As our law firm in the last couple of years has handled quite a lot of transactions involving commercial properties and residential rental properties – for Danish buyers and international investors – I have found it expedient to give some detailed informations about investments in real estate in Denmark.
Ad the purchaser/who shall be the vendor
For more than 2000 years ago
the Nabataeans also had their
transfer of real estate registered.
A foreign investor has to consider whether or not to buy directly (asset deal) or through a Danish company. As concerns a Danish company, see my article “Establishing of business in Denmark”, which article contains informations about Danish taxation, share capital and so forth.
A purchaser can of course as owner use the real estate as a collateral for a loan.
If the purchaser take over shares in an existing company which company owns the real estate, purchaser of course also take over all existing agreements, debts and assets, hereunder the real estate. As the company is the registered owner, it is obviously not necessary to transfer the ownership.
The purchaser cannot put up the real estate as collateral for the purchase of shares in the owner company.
Alternatively the purchaser can ask the vendor to place the property in a daughter company, registered with the sole purpose of selling the property. This transfer of the property – by the vendor – to the new company can be carried out for less taxation costs than the direct asset deal; and then the purchaser take over the sole ownership of the shares in the new company.
Ad registration/title deed
Please be aware that all transfers of properties are recorded electronically in the digital land register and under separate specifications (title numbers). The land register has a public access which you can se on www.tinglysning.dk. As well as who is the actual owner, you can also look at eventual mortgagees and easements.
Ad due diligence/the tenant in the property
Investors have to be aware that there are three Acts regulating lease contracts.
Within the sphere of the real estate business
not all is idyllic
There are two Acts regulating terms and conditions for residential rental properties. Residential rental properties are often sought because of – at least in Copenhagen and other major Danish cities – low vacancy risk. The returns tend to be lower than for commercial properties. On the other hand the returns might vary if the property is newly built.
The regulations for residential properties are laid down in a Rent Act and an Act regulating how to calculate a yearly rent in old residential properties and small residential properties and newly built residential properties. It may appear from this that it is rather difficult to obtain any kind of transparency if you are not a specialist in these areas.
The terms for lease contracts in commercial properties are regulated in the Business Lease Act. The main rule is that many of the conditions in a commercial lease contract can be agreed upon contrary to lease contracts involving residential properties. When this is stated an investor in a commercial property has to be aware that a lease contract might be irrevocable for perhaps up to 5 years which generally occurs in shop leases. Furthermore a shop leaser often is entitled to transfer the lease contract with the shop as such.
Except from guarantees/a concrete agreement it is very difficult to claim a reduction in the purchase price and especially if the seller is in good faith. It is therefore very essential that a meticulous due diligence is carried out and the more so if the investment is involving a particular use of the estate. Furthermore there might be technical and environmental issues. Furthermore an investor also need to take into consideration if the property should be purchased in a separate - founded to the occasion - company(where the shares can be sold instead of the property as such and thereby stamp duties saved).
Finally I would like to draw the attention to some major changes in the above mentioned Rent Regulation Act, which was carried through The Danish Parliament in the summer of 2020. The heading for the intervention is the Blackstone Regulation, and this regulation was coursed as to limit a landlord’s possibilities of getting a raise in the rent of a refurbished apartment. Before a landlord can raise the rent in a refurbished apartment, the landlord is under the obligation to own the building for 5 years before a refurbishing in effort the raise the rent can take place. There are very few exceptions to this main rule. The energy evaluation of a property as mentioned above will have to be registered in the category A to C, before a refurbishing can take place. There are other regulations as well.
Ad purchase amount/stamp duty
The acquisition of a piece of real estate is in Denmark carried out as a cash payment/cash transaction. The seller might demand a bank guarantee or a deposit of the total cash price in the seller’s bank. The cash price has to been secured before the takeover date.
As there is always some kind of taxation in Denmark you will not be surprised when I reveal that there until 1 January 2023 is a registration fee on each document amounting to DKK 1.730,00 and from then on DKK 1.825,00. Furthermore there is a stamp duty calculated by 0,6 % of the acquisition sum – and as a minimum of the official evaluation of the property – and if the acquisition sum is financed by mortgages, there is a stamp duty calculated with 1.5 % of the principal amount. Please be aware that the obligation on stamp duty on mortgages can be reduced if the seller has a mortgage, which has already been stamped. The rules are rather complicated and please see the official web site of the digital registration office www.tinglysning.dk. Finally see above as concerns the possibility of buying a property placed in a company.
Real estate tax/VAT/taxation of profit etc.
Real estate tax is in Denmark termed land tax and the owner will each year from the local municipality receive the calculation of this land tax and as a general rule also the official tax assessment of the property. The land tax can be levied on the tenants.
Whether or not there is VAT involved on a commercial property depends on whether or not the seller has a VAT registration and thereafter the individual agreement with the purchaser. If a commercial property has been substantially rebuilt/renovated the seller will often have a VAT registration which has to be looked in to or taken over by the purchaser. Especially investors have to be aware that old industrial properties that are converted to rental apartments from scratch under certain circumstances will release an obligation to pay V.A.T. when this “new building” is sold.
As finally regards capital gains/profits an investor will have to seek individual guidance as it depend on whether or not the property is owned by a Danish company and shares are sold or if the property is sold as such.
As concern the payment of dividend from a Danish company, please see the above mentioned article “Establishing of business in Denmark”.
As regards taxation of a capital gain when you sell investment properties in Denmark, please be aware that he current members of the Danish Parliament has entered into an agreement whereby a law will be introduced concerning taxation of the notional gain versus taxation of the actual gain in connection with a sale of an investment/commercial property. The actual law has not yet been introduced. This national gain taxation is to enter into force from 1 January 2023. This kind of taxation will of course limit the interest in placing a property in a separate company – except for properties that are used as a company domicile and storage and production facilities/plants.
As always with taxation there are exceptions.
Ad useful links/whitewash rules
Several of the major real estate agents in Denmark issue market reports, so instead of recommending specific real estate agents, please Google “real estate investment Copenhagen” and you will get some of the major real estate agent offices.
- The website of the Danish Property Federation which is an NGO for rented housing – both apartment houses and business properties
- Byggesocietetet – also a NGO
- The website for the Ministry of Housing, Urban and Rural Affairs.
- For what you need to know doing business in Denmark, see The Danish Business Authority.
- Relevant link as regards investment in real estate etc. in Denmark, see Ministry of Foreign Affairs of Denmark.
- For financing see e. g. Danske Bank. This is just one bank and there of course others. and building societies.
Please be aware that we in Denmark strictly follow the whitewash rules and of course both for persons and companies. If you establish a company it is obligatory to show identification; e.g. a passport. You can read more about whitewashing rules on the website of the Danish Law Society www.danskeadvokater.dk.