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February 3, 2023

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:

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.

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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.

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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Featured Image: Photo by Sean Pollock on Unsplash
Featured CTA blog post: Photo by Jurica Koletić on Unsplash / Photo by Christina @ wocintechchat.com on Unsplash

Published by Alexandra Singer in How to
Tags: Germany, Investments, Luxembourg, Real Estate, UK
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January 6, 2023

Challenges in Corporate Governance

Learn about the most important challenges of corporate governance and how three major jurisdictions, Germany, Luxembourg, and the UK differ.

Dear Legal Ops!
Welcome to this week’s Let’s talk about Legal Ops, offered by Newton. We tackle corporate legal departments, speed up processes, and career growth. Please send us your questions; in return, we come back with real insights and actionable tips.
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Corporate governance can, in theory, seem a rather obscure and vague subject, especially when confused with the issue of a company’s ethical behaviour – or lack thereof. Many definitions have been given to the concept of governance. Quite simply, however, it can be summarised as the system by which companies are controlled and directed. It comprises the processes, rules and laws governing a company’s conduct, particularly concerning its shareholders and board. In the following article, we deep dive into the challenges of corporate governance with a brief comparison of the differences between Germany, Luxembourg and the UK.

In this article, we will cover the following:

Why is Corporate Governance so important?

The Wirecard fraud case currently being tried in Germany is one of the country’s greatest corporate frauds in its history and an embarrassment for its regulatory authorities. It raises significant questions about how this scandal could have been allowed to occur – especially given the importance that German regulation places on corporate governance.

In the 21st century, good corporate governance is considered so important due to the fundamental role it plays in ensuring that a company is run both effectively and efficiently, with appropriate regard to the interests of every relevant stakeholder, including employees, shareholders, and customers. Fundamentally, corporate governance plays a key role in both building and organising relationships within companies, and generating profits for shareholders and other stakeholders.

A vital component of corporate governance is the fact that it also tends to determine the ability of a company to cope with a crisis. in this way, a company’s stability and success can be largely attributed to its level of corporate governance, given the importance of a firm framework based on clear values such as honesty and accountability. The strength of these principles in an organisation will direct the way it is managed, its success and the extent of its attractiveness to investors.

As the Organisation for Economic Cooperation and Development (OECD) notes, corporate governance is the “structure by which business corporations are directed and governed.” Good corporate governance, in terms of transparency and compliance with key principles such as accountability in organizations, also has wider implications for business and society in general, on both a national and a global scale. It results in increases in shareholder value, the ability of businesses to weather difficult financial periods and environments, and the general improvement of the global economy.

Germany has been rocked by the Wirecard scandal. The company, which grew from a small and unknown payments company to become one of Europe’s largest fintech firms, had long been held up as an example of the opportunities that Germany’s digital economy offers companies for advancement. Yet the later discovery of Wirecard’s engagement in dishonest accounting procedures and the concealment of debt of billion of euros, culminating in its collapse in June 2020, has left investors and regulators in shock. Crucially, it has raised pertinent questions about the sufficiency of Germany’s regulation of companies and corporate governance.

Understanding the Challenges and Complexity of Corporate Governance

Corporate governance does not take place in a vacuum. It is the result of a nation’s legal, cultural, historic and economic development and landscape, and it is for these reasons that governance structures vary so differently between jurisdictions. Global corporate governance is a pipe dream; there is no alternative but to accept the often-wide international variations between nations and companies, and the legislative and regulatory bases upon which their corporate governance is based. This is in any case inevitable, given the fact that corporate governance may be said to be inextricably connected to the prevailing economic development of a country’s economy and the way in which this has determined organisational ownership and control structures.

Corporate Governance in the UK

This distinction is especially noticeable in the way in which European corporate ownership patterns differ so distinctively from UK ownership structures, and this has carried over into patterns of corporate governance. In Europe, share ownership tends to be concentrated much more significantly in the hands of a smaller group of shareholders and as such, is more orientated towards bank ownership rather than that of financial institutions. Whilst this results in a strong group of owners, it also means that other shareholders are weak and scattered and subject to the control of capital-owning blockholders that have the power to appoint managers. This is precisely the opposite of the UK, or the Anglo-Saxon system, where share ownership tends to be highly fragmented. This results in the ability of a company’s board to exert a significant amount of power over a company’s direction – something that is rarely seen in Europe, where many companies are tightly owned by wealthy families in possession of over 20% of shares.

