Usual market price

What it means

The customary price is the price at which the same or comparable goods or services are normally sold between independent parties at a given place and time. It is market value, disregarding exceptional circumstances and personal relationships between buyer and seller.

The concept is used in tax law wherever the agreed price may not reflect reality: typically for non-cash income, gifts, transactions between related parties or the private use of business assets.

The customary price can be established by comparison with similar transactions, from price lists and offers of independent sellers, and for assets with no comparison available, by an expert valuation. For transactions within a group the method is set out in detail by the transfer pricing rules.

How it works in practice

When an asset is sold to a shareholder or a group company, we always prepare support for the price: listings, quotes or a valuation. For cars and property the gap between net book value and the customary price is often large, and the tax office notices it in an audit.

For non-cash benefits to employees, such as use of a company flat or purchases at a discount, we calculate taxable income from the customary price. The employee is taxed on the difference between the customary price and what they paid.

The customary price also plays a role in VAT. For supplies between related parties at a price below or above the customary price, the taxable amount is adjusted to the customary price under certain conditions, particularly where one party lacks full entitlement to deduct.

What to watch out for

Selling an asset to family or a shareholder for a symbolic euro looks simple, but the tax office can later add back the difference to the customary price and tax it. For companies the difference is added to the tax base; for an individual it may be taxable income.

The customary price is not a single figure but a range. In an audit, a price within a reasonable range that is documented will stand. A valuation prepared only after the audit has started carries less weight than documentation prepared at the time of the transaction.