Purchasing an Apartment in a Private Company — Legal Advantages and Risks

What is a Private Company in Real Estate and How Does it Differ from Direct Ownership?

Purchasing an apartment through a private company is a legal model that differs from traditional real estate purchase through direct ownership. Instead of being registered as the direct owner in the Land Registry, you purchase shares or a stake in a private company that holds the property. This model has become particularly common in urban renewal projects, new construction, and transactions involving complex tax considerations and asset management.

The fundamental difference: when purchasing through direct ownership, you are registered as the direct owner at the Land Registry. When purchasing through a private company, you own shares or a stake in the company, and the company is the registered owner of the property. Each model has different legal and financial advantages and risks.

Why Do Buyers Choose to Purchase Through a Private Company?

There are several key reasons why buyers and sellers choose to purchase an apartment through a private company:

• Tax benefits: In certain transactions, the sale of company shares may have lower tax implications than a direct real estate sale. This is a significant consideration, especially in transactions where profits are substantial.
• Management of shared assets: In urban renewal projects or shared office buildings, the company manages shared assets (parking lots, roofs, common spaces) in a centralized manner, which simplifies management.
• Flexibility in the transaction: A share purchase may be more flexible in terms of conditions, payments, and dividend distribution compared to a direct sale transaction.
• Legal protection: In a private company, the owners' liability is limited to their investment in the company, providing a degree of protection if legal issues arise related to the property.

Legal Structure: What Exactly Are You Buying?

When you purchase an apartment through a private company, you are essentially buying shares in the company, not a direct asset. This means the company has legal obligations toward you as a shareholder, and there are various legal documents you need to understand: the company's registration certificate, the company's bylaws, shareholders' agreement, property management agreement, and others. All of these determine your rights as a shareholder, your obligations, the method of dividend distribution, your voting rights in company decisions, and other matters.

Advantages of Purchasing an Apartment Through a Private Company

This model has several significant advantages, particularly under certain circumstances. Understanding these advantages helps you decide if this is the right path for you:

1. Tax Benefits and Economic Efficiency

One of the central advantages is potential tax benefits. In certain transactions, the sale of company shares is subject to capital gains tax at a lower rate than a direct real estate sale. Particularly in transactions where profits are substantial, the difference can be significant. However, this depends on the specific circumstances of the transaction, the type of property, the holding period, and other factors. It is important to consult with a tax advisor to understand the implications for your specific transaction.

2. Simple Management of Shared Assets

In shared construction projects, office buildings, or urban renewal, the company is responsible for managing shared assets. This means you do not need to directly deal with parking lot repairs, roof maintenance, hallway lighting, or contractor agreements. The company handles all of this, and expenses are divided among the owners. This improves quality of life and reduces the management burden.

3. Flexibility in Transaction Terms

A share purchase may be more flexible in terms of price, payments, and timing. Sometimes there is an option for installment payments, exchange transactions, or special conditions that are more difficult to achieve in a direct sale transaction. This can be particularly important if you are purchasing during construction or if there is a need for flexibility in payment timing.

4. Limited Legal Protection Through Limited Liability

As a shareholder in a private company, your liability is limited to your investment in the company. This means that if there is a legal issue related to the property (for example, a lawsuit from a neighbor, infrastructure problems, or an insurance claim), you are not exposed personally to the same extent as a direct owner. The company bears some of the liability. This is a legal structure that provides a degree of protection.

Legal and Financial Risks of Purchasing an Apartment in a Private Company

Although there are advantages, there are also significant risks that it is important to understand before signing an agreement. These risks can affect your rights, the value of your property, and your ability to use it freely.

1. Financial Risk: Dependence on Company Performance

When you own shares in a company, the value of your investment depends on the company's performance. If the company encounters financial difficulties (debts, losses, management failure), this can directly affect the value of your shares. Unlike a direct real estate transaction, where you own a physical asset, in a private company you depend on the company's willingness and ability to manage the asset properly. If the company deteriorates, your property may also be harmed.

2. Legal Risk: Liability to Third Parties

If there is a legal claim related to the property (for example, a claim from a neighbor for damages, a claim from an employee injured on the property, or a claim for breach of contract with a contractor), the company is the defendant. However, if the company cannot pay, or if it is determined that the owners are responsible, you may be exposed. Additionally, if the company has a legal debt to third parties, this could affect the property and your rights.

3. Lack of Transparency and Management Difficulties

In a private company, property management is conducted by the company's management or by a manager on behalf of the company. If there is no complete transparency, or if there are disagreements between shareholders, this can cause problems. For example, if the manager decides to make major repairs to the property, or if there are unexpected expenses, you may not be involved in the decision yet still be required to pay. Additionally, if there are disagreements between shareholders, this can lead to legal disputes and also delay important decisions.

4. Difficulties in Transfer and Exit from the Deal

Unlike a direct real estate transaction, where the process is clear and regulated, selling shares in a private company can be more complex. The company's articles of association or a shareholders' agreement may restrict your right to sell your shares, or may require approval from other shareholders. This can make the asset less liquid, meaning it is harder for you to exit the deal quickly if you need to.

5. Issues in Pledging Security or Taking a Loan

If you want to use the property as collateral for a bank loan, the bank may not accept shares in a private company as collateral, or may accept them on less favorable terms than a registered deed. This can make it difficult for you to raise capital if you need to.

6. Future Tax Risk

If the company distributes dividends, you may be required to pay tax on the dividends. Additionally, if there is a change in legislation or tax interpretation, this could affect your tax situation. It is important to consult with a tax advisor to understand the potential tax implications of ownership in a private company.

Comparison: Purchasing an Apartment Through a Ltd. Company vs. Direct Property Registration

To decide which model suits you, it is important to understand the substantive differences between the two models:

As can be seen from the table, each model has advantages and disadvantages. Choosing the right model depends on your specific circumstances, your needs, and the level of risk you are willing to assume.

Important Legal Tips for Real Estate Buyers in a Ltd. Company

To protect yourself and ensure the transaction is conducted safely, here are some important legal tips:

1. Read All Documents Carefully Before Signing

Do not sign any document without reading it carefully. This includes the company bylaws, shareholders agreement, purchase agreement, property management agreement, and any other legal document. If you don't understand something, ask a lawyer for clarification.

2. Obtain Legal Advice Before Any Commitment

Before you commit to purchasing, obtain legal advice from a lawyer specializing in real estate. A lawyer can identify risks you may not notice and help you negotiate better terms.

3. Check the Property Condition and Company Liabilities

Check the physical condition of the property and also verify whether the company has legal or financial liabilities. This is important to understand potential risks and to decide whether the transaction is worthwhile for you.

4. Review Ownership Rights and Restrictions on Sale

Read carefully the restrictions on selling shares. If there are significant restrictions, it could affect your ability to exit the deal in the future. Make sure you are satisfied with these restrictions.

5. Obtain Tax Advice Before Purchase

Consult with a tax advisor to understand the tax implications of the purchase. This can help you plan your finances better.

6. Check Insurance Options

Check whether the property is properly insured and also verify whether you can obtain third-party liability insurance. This is important to protect yourself against unforeseen risks.

7. Maintain Clear Communication with Other Shareholders

If there are other shareholders in the company, maintain clear communication with them. Good communication can prevent legal disputes in the future.