Although today most countries have corporate governance codes, such as the UK’s Combined Code on Corporate Governance, these are generally soft law that is not legally binding but is rather intended to influence behaviour and set standards. Whilst the UK Combined Code is certainly sophisticated, it is essentially a guide for company self-regulation. The overriding principle in the UK is that of “comply or explain”, by which a compromise is intended to be achieved through the allowance to companies of some flexibility whilst ensuring that reporting and governance requirements are met.

Yet this soft law has no overarching ability actually to improve director accountability and company transparency. Although the UK Code might initially appear strict, it can be criticized for its broadness as well as being open to interpretation. Many companies consider that they have complied with their duties by issuing generic policy statements.

Corporate Governance in Germany

In contrast to the UK, Germany may be said to have one of the tightest regulatory structures for corporate governance. In addition to this, in contrast to the UK, German boards are comprised of two-tier organisations, which is intended to ensure a separation between management and control. Yet, in reality, the functions assigned to the management board and supervisory board are divided differently depending on the specific industry, company size, tradition, and, especially, if one board or the other has strong leaders.

A vital reason for the mandatory policy of the two-tier board in Germany is the politically entrenched policy of labour co-determination. This powerful instrument of corporate governance enables workers to enjoy rights that allow them to actively shape their working environment. This is hardly something that a one-tier board would be likely to tolerate. In contrast to Germany, the reason for the existence of the one-tier board in the UK is likely historically due to the emergency of entrepreneurial activity and resistance to any state or trade union attempts to oversee company structures and introduce labour co-determination. Although labour codetermination is a feature in many European countries, German regulation is significant for its regulatory mandate that there must be an equal shareholder and employee membership at the supervisory board level.

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Corporate Governance in Luxembourg

Luxembourg, in contrast, is a rather more complex case; public limited liability companies, for example, have the choice between a two-tier or a one-tier board structure. It is certainly curious that the overwhelmingly preferred option in Luxembourg is the one-tier structure, suggesting that in the absence of regulatory force, companies prefer the freedom of a mixed board that does not separate supervisory and management functions.  Perhaps Germany too would not embrace two-tier boards and labour codetermination were its companies provided with such a choice. That’s not to say, however, that Germany is without fault. Local emphasis on employee representation has blocked companies from making necessary redundancies, whilst the evolving door that exists between the two tiers of a board has resulted in problematic conflicts of interest.

As an international financial centre, Luxembourg’s corporate governance principles should objectively be stricter, and yet there is no single corporate governance code that is applicable to all companies. Furthermore, the risks of short-termism have been recognised and there is a need to improve board governance structures and improve the focus on reporting requirements. Indeed, there have been various rumbles over the years regarding violations of good corporate governance principles, especially in relation to the close relationships and overlapping interests that exist between the political class, the business community, and its regulators.

Conclusion

Regardless of the differences in corporate governance between the UK, Luxembourg and Germany, rules are only as good as their enforcement. Each nation has developed its own systems and rules in the context of its historical, cultural, economic and legal features, and corporate governance is also inevitably shaped by the economic and political landscape. Regulation and the monitoring of corporate governance is a complex endeavour, and whilst the aim is ultimately to ensure accountability, an accommodation must also be made with the practicalities of business.

About this article

Sources

Financial Times (2019). German governance must be fit for purpose Recent scandals have exposed shortcomings in the corporate model
Kelleher, E. (2013). Luxembourg faces fresh criticism over good governance
European Journal of Business & Management Research (2021). Corporate Governance and Financial Fraud of Wirecard
Mondaq (2022). Luxembourg: Corporate Governance Comparative Guide
No. 13 Hans-Böckler-Stiftung, Dusseldorf (2018). Co-determination in Germany: A Beginner’s Guide
Reuters (2022). Wirecard bosses’ fraud trial begins after scandal that rocked Germany
Deakin Law Review. Vol. 23: 177-208 (2018). Are Corporate Governance Code Disclosure and Engagement Principles Effective Vehicles for Corporate Accountability? The United Kingdom as a Case Study
The Organisation for Economic Cooperation and Development (OECD) (2014). The OECD Principles of Corporate Governance OECD Publication Service
Thomson Reuters. Practical Law (2022). Corporate governance and directors' duties in Luxembourg: overview
United Kingdom (2018). The Combined Code on Corporate Governance

Images

Featured Image: Photo by airfocus on Unsplash
Featured CTA blog post: Photo by Jurica Koletić on Unsplash / Photo by Christina @ wocintechchat.com on Unsplash

Published by Alexandra Singer in Corporate Governance
Tags: Challenges, Germany, Luxembourg, UK
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