Patatin-like phospholipase-domain-containing 2 (PNPLA2; also known as adipose triglyceride lipase, ATGL) and PNPLA3 (also known as adiponutrin) are encoded by close paralogues and appear to have opposite functions on triacylglycerol mobilization and storage. PNPLA2 is a major triglyceride lipase in adipose tissue and liver, whereas a common human variant of PNPLA3, I148M, greatly increases risk of hepatosteatosis. Nonetheless, the function of PNPLA3 and the mechanism by which the I148M variant promotes triacylglycerol accumulation are poorly understood. Here we demonstrate that PNPLA3 strongly interacts with α/β-hydrolase-domain-containing 5 (ABHD5; also known as CGI-58), an essential co-activator of PNPLA2. Molecular imaging experiments demonstrate that PNPLA3 effectively competes with PNPLA2 for ABHD5 and that PNPLA3 I148M competes even more effectively. Inducible overexpression of PNPLA3 I148M greatly suppressed PNPLA2-dependent lipolysis and triggered massive triacylglycerol accumulation in brown adipocytes, with these effects dependent on ABHD5. The interaction of PNPLA3 and ABHD5 can be regulated by fatty acid supplementation and synthetic ABHD5 ligands, raising the possibility that this interaction might be targeted for the treatment of fatty liver disease. Here the authors demonstrate a mechanism by which PNPLA3 and its risk variant I148M contribute to intracellular lipid metabolism. PNPLA3 interacts with ABHD5 to prevent the PNPLA2–ABHD5 interaction, thereby inhibiting lipolysis in brown adipocytes and promoting lipid storage. The PNPLA3 I148M variant enhances this interaction.