Doctor in 1999. He has been a lecturer at the Austrian Law School (FOWI, Vienna) at the Law Faculties of Brno and Bratislava since 2001. He has published numerous articles in international journals.