Car sold to a director at a low price is not abuse of law

The Court of Appeal in 's-Hertogenbosch held that supplying a car for an abnormally low consideration is not abuse of law and that the constructive dividend does not form part of the taxable amount. We have reservations.

The facts

X BV bought a car in 2018 and deducted the VAT on the purchase. Its managing shareholder used the car for both business and private purposes, and X BV accounted annually for a private use adjustment. Two years later, in 2020, X BV sold the car to the director for € 2,597 including VAT and residual registration tax, while the valuation was € 34,040 including VAT and residual registration tax. For the difference of € 31,443, X BV and the director recognised a constructive dividend for corporate income tax, dividend withholding tax and personal income tax purposes. Dividend withholding tax was paid and income tax charged.

The dispute

X BV took the valuation as its starting point in its return but considers that VAT is due only on the low selling price, and objected to the amount paid. The inspector took the view that VAT is due on the valuation and rejected the objection. The District Court of Zeeland-West-Brabant allowed the appeal and granted a refund of € 5,457, after which the inspector appealed.

On appeal the taxable amount was in dispute. The issues were whether there was a supply for consideration and, if so, whether there was abuse of law. If not, the further question was whether the constructive dividend forms part of the taxable amount.

The Court of Appeal's ruling

The court holds that there is a supply for consideration: there is a legal relationship between X BV and the director and the price is not symbolic. Despite the low price there is a direct link between the supply and the consideration. The low price, the connection between buyer and seller and the purpose they had in mind do not alter that.

Nor, in the court's view, is there abuse of law. There is no set of transactions or steps designed to obtain the tax advantage: only one relevant transaction can be identified here, the supply of the car. That it takes place for a consideration far below actual value is not enough.

Finally, the constructive dividend does not form part of the taxable amount. That happens only in exceptional cases, because a dividend is in principle connected with a financial shareholding and flows from the mere ownership of shares. The inspector did not make it plausible that there was nonetheless a direct link between the dividend and the supply.

No abuse of law?

Abuse of law arises where two conditions are met:

• the transactions result in a tax advantage contrary to the purpose of the VAT Directive and national law (the objective element)
• the essential aim of the transactions is to obtain that advantage (the subjective element)

The court construes the abuse test very strictly. On that reasoning, a supply at a low price can never amount to abuse of law, because there is no set of transactions. Such a set means a combination of, for example, contractual arrangements and payments that together form an artificial arrangement.

That the Court of Justice of the EU uses the plural in formulating the conditions does not, in our view, mean the doctrine is limited to that. The plural may simply reflect the fact that in the cases the Court has decided there was always a series of legal acts. Where selling a car at an abnormally low price produces a VAT advantage contrary to the directive and to national law, and that advantage is the essential aim, we see no reason to exclude the situation from the doctrine. Support for that view can be found in the Dutch school building cases, in which a municipality supplied a new school for a fraction of its construction cost. There the Supreme Court did not use the single transaction argument to disapply the doctrine.

Whether selling a car to a director at an abnormally low price amounts to abuse must be assessed case by case. The objective element appears to be met, because the abnormally low price reduces the VAT borne on final consumption to a minimum. For the subjective element the VAT advantage must be the decisive aim. The sale to the director may itself have another reason, such as the substantial benefit-in-kind charge for private use in payroll tax. That charge may be a decisive reason for the sale, but not, in our view, for the abnormally low price.

We are therefore not convinced the ruling is correct. This case is expected to be litigated all the way to the Supreme Court. Companies and directors who have taken this VAT-saving route cannot breathe easy yet.