Real Estate Law in Finland

Under Finnish legislation, real estate refers to a land ownership unit entered into the cadastre. There may or may not be buildings located on the real estate. Real estate may either be owned by natural persons or legal entities, e.g., by real estate companies, mutual real estate companies or housing companies. The basis of the real estate legislation in Finland is set out in the Code of Real Estate (12.4.1995/540, as amended). The Code of Real Estate regulates, among other things, the sale and purchase of real estate, registration procedures as well as real estate rights and encumbrances.

Hence, the provisions of the Code of Real Estate are crucial when ownership of real estate is transferred. However, where the ownership of shares in a company possessing the ownership of a real estate (and not the real estate itself) is transferred, the provisions on the sale and purchase of the Code of Real Estate will not apply to the transaction as such. Instead, the provisions of the Finnish Limited Liability Companies Act (21 July 2006/624, as amended) or the Limited Liability Housing Companies Act (22 December 2009/1599, as amended) will become relevant for this type of transaction, depending on the company’s form and the articles of association of the target company. Furthermore, the Finnish Contracts Act (13 June 1929/228, as amended) also applies to most contractual relationships as it is the general law in the field of contract law in Finland. In addition, there are various regulations in place governing, e.g., land use, building and environmental matters, as well as laws regulating the lease of real estate and premises, which usually are highly relevant in real estate transactions, irrespective of the structure applied. In terms of the sale and purchase of real estate, the Code of Real Estate particularly states that the principle of freedom of contract applies to the transfers of real estate, unless otherwise specifically provided by law. Thus, the parties may determine the terms and conditions of the transaction rather freely as far as no restrictions on the relevant matters are imposed elsewhere in the legislation. However, there are certain formal requirements that need to be met in order to make a direct transfer of real estate valid, the requirements of which have been itemized in the Code of Real Estate. In essence, the due diligence and the potential findings made in connection therewith play an important role when negotiating and determining the final terms and conditions of the sale and purchase agreement for each particular transaction, regardless of whether the transaction constitutes a direct transfer of real estate or an indirect transfer by the transfer of company shares.

Acquisition structures usually applied in real estate transactions

Real estate transactions in Finland, which normally require the involvement of specialized legal counsel, are usually structured in a way that either an ordinary real estate company (REC) or mutual real estate company (MREC) owns and possesses the real property, the latter alternative having been the most commonly used structure in recent years. An MREC differs from a REC to some extent. A REC is an ordinary limited liability company owning real estate, whereas an MREC is a limited liability company but with some specific characteristics typical for housing companies.

MRECs operate in the same way as housing companies, i.e., in MRECs, the shares entitle a shareholder to control specific premises in the building(s) owned and possessed by the MREC, or another part of the company’s building or the real estate under its possession, as laid down in the articles of association. By contrast, shareholdings in RECs are, by their nature, similar to other limited liability companies, i.e., shareholders own a proportional share of the company corresponding to their shareholding.

Another important character of the MREC is that rental income deriving from the property owned by the MREC is not paid to the company but directly to the shareholders, whereas in the case of RECs, rental income goes directly to the company and may (if all legal requirements for the distribution of assets are met) be distributed as dividends to the shareholders. These options naturally have important tax implications and should therefore be carefully assessed when determining the transaction structure. Further, in contrast to RECs, MRECs typically receive their income from their shareholders through monthly maintenance charges, which are intended to cover expenses of the MREC, such as costs for maintenance, taxes, and insurance.

Restrictions applicable to foreigners and specific areas of the country

The principal rule is that there are no restrictions on real estate ownership by foreigners as such in Finland. Thus, foreign individuals or foreign legal entities may, as a rule, acquire and own real estate in Finland on the same basis as Finnish persons and entities. However, from 2020, foreign purchasers (both private individuals and legal entities) from outside the European Union (EU) and European Economic Area (EEA) are required to obtain a permit from the Ministry of Defence to acquire real estate in Finland, except for real estate acquisitions on the Åland Islands, which are governed by separate rules due to Åland’s special status: The Åland Islands is a self-governing province located southwest of Finland. In order to give effect to the right of the people of Åland to own land on the Åland Islands, the acquisition and possession of real estate have been restricted by law and are subject to certain authority proceedings, which not only applies to foreigners but also Finnish individuals and entities. Additionally, in Finland, municipalities may, in certain situations, have the right to redeem real estate sold if the land is required for civil engineering, recreational, or protection purposes. Also, the state holds a pre-emptive right in real estate transactions involving properties located in the immediate vicinity of strategic sites, primarily referring to sites crucial for defense and national security.

