Maximize Real Estate ROI with the Right Legal Entity

Discover how technology solutions can help lawyers navigate real estate investments and optimize legal entity management. Learn the importance of choosing the right legal entity and how to manage it efficiently in this informative article.

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Real estate investment can be an incredibly lucrative venture, but is also complex and challenging. Yet helping your clients to understand the complexities of the real estate investment landscape doesn’t have to be daunting. With the right legal technology company to help, as an expert in your field, you can navigate and guide your clients through the complicated legal landscape surrounding investment property with ease. Through the provision of comprehensive support and suite of services, the correct technology is crucial to ensuring the correct choice of legal entity and managing your clients’ investments.

Investing in real estate involves a great deal of intricate planning. As such, you’ll know how critical it is to select the right legal real estate structure to safeguard your clients’ investments and ensure they fully benefit from them. In this article, we’ll look at the various types of legal and business entities used for real estate investment in Luxembourg, Germany and the United Kingdom (UK). We’ll also explore other factors, such as the need for asset protection as well as how the use of certain company structures, for example the secretive company Cascade LLC used for the avoidance of holding transparency by the Microsoft founder and billionaire Bill Gates, can be best utilised for the benefit of your clients.

In this article, we will cover the following:

Choosing the Right Legal Entity for Real Estate Investment in Germany, Lux, and UK

Investing in German Real Estate: Understanding the Legal Landscape

When it comes to real estate investment, selecting the correct legal entity is a key component in safeguarding your clients’ possessions. The ideal legal entity to use is dependent on your clients’ individual requirements and objectives. In Germany, it is common for larger property holdings to be owned by corporate entities instead of individuals. This allows for greater flexibility in managing the real estate and optimizing taxation.

Although the intricacies of registration vary between Germany, Luxembourg, and the UK, in all three jurisdictions, the options that exist for the structuring of a real investment transaction remain essentially the same. As in Luxembourg and the UK, in Germany, the acquisition of property can be organized as an asset transaction, which requires the procurement of the asset from either an individual or a holding vehicle, or as a share deal, which involves obtaining the shares in the holding vehicle from the shareholders.

Real estate can be invested in either directly through an asset transaction, or indirectly through the acquisition of shares in a legal entity possessing real estate – a share deal. In Germany, legal entities such as this are usually structured in Germany as a limited partnership (e.g. GmbH & Co KG) or a limited liability company (e.g. GmbH). The name of the GmbH highlights the fact that its proprietors (Gesellschafter, also recognised as shareholders) do not have any personal liability for the corporation’s obligations. In this way, the GmbH & Co. KG amalgamates the benefits of a partnership and those of a limited liability organization. More often than not, the general partner will be an external limited company such as a UK Limited Company or a Luxembourg S.à r.l. instead of a pure GmbH, as the combination of those legal entities provide excellent tax benefits. As with all property transactions, the conduct of full and comprehensive due diligence is vital.

However, in Germany, in contrast to many other legal systems, there is no reliable shareholder register. This means that if the ownership of the shares has changed hands multiple times, it is essential to check that there is an uninterrupted sequence of notarial transfer documents stretching back to the initial shareholder, to guarantee that the seller actually fully owns the shares. If the seller does not have a valid claim to the shares, the buyer, who may be purchasing in good faith, will lack any protection. This is quite different to the case of the direct asset purchase of real estate, where the seller is normally assumed to be the legitimate owner if it is officially registered, and so an acquisition in good faith is possible.

Another option by which to structure a real investment purchase in Germany is through the real estate investment trust (REIT). In 2007, Germany introduced the concept of real estate corporations with shares traded on the stock market as REITs. This legal entity needs to take the form of a “stock corporation” (Aktiengesellschaft), with a €15m minimum capital requirement. The REIT’s headquarters must be in Germany, and at least 15% of the shares need to be held by different investors with no single one holding more than 3% (the small investor rule). The ownership and transfer of REIT shares are supervised by the German Federal Financial Supervisory Authority (BaFin). Additionally, REITs are exempt from corporate income tax, including the solidarity surcharge, which is a potential client benefit.

Exploring the Advantages of Real Estate Investment in Luxembourg

Luxembourg is a popular destination for a real estate investment group, as its property sector has advanced to offer investors various flexible and imaginative investment possibilities. At present, there is no specific vehicle dedicated to real estate investments. However, Luxembourg furnishes an array of vehicles that can be utilised for this purpose. The selection of the vehicle will be, as you know, mainly contingent on your client’s investor profile, the form of investments to be made, the form of capital to be obtained, and any tax considerations that may need to be taken into account.

Luxembourg supplies a platform of services and structuring opportunities, and available products include standard business companies, i.e. structures that are not monitored at all or indirectly supervised by an appointed alternative investment fund manager (“AIFM”), or investment structures that are (perhaps in addition to the appointed AIFM) supervised by the Luxembourg regulator, the Commission de Surveillance du Secteur Financier (“CSSF”), and thus regulated structures. Investment vehicles from Luxembourg can be employed for real estate investments situated in Luxembourg or abroad. As there is no particular vehicle for domestic investments, one of the benefits of using the same fund vehicle is that it can combine both local and foreign investments.

