Immediate programme of tax incentives for investment to boost the competitiveness of Germany as a business location
The German economy is under pressure - international crises, high energy prices, an increasing skills shortage and sluggish investments are putting a strain on Germany as a business location. At the same time, international competitive pressure is growing - especially from countries that are trying to attract companies with aggressive tax incentives and massive investment programmes. In July 2025, both houses of the German parliament approved the Act for an Immediate Programme of Tax Incentives for Investment in Germany. The report that now follows considers the most important measures.
An overview of the areas and measures
The Immediate Programme includes 60 specific measures that are divided into the following five areas:
An investment offensive
(to generate strong stimuli for more growth)
Simplification and acceleration
(to enhance the attractiveness of Germany as a business location by simplifying and accelerating processes and making them less bureaucratic)
A state that is more secure and able to work more effectively
(including digitalisation and modernisation of the state)
New economic growth
(structural reforms to boost economic growth)
Strong cohesion, stable democracy
(to boost societal cohesion)
The focus here of the Act for an Immediate Programme of Tax Incentives for Investment that was adopted is, most notably, on small and medium-sized companies (SMEs); these are frequently especially severely affected by economic uncertainties. In particular, there are six measures included that are discussed in greater detail below:
1. Re-introduction and top-up of the declining balance depreciation method for long-term movable assets (“investment booster”)
2. Introduction of an arithmetic declining balance depreciation method for newly acquired electric vehicles
3. With regard to company car tax, the gross list price limit has been increased to €100,000 for the tax concession related to electric vehicles
4. Extension of the Research Allowance Act (Forschungszulagengesetz, FZulG)
5. Phased reduction in the corporation tax rate, starting 1.1.2028, from currently 15% to 10% as of 2032
6. The tax rate on retained profits pursuant to Section 34a of the Income Tax Act (Einkommenssteuergesetz, EStG), for profits that have not been extracted, will be lowered in three steps from the current 28.5% to 25%
Details about important measures
1. Declining balance method of depreciation
For long-term movable assets (e.g., machines, vehicles) purchased between 1.7.2025 and 31.12.2027, instead of straight-line depreciation, companies will be able to claim depreciation according to the declining balance method for a maximum of 30% per year of the remaining carrying amount in each case (Section 7(2) EStG). Apart from the maximum rate of 30%, depreciation will be limited to three times the depreciation rate that would apply for straight-line depreciation. The declining balance method of depreciation means that companies will be able to offset their investments against tax more quickly and this will enhance the financial attractiveness of investments.
Example: P GmbH [German limited liability company] purchases a new machine as at 1.1.2026. The net acquisition costs are €100,000. The useful life is 10 years. The difference between the amount of depreciation according to the declining balance and straight-line methods in the first five years of use is clearly shown in the table below:
Based on our calculations, this would result in the following tax advantages if we assume a municipal multiplier for trade tax of 400%:
Over the entire useful life, where the tax rates remain unchanged, the cumulative effect arising from the declining balance depreciation would merely be a liquidity advantage. In the case of a reduction in the corporation tax rate, claiming declining balance depreciation at an early stage would also result in an overall tax advantage because the later, relatively lower declining balance depreciation charge would then be ‘valued’ using a tax rate that is lower than the one applied to the initial high depreciation amounts deducted. In the case of sole proprietorships and partnerships, the personal tax rate would be important for determining whether or not the declining balance method of depreciation would be advantageous for tax purposes over the total period, too.
2. Introduction of an arithmetic declining balance depreciation method for newly acquired electric vehicles
Under Section 7(2a) EStG, for electric vehicles purchased between 1.7. 2025 and 31.12.2027 it will also be possible to apply depreciation according to the declining balance method as an alternative to the straight-line method; the depreciation will then be staggered as follows: 75% in the year of acquisition, 10% in the subsequent year and between 5% and 2% thereafter. With this measure German lawmakers have retained the overall useful life of 6 years for vehicles, which was also previously applicable; however, a large proportion of the depreciation volume has been brought forward to the benefit of taxpayers.
Please note: The example presented under 2.1 similarly applies.
3. Increase in the gross list price limit for so-called company car tax
For vehicles purchased between 1.7.2025 and 31.12.2030 the gross list price limit for tax on company cars will be increased from currently €70,000 to €100,000 (Section 6(1) no. 4 EStG).
4. Extension of the research tax allowance
The tax breaks for research under Section 3(5) FZulG will be significantly expanded. As of 1.1.2026, the maximum assessment base will go up from currently €10m to €12m. Furthermore, for research projects that commence after 31.12.2025 it will now be possible to allow for additional overhead costs and other operating costs via a standard deduction of 20% of the eligible expenses incurred. Very research-intensive SMEs will most notably be able to benefit from this.
5. Reduction in the corporation tax rate
From 2028, there will be a phased reduction in the corporation tax rate from 15% to 10% by 2032, (Section 23(1) of the Corporation Tax Act [Körperschaftsteuergesetz, KStG]). This measure aims to relieve the burden on corporations in the long term and to boost international competitiveness.
6. Lowering of tax rate on retained profits (Section 34a EStG)
Under Section 34a EStG, sole proprietorships and partnerships can elect to retain profits in the business (i.e., not to extract them) and, therefore, to avail themselves of a reduced tax rate of currently 28.25% on the retained profits (so-called preferential treatment of retained profits). The aim is to reduce the tax rate on retained profits in three steps from 28.25% to 27% (2028/29 assessment period), 26% (2030/31 assessment period) and ultimately 25% (as of the 2032 assessment period). As was previously the case, if the profits are subsequently extracted, they would likewise be subject to retrospective tax.
Actual effects in practice
The Immediate Programme for Investment will generate a considerable number of tax incentives for businesses to make new investments both in movable fixed assets or vehicles as well as in research projects. The option to make use of the declining balance method of depreciation means that investments can be offset against tax more quickly. This will directly improve liquidity because companies will be able to reduce their tax burden earlier. In economically strained times in particular, this can be a crucial factor for not putting off investments.
Furthermore, the Programme provides greater planning security. The tax concessions that have been adopted - such as the phased reduction in the corporation tax rate - have a long-term focus and will enable companies to align their financial and investment strategies accordingly. Moreover, the targeted support for research and development with the enhanced framework conditions for the research allowance sends a strong signal to innovative enterprises.