The National Land Survey Authority of Finland maintains registers concerning real estate, such as the cadastre and the title and mortgage register. In addition to the National Land Survey Authority, many municipalities participate in the maintenance of the cadastre. The cadastre is a public register that is a part of the Land Information System. The Land Information System consists of information included in the cadastre (mainly property details and information on the location of properties) and in the title and mortgage register (mainly information on ownership, real estate mortgages, special rights and restrictions concerning properties) covering the entire country. In the field of real estate, registrations typically have major legal consequences, as most of the real estate rights are established only at the moment when relevant registrations take place. Hence, it is important that all required registrations are duly completed post-transaction and that deadlines provided by law are adhered to.

The Residential and Commercial Property Information System was introduced in Finland in 2019. The system is nationwide and maintained by the National Land Survey of Finland. It includes information on ownership, pledges, and restrictions of shares in housing companies and MRECs. Membership in the system is mandatory for all housing companies. Additionally, MRECs established in 2019 or later are automatically entered into the system, while membership is optional for older MRECs established before 2019.

Once a company has been entered into the Residential and Commercial Property Information System, the National Land Survey of Finland is responsible for maintaining the company’s share register. Therefore, when a real estate transaction is structured as a sale and purchase of shares in an MREC or housing company belonging to the Residential and Commercial Property Information System, the change of ownership should be notified to the National Land Survey of Finland post-transaction and registered in the system.

There is no need for notarization of a real estate transaction in Finland. However, a public purchase witness acts as a witness to a transaction as well as identifies the parties and confirms the formal validity of the real estate transaction. A public purchase witness is required only in the case of a direct ownership change of real estate. Hence, there is no need for a public purchase witness for the sale and purchase of shares in a company possessing the ownership of a real estate. If a real estate transaction has not been duly witnessed, it is considered invalid, and the purchaser cannot be granted title to the property. Only a public purchase witness can witness a real estate transaction. However, if real estate is transferred using the Property Transaction Service administered by the National Land Survey of Finland, a public purchase witness would not be necessary.

Legal responsibility of the seller

The principle of freedom of contract is, as a rule, applied to real estate transactions in Finland. Hence, the responsibility of the parties, including the seller’s responsibility towards the purchaser, may be agreed upon rather freely between the parties of the transaction. Typically, the seller would not be liable for matters which have been fairly disclosed to the purchaser in connection with the due diligence process, unless otherwise specifically agreed between the parties in the sale and purchase agreement. There are, however, certain provisions defining the legal position of the parties. For example, the seller is by law responsible for any payment obligations that are regarded as public in nature (i.e., obligations towards authorities) and created prior to the transaction.

Contractual representations and warranties

As with other transactional contracts, representation and warranties (R&W) are typically an essential part of real estate sale and purchase agreements. R&Ws in real estate transactions are strongly dependent on the outcome of the due diligence review and findings. Also, the value of the transaction and the previous use of the real estate are typically relevant when determining how extensive R&Ws are necessary and reasonable in the transaction at hand. R&Ws are typically included with respect to, e.g., ownership and authority, mandatory permits and inspections, mortgages, easements, and encumbrances in relation to the property in question. When a real estate transaction is structured in the form of a sale and purchase of shares in a company holding the ownership of real estate, the R&Ws are, in many aspects, similar to those of typical share deals. R&Ws on corporate and compliance related matters would, for instance, typically be included in such share sale and purchase agreements in addition to those R&Ws relating to the actual asset.

In Finland, there are several ways to secure financing for real estate investments and to use real estate as a security. Practically almost any kind of asset can be subject to security provided that it can be identified, is assignable and can be subject to an enforcement procedure as well as has value as a subject of exchange. Typical forms of securities in the field of real estate include but are not limited to: (i) pledge over real estate or leasehold (mortgage); (ii) pledge of movable property (e.g., shares, receivables, bank accounts, rental income); (iii) floating charge; and (iv) contractual commitments, such as covenants and letters of comfort. The most common security arrangement used and relating directly to real estate is the mortgage, which may be registered over the relevant asset through a mortgage application process with the National Land Survey Authority.

