Excess VAT Carry-Forward: Key Takeaways from CJEU Case C-680/23

Introduction

On December 5, 2024, the Court of Justice of the European Union (CJEU) delivered a judgment in the case of Modexel - Consultores e Serviços SA v Autoridade Tributária e Assuntos Fiscais da Região Autónoma da Madeira (C-680/23). The case addressed the interpretation of Article 183 of the VAT Directive (2006/112/EC), particularly in relation to the right to carry forward excess VAT following the cessation and resumption of economic activity. This ruling holds significant implications for taxable persons within the EU, as it clarifies the boundaries within which excess VAT may be carried forward.

Background of the case

Facts and circumstances

Modexel - Consultores e Serviços SA ceased its economic activity on February 28, 2015, while carrying an excess VAT credit of €12,456.20. This excess VAT was declared in its final VAT return before the cessation. The company did not request a refund of the excess VAT at the time of cessation but instead retained the credit.

On May 10, 2016, Modexel resumed its economic activity. Upon filing its first VAT return after the resumption, the company attempted to deduct the previously declared excess VAT from its new VAT liabilities. However, the Portuguese Tax Authority refused the deduction, arguing that under Portuguese VAT law, excess VAT must be claimed within 12 months following the cessation of economic activity. Since Modexel had not requested a refund within this period, the tax authority deemed the excess VAT forfeited.

In response, Modexel brought an action before the Administrative and Tax Court of Funchal, which then referred the matter to the CJEU for a preliminary ruling on the interpretation of "following period" under Article 183 of the VAT Directive.

Legal framework

European VAT principles and Article 183 of the VAT Directive

Under the VAT Directive, businesses registered for VAT are entitled to deduct input VAT from output VAT. Article 183 states that if, in a given tax period, the amount of VAT deductions exceeds the VAT due, Member States may either refund the excess or allow it to be carried forward to a following period. However, the Directive leaves the conditions for refunds and carry-forward provisions largely to the discretion of national authorities.

Article 9(1) of the VAT Directive defines a taxable person as anyone independently engaged in an economic activity, regardless of its purpose or results. Article 213(1) requires taxable persons to notify tax authorities when they commence, change, or cease business activities. Furthermore, Article 252 allows Member States to set tax periods of up to one year, with deadlines for VAT return submissions not exceeding two months after the end of the relevant tax period.

The CJEU has consistently ruled that VAT neutrality is a fundamental principle, meaning that VAT should not become a financial burden on businesses engaged in taxable activities. However, the right to deduct VAT must be exercised in accordance with procedural rules established by Member States, provided they do not violate EU principles of equivalence and effectiveness.

Portuguese VAT legislation

The Portuguese VAT Code (Article 22) transposes Article 183 of the VAT Directive into national law. Under Portuguese rules:

·         Excess VAT from a tax period is generally carried forward to the following periods.

·         If an entity ceases its economic activity, it has 12 months from the cessation date to request a refund of excess VAT.

·         If no refund is requested within this period, the excess VAT is forfeited.

These provisions are aimed at ensuring that VAT refunds are processed efficiently while preventing businesses from indefinitely deferring excess VAT claims.

Key legal issues and CJEU analysis

1. Interpretation of "following period"

One of the key issues in this case was the interpretation of "following period" under Article 183 of the VAT Directive. The fundamental question was whether this term should be understood strictly as the next tax period in sequence or whether it allows for a longer lapse, particularly in situations where a business ceases its activity and later resumes operations.

The CJEU ruled that "following period" must be interpreted in a strict sense, meaning the tax period immediately succeeding the one in which the excess VAT arose. This interpretation ensures the continuity and predictability of VAT administration across Member States and prevents undue delays in VAT settlement.

The Court provided further clarification, stating that:

·         The concept of "following period" is independent of whether a taxable person's economic activity is continuous or interrupted.

·         Once a taxable person ceases operations, they lose their VAT status, meaning there is no "following period" available for carrying forward excess VAT.

·         If a business later resumes its economic activity, it constitutes a new taxable period, separate from the prior period in which the excess VAT was accumulate

The Court underscored that the fundamental principle of VAT is that it applies to ongoing economic activities, and the framework does not allow indefinite carry-forward claims beyond the prescribed limits.

2. Limits on excess VAT recovery upon resumption of activity

Another critical aspect of the ruling was the confirmation that Member States retain discretion in setting conditions for VAT refunds. However, such conditions must comply with two fundamental principles:

·         Equivalence: National rules on VAT refunds must not be less favorable than those governing similar domestic claims.

·         Effectiveness: National rules must not make it excessively difficult or impossible for taxpayers to recover VAT.

The CJEU examined Portugal’s 12-month deadline for reclaiming excess VAT upon cessation of business activity and found it to be reasonable and compliant with EU law. The ruling emphasized that taxpayers are expected to be aware of refund deadlines and must act within the prescribed timeframes to safeguard their rights.

Additionally, the Court highlighted that allowing businesses to carry forward excess VAT after resumption of activity, beyond the defined periods, could create opportunities for abuse and circumvent existing tax rules. It affirmed that maintaining structured deadlines enhances legal certainty and prevents distortions in VAT administration.

Implications of the judgment

For taxable persons

This ruling underscores the importance of effective VAT credit management for businesses. Companies planning to cease operations must proactively assess their VAT position and take timely action to recover excess VAT within the prescribed period. A failure to do so may result in the irreversible loss of VAT credits, which could impact financial planning and cash flow.

Furthermore, businesses resuming economic activities should not assume that previously accumulated VAT credits will remain available for future deductions. This ruling makes it clear that any excess VAT declared before cessation cannot be carried forward upon resumption. Instead, companies should consider the refund mechanisms available and comply with national deadlines to safeguard their interests.

For Tax Authorities

The ruling provides much-needed clarity to tax authorities regarding the treatment of excess VAT when businesses cease operations. Authorities now have judicial backing to enforce national deadlines for refund claims without fearing non-compliance with EU law. It also reinforces the importance of maintaining administrative consistency, ensuring that refund and carry-forward mechanisms operate within structured timelines that promote legal certainty.

Additionally, tax authorities must ensure that their VAT refund systems comply with the principles of equivalence and effectiveness. Refund policies should not create undue barriers for taxpayers but must remain aligned with similar domestic tax procedures.

For EU VAT law interpretation

This judgment reaffirms that VAT is designed to function as a tax on active economic activity. The ability to deduct VAT or claim refunds is inherently linked to a business’s status as a taxable person. The ruling also strengthens the EU principle of VAT neutrality, ensuring that businesses are neither advantaged nor disadvantaged by discontinuing and resuming operations. Furthermore, Member States retain the flexibility to design their VAT systems but must do so within the framework of EU principles, preventing indefinite VAT credit carry-forwards that could lead to fiscal uncertainties.

Conclusion

The judgment in C-680/23 clarifies that "following period" under Article 183 of the VAT Directive strictly refers to the immediate subsequent tax period. The ruling supports national rules requiring taxpayers to claim VAT refunds within a set timeframe after ceasing business activities, reinforcing legal certainty and administrative efficiency.

For businesses, this case underscores the importance of strategic VAT planning when suspending or resuming operations. Failure to adhere to national refund deadlines can result in the loss of substantial VAT credits, impacting financial liquidity. This ruling thus serves as a crucial reference point for businesses operating within the EU VAT framework and for policymakers aiming to balance tax administration with taxpayer rights.