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The tax base to which the applicable VAT rate (currently 16 % general rate; 7 % on certain supplies) is applied to calculate VAT is normally the price charged (net of VAT) for the taxable goods or services supplied. Under sec. 10 (5) UStG, the cost incurred by an entrepreneur in making a taxable supply constitutes an alternative minimum tax base for supplies to certain related persons, as defined in sec. 10 (5) UStG. The provision is intended to prevent entrepreneurs from delivering goods or rendering services to related persons at bargain prices and thereby reducing the VAT normally payable on the transaction. Authorisation for the provision is found in Article 11 Part A (1) (a) of the 6th VAT Directive.

Ruling on a case referred to it by the German Federal Tax Court, the European Court of Justice has now held that the alternative minimum tax base cannot be applied to transactions with related persons if a market price was charged by the entrepreneur with respect to the supply (ECJ BB 1997, 1934 - 29 May 1997). The case involved rental of residential property at a market price according to local rental statistics. This price was, however, under the alternative minimum tax base. The ECJ stated that the alternative minimum tax base as authorised by the 6th Directive was intended solely to prevent abuse. Reasoning that abuse cannot occur if a market price is charged, the ECJ ruled that the German alternative minimum tax base cannot apply to such situations.

The Federal Tax Court has since applied the ECJ's holding to the case before it (UR 1998, 147 - 8 Oct. 1997). Consequently, sec. 10 (5) UStG is to be interpreted as not applicable to situations in which a market price (marktuebliches Entgelt) has been charged.

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