Land leases

The lease of real estate property is regulated in the Land Tenancy Act (29 April 1966/258, as amended). The law applies in situations where a property or a part of it is let out by the landowner(s) against consideration. Typically, land lease agreements are very long, fixed-term agreements; the length also being dependent on the type/purpose of the relevant property, as the legislation includes certain rules on maximum and minimum durations depending thereon. Land lease agreements must, as a rule, be made in writing and include all terms and conditions. Such terms and conditions that have been left out of a written agreement are, by law, considered void. Furthermore, the agreements must inter alia be dated and signed by the parties and include detailed information on the object of lease, purpose of use, and the lease term. Although the freedom of contract is a strong principle, land lease agreements are, by their nature, more restricted contracts as the legislation is mandatory in many aspects, meaning that the contracting parties may not by contract deviate from the legal provisions.

A land lease agreement can be registered as a special right in the title and mortgage register. The entry is applied for from the National Land Survey of Finland. Once registered, the lease right always binds the new owner of the property that is the subject of the right. The registration also gives protection against the property owner’s creditors in accordance with its priority order. Certain types of land lease rights are, however, subject to mandatory registration. These are fixed-term leases that can be transferred to a third party without hearing from the landlord, provided that buildings exist on the leased area, or that buildings may be constructed and/or appliances exist that are owned by the tenant. The registration requirement also applies to transfer of such rights. A registered leasehold may be used as security for debt.

Lease of business premises

The lease of business premises in Finland is regulated by the Act on Commercial Leases (31 March 1995/482, as amended). The act applies to leases of buildings or parts of buildings (premises) for other than residential purposes (commercial leases). Such leases may also comprise land areas which are to be used in connection with the business premises. The contracting parties may, in the lease agreement, deviate from the provisions of the act, unless otherwise provided for therein. When negotiating on a commercial lease agreement, it is therefore crucial to keep in mind that the provisions of the Act on Commercial Leases will apply to the tenancy as such, should the parties not specifically have agreed otherwise in the lease agreement. If a matter is not regulated in the act, the general principles of contract law will apply.

Commercial leases may be entered into for a fixed term or until further notice. As a rule, commercial lease agreements are made in writing to ensure that the contents of the tenancy are properly documented, which is highly advisable. Oral agreements are not, as such, prohibited, but these agreements are by law considered valid until further notice, although the parties would in fact have agreed on a fixed term. Commercial lease agreements typically tend to include provisions on the rent and its payment, rent adjustment, term of lease and termination, property maintenance, lease collateral, insurance, subleasing, and dispute resolution. Further, it is crucial to specify the object of the lease as precisely as possible as well as agree on the purpose of use, as the premises may only be used for such agreed purposes.

The most significant act regulating construction work and other developments is the Finnish Land Use and Building Act (5 February 1999/132, as amended). Prior to starting any construction work, a building permit or an action permit must be obtained from the municipal building authorities. A building permit is required when constructing a new building and, for instance, when making major renovations and other alterations and repairs that correspond to new construction. For minor repairs and the construction of small outbuildings, an action permit, or a notification to the municipal building authority, as the case may be, is usually sufficient. In some cases, an environmental permit will also be needed if the activities to be carried out on the property may lead to, e.g., pollution or contamination of the environment. In addition, some other permits may be required depending on the location of the property (e.g., depending on the zoning situation on the specific area) and the specific operations that will be carried out on the same.

Environment

With respect to the environment, the Finnish legislation inter alia sets out a framework for the treatment of contaminated areas. The prohibition of actions that may contaminate soil and groundwater and the general principles set out in the Environmental Protection Act (27 June 2014/527), aim to prevent contamination. Should full prevention not be possible, minimizing the environmental impact of harmful substances is the key principle.

The legislation also sets out provisions on the assessment of contaminated areas and the requirements for remediation of such areas, allocation of the responsibility for the remedial measures, permits required for such measures, as well as notification of obligations when selling or renting out property. Typically, specific environmental due diligence is carried out on site by experts in the field in connection with real estate transactions in Finland. Hence, the legal due diligence tends to focus primarily on reviewing potential documentation in relation to environmental permits and authorizations, environmental violations as well as environmental investigations and audits, to mention some key areas.