Navigating the UK Real Estate Market: Considerations for Investors

In the UK, as with Luxembourg and Germany, property investment is transacted through a direct asset purchase or a share deal, and by utilising a third-party entity like a company, partnership, or trust. A popular option for real estate investment groups for the holding of property in the UK is to use a non-UK company established in a low taxation jurisdiction, such as the Channel Islands, Cayman or the British Virgin Islands. There are various tax rules and benefits for this structure, especially as, unless the property is a residential home worth more than half a million pounds and available to the proprietor or some related person, non-UK resident companies are not obligated to pay UK capital gains tax on any profits acquired from a property sale. Using a limited partnership is also popular, due to its transparency for tax purposes. However, as the rules are complicated, advice must be provided with regard to the intricacies of each specific situation. The UK also provides other various options for the holding of real estate through non-UK Property Unit Trust (PUTs), which are popular as they are also look-through for tax purposes, as well as Property Authorised Investment Funds (PAIFs). Real Estate Investment Trusts (REITs) are also common as any income and gains from this vehicle are not subject to UK tax, but must instead distribute a minimum of 90% of its annual profits – property income dividends–within one year of the end of its accounting period.

Factors that will influence the choice of a real estate investment structure will include the level of income and capital gains taxes, as well as withholding taxes, value added tax, property transfer taxes and stamp duty, among others. Yet for investors in all three jurisdictions, where they wish to shroud the ownership of their assets, it is ultimately the use of a holding company that might be their most favorable option. This is precisely what the controversy involving Bill Gates and his use of the company Cascade LLC to conceal its investments concerned.

The Importance of Asset Protection

The consideration of asset protection is, as always, a vitally important factor in any investment in a real estate structure, and the right legal entity can help guard your clients’ assets from possible creditors and lawsuits. The holding company offers further benefits in addition to privacy with regard to liability protection, as owners won’t be held personally responsible for its debts and liabilities. This can be especially useful for properties that involve a high risk of liability, such as rental properties. In Germany, from a liability perspective, a GmbH & Co. KG or GmbH can be appropriate for asset protection, although the choice for a particular corporate structure must take into account intensive and targeted tax advice.

Luxembourg is a desirable spot for asset safeguarding in light of its status as a major European financial centre, as well as its favorable taxation regulations and stable economic and political status. Asset protection in Luxembourg can be achieved through a variety of methods, such as the SPF (Société de gestion de patrimoine familial), special tax arrangements for intellectual property rights, expatriates, businesses, and the Luxembourg life insurance contract which is considered an investment tool.

In the UK, although the use of a trust fund to hold property can provide some form of asset protection, this might not be as foolproof as clients would hope. Investors should be advised on the development of a strategy that considers the number of their properties, the amount of equity in each one and any attendant hazards. As Gates’ concern Cascade is a private company, attempting to determine its precise assets is difficult, which is of course its objective. Luxembourg is a popular destination for the operation of a holding company, with its Société de Participations Financières (SOPARFI).Clients who invest in real estate may opt for holding companies that conceal the ultimate proprietor for reasons such as preserving confidentiality and to keep the investor’s personal information, e.g. name and location, out of public documents. Furthermore, this strategy can shield private assets from potential creditors or lawsuits, and it can even provide advantageous tax benefits.

Harnessing the Power of Technology Solutions for Optimal Legal Entity Management

We know exactly how intricate and laborious real estate investments can be to manage, due to the need to track so many financial and legal particulars. Now legal technology has become progressively essential for lawyers to negotiate their processes and streamline their performance.

Our technology aids lawyers in managing clients’ real estate investments more effectively and precisely. It assists in automated document assembly, permitting lawyers to promptly generate, assess, and amend records. It also helps in the monitoring of clients’ investments, reducing the risk of pricey errors and ensuring compliance with regulations, especially where multiple jurisdictions are concerned.

Our legal technology also facilitates the strengthening of communication between you and your clients, through the provision of secure, cloud-based record sharing. By enabling lawyers to gain access to data quickly, you can make any alterations expeditiously. All in all, legal technology is a crucial tool, facilitating the delivery of a smooth and comprehensive service to your clients, wherever they may be located.

About this article

Sources

Baker & McKenzie (2023). Global Corporate Real Estate Guide (Luxembourg)
DLA Piper (2023). Real Estate Investment in Germany: The Legal Perspective
Eicher, P. and Hoffman, S. (2021). In review: real estate investment in Luxembourg
The Law Reviews (2022). The Real Estate Investment Structure Taxation Review: Luxembourg
Norton Rose Fulbright (2016). Investing in UK Property. Quick Tax Guide
Rose & Partner (2023) Real estate in a company under German law
Dentons (2022). The Real Estate Investment Structure Taxation Review: United Kingdom

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