A managing director buys a company car at half its market value.
The company records the low price as the VAT taxable amount. The tax authority challenges it. The case goes to court. Now, an Advocate General at the European Court of Justice has weighed in with an opinion making every founder reconsider how they structure transactions with insiders.
The core question is simple: does a tax authority get to adjust the VAT taxable amount to market value when a company sells an asset to a related party at an abnormally low price?
The Advocate General says yes… even when a member state hasn’t implemented the optional anti-avoidance rule under Article 80 of the VAT Directive.
This expands the reach of VAT abuse doctrine into territory many founders assumed was safe.
The Mechanism Behind the Problem
The structure creates exposure like this.
A company sells a car to its managing director for €10,000. Market value is €20,000. The company charges VAT on €10,000. The managing director has limited VAT deduction rights because the car is used partly for private purposes.
The tax authority sees this and recalculates. It says the taxable amount should be €20,000, not €10,000. The company owes more VAT.
The company appeals. It argues VAT uses subjective value, meaning the consideration received, not an estimated market value. This is settled case law. The taxable amount is what the parties agreed, not what an appraiser says.
But the Advocate General introduces a distinction.
When the transaction involves related parties and the recipient has limited deduction rights, the below-market price constitutes an abuse of rights.
When abuse is present, the tax authority redefines the transaction to restore what would’ve happened without the abusive elements.
Why This Expands VAT Enforcement
The traditional understanding was that Article 80 of the VAT Directive gave member states an optional tool to adjust taxable amounts in related-party transactions. If a member state didn’t implement it, the tool wasn’t available.
The Advocate General’s opinion changes that calculation.
Even without Article 80 implementation, the general principle of abuse of rights allows adjustment when the transaction structure is designed to gain a VAT advantage artificially.
This aligns with the Court’s reasoning in Weald Leasing, where artificially low rents imposed through a third-party intermediary were deemed abusive. The Court ruled that abusive contractual conditions must be redefined to restore the situation as it would have been without the abuse.
The pattern is consistent. When a transaction structure creates an artificial VAT advantage through related-party pricing, and the recipient cannot fully deduct VAT, the authorities can intervene.
This isn’t about punishing low prices. It’s about preventing VAT leakage through structures exploiting the relationship between parties and their differing deduction rights.
Partial Exemption Creates Hidden Liability
Partial exemption is the key trigger.
When the recipient has full VAT deduction rights, a below-market price doesn’t create a VAT advantage. The recipient pays less VAT, but also deducts less VAT. The system balances.
But when the recipient has limited or no deduction rights, the below-market price creates a structural benefit. The company charges less VAT. The recipient doesn’t deduct it anyway. The tax base shrinks.
The Advocate General identifies this as the abuse. The transaction is structured to exploit the recipient’s limited deduction position.
Founders often miss this. They focus on the commercial logic. The managing director gets a benefit. The company records a sale. Feels like a normal transaction.
But the VAT system doesn’t measure intent. It measures structure. This structure creates exposure.
What the Högkullen Precedent Adds
The Court’s recent ruling in Högkullen reinforces that tax authorities must assess each transaction individually when related parties are involved.
The case involved a parent company providing services to subsidiaries. The tax authority wanted to treat all services as a single supply and apply a blanket market value adjustment.
The Court said no. Articles 72 and 80 require individual assessment of each service, even in active management contexts. You don’t get to apply a categorical rule.
This creates a procedural safeguard. Tax authorities must prove each specific transaction meets the abuse criteria. They don’t get to rely on general suspicion about related-party dealings.
But every below-market transaction with limited deduction rights is now subject to individual scrutiny.
The defense isn’t “we’re related parties, this is normal.” The defense is “this specific transaction has a commercial rationale independent of VAT advantage.”
The Proportionality Requirement
The Advocate General emphasizes that any adjustment must be proportionate.
You don’t impose penalties beyond what’s necessary to eliminate the abuse. The remedy is to adjust the taxable amount to market value and collect the VAT owed.