Energy

Energy-smartness and energy efficiency have become increasingly important in society in recent years. Naturally, this has also had implications for the energy requirements for real estate and buildings. Regulations on energy efficiency in respect of buildings are mainly set out in the Land Use and Building Act (5 February 1999/132, as amended). Buildings should, by law, be constructed for their intended use in such a way that energy and natural resources are used sparingly. The legislation also provides for the use of renewable energy for new buildings and extensively renovated buildings. An energy account may, depending on the project, be required for the building permit application. In Finland, there is also a specific act on energy certificates. Energy certificates are, as a rule, mandatory for all buildings. The certificates constitute, inter alia, tools for comparing and enhancing the energy efficiency of buildings as well as promote the use of renewable energy in buildings. Typically, on-site technical due diligence is carried out by experts in the field in connection with real estate transactions in Finland to verify that the target property is technically compliant with the prevailing legislation and building standards.

Transfer tax

The transfer of shares in a Finnish housing or real estate company (or in companies of other forms whose activities in practice consist mainly of directly or indirectly owning or controlling Finnish real estate) is subject to a transfer tax of 1.5%. This definition includes Finnish and non-Finnish holding companies. The tax base used for calculating transfer tax is: the purchase price plus any payment made by the purchaser that is a condition for the transfer in the transfer agreement (e.g., payments made in the closing event), plus any liability the purchaser assumes as part of the transfer where the transferor benefits from the arrangement (e.g., assumption of debt obligations), and where the seller or a related party to the seller benefits from the arrangement. Furthermore, generally, where shares are transferred in an MREC, loans that are attributable to the designated shares of the MREC would also be included in the tax base.

Transfer of Finnish real estate is subject to transfer tax at a rate of 3% on the purchase price.

The party liable to transfer tax is the purchaser. Generally, if the purchaser is a non-resident, the Finnish resident seller has a secondary liability on the transfer tax and thus may be liable to collect the transfer tax from the purchaser and remit that tax to the tax administration. Transfer tax is payable, and the transfer tax return is due within two months of the share acquisition (including shares of RECs) or within six months of the real estate acquisition.

Non-resident capital gain tax

Finnish non-resident capital gain tax at standard CIT rate of 20% applies on gain derived from disposal of Finnish real estate.

Further, a non-Finnish seller may be subject to Finnish non-resident capital gain tax if disposing shares in a (Finnish or non-Finnish) entity that is considered real estate rich for capital gain tax purposes.

A company is deemed real estate rich for capital gain tax purposes if more than 50% of the company’s assets consists of directly or indirectly held Finnish real estate at disposal or at any time within 365 days preceding the disposal.

If the disposed company is deemed real estate rich, any gain is subject to non-resident capital gain tax at standard CIT rate of 20% under domestic legislation. However, double tax treaties may restrict Finland’s right to impose non-resident capital gain tax. Further, Finland updated its Multilateral Instrument (MLI) position in 2023 by withdrawing is its reservation on Article 9 and chose to apply optional Article 9(4), which introduces provisions for the taxation of gains from the alienation of shares or comparable interests deriving more than 50% of their value from immovable property at any time during the 365 days preceding the alienation.

Value added tax (VAT)

The sale of real estate is VAT exempt in Finland. The VAT exemption also applies to the sale of shares of an MREC or REC. Further, the input VAT on transaction costs related to the sale of real estate or shares of a real estate company is typically not deductible in Finland, according to the Finnish tax authorities’ guidance. Also, the leasing of real estate property is VAT exempt in Finland and, accordingly, the input VAT on costs incurred in relation to the VAT exempt leasing, e.g., VAT on new construction and maintenance costs, is not deductible. However, it is possible to opt for VAT for leasing of real estate property provided that certain conditions are met, e.g., the real estate or a part of it is used continuously for activity which is entitled to VAT recovery. When the lessor opts for VAT and the leasing of real estate property is subject to VAT, the input VAT on costs directly relating to this activity is also deductible.

Real estate investments, i.e., new construction or major renovation works, are subject to a 10-year VAT adjustment period. The adjustment period starts at the beginning of the calendar year during which the construction work was completed. If the taxable use of the premises decreases during the 10-year adjustment period, VAT deductions made may need to be adjusted, i.e., VAT is partially repaid. Respectively, if the taxable use of the premises increases, additional VAT deductions can be made.

Proper documentation should be maintained, and the taxable use of the premises should be monitored constantly during the 10-year adjustment period.

When real estate is sold, the adjustment liabilities and rights are, as a main rule, transferred to the purchaser of the real estate. The seller must provide a specification of the real estate investments subject to the VAT adjustments in order for the purchaser to be able to comply with the VAT legislation.

Download: Handbook for Real Estate Transactions