This limits the damage. The exposure is the VAT difference plus interest, not a broader sanction.
But proportionality doesn’t eliminate the risk. If you’ve been structuring transactions this way for years, the accumulated exposure gets significant.
The adjustment process creates cost. You need to defend the transaction, provide evidence of commercial rationale, and negotiate the market value determination.
What Founders Should Check Now
If you’ve sold assets or provided services to related parties at below-market rates, you need to assess exposure.
The control points are straightforward:
Identify transactions with related parties where the recipient has limited VAT deduction rights. This includes managing directors, shareholders, and affiliated companies with partial exemption.
Document the commercial rationale for any below-market pricing. If the price reflects actual conditions (used asset, employee benefit structure, volume discount), record it. If it’s a favor, you have exposure.
Calculate the VAT difference between the charged amount and market value. Your maximum exposure per transaction.
Review whether your member state has implemented Article 80. If yes, the anti-avoidance rule applies directly. If no, the abuse of rights doctrine still provides a basis for adjustment.
Install a control that flags future transactions before they close. Any sale or service to a related party with limited deduction rights should trigger a market value check.
The goal isn’t eliminating all related-party transactions. It’s ensuring when you price below market, you defend the structure as commercially driven, not VAT-driven.
The Broader Enforcement Trend
This opinion sits within a larger pattern. The interaction between transfer pricing and VAT is intensifying across European jurisdictions.
Transfer pricing rules require arm’s length pricing to prevent profit shifting between related entities. VAT traditionally didn’t impose an arm’s length requirement. Used the consideration paid.
As tax authorities see more structures, they’re using abuse of rights doctrine to import market value analysis into VAT.
The cases pile up. Arcomet. Weatherford Atlas. Weald Leasing. Högkullen. Each one refines the boundary between legitimate structuring and abusive avoidance.
The common thread is that when a transaction structure exploits differences in deduction rights between related parties, it attracts scrutiny.
The scrutiny is individual. You don’t get to hide behind “this is how we’ve always done it” or “everyone does this.”
What This Means for Decision Structure
You need a decision rule before you price a related-party transaction.
The rule is simple: If the recipient has limited deduction rights, price at or near market value unless you document a clear commercial reason for the discount.
The documentation must exist before the transaction, not after the audit notice arrives.
This doesn’t mean you stop providing employee benefits or shareholder advantages. You structure them to prevent VAT leakage through artificial pricing.
In many cases, this shifts the benefit structure. Instead of a below-market sale, you provide a market-rate sale with a separate, documented compensation element.
The economic result is similar. The VAT exposure disappears.
The Control That Prevents Expensive Surprises
Most VAT exposure in related-party transactions isn’t fraud. It’s drift.
Someone approves a transaction because it feels reasonable. The managing director needs a car. The company has one available. A below-market price seems fair.
Nobody checks whether the recipient has full deduction rights. Nobody calculates the VAT difference. Nobody documents the commercial rationale.
Years later, an auditor flags it. The company owes back VAT plus interest. The cost is real.
The control preventing this is procedural, not technical.
Before any related-party transaction closes, one person must answer three questions:
Does the recipient have full VAT deduction rights?
Is the price at or near market value?
If not, what is the documented commercial rationale?
If you don’t answer all three, the transaction doesn’t close until you do.
This control costs nothing. It prevents expensive reconstruction.
Final Observation
The Advocate General’s opinion isn’t final. The Court still needs to rule.
But the direction is clear. The abuse of rights doctrine is expanding into related-party VAT transactions, particularly when partial exemption creates artificial advantages.
Founders who assumed that subjective value protected all below-market pricing need to recalibrate.
The system doesn’t measure your intentions. It measures structure and consequence.
If the structure creates VAT leakage through related-party pricing and limited deduction rights, you have exposure.
The fix is simple. Price at market or document why you didn’t. Install the control before the transaction, not after the audit.
Structure is cheaper than recovery.
