15.07.2025Upper house approves law to introduce tax incentives for investment boost
Measures include a tax investment booster, corporate income tax rate to be reduced starting from 2028
Update
The law has been signed by the president on 14 July 2025 and published in the Federal Gazette on 18 July 2025 (Federal Gazette 2025 part I, No. 161).
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After the approval of the lower house of parliament (Bundestag) on 26 June 2025, the upper house of parliament (Bundesrat) on 11 July 2025 also approved the “Law for a tax-based immediate-action investment program to strengthen Germany as a business location.” The bill is the first important measure to boost the German economy taken by the new German government and comes just two months after the new government headed by chancellor Friedrich Merz took office. The tax package, worth approximately EUR 46 billion (USD 53 billion), is expected to have a significant impact on the German economy, together with an earlier significant investment package on infrastructure and defense worth a further hundreds of billions of euros.
The final law includes measures that were already included in the coalition agreement between the governing parties that was published earlier this year (see GTLN dated 04/11/25). The main measures in the law include the following:
- A declining balance depreciation method (an “investment booster”) for moveable fixed assets that are acquired or manufactured after 30 June 2025 and before 1 January 2028 is (re-)introduced. The maximum amount of the declining balance depreciation is limited to three times the applicable straight line depreciation rate, with a maximum of 30% annually. The declining balance depreciation method was already available for movable fixed assets that were acquired or manufactured in the period between 1 January 2020 and 31 December 2022 (capped at 25%) and in the period between 31 March 2024 and 1 January 2025 (capped at 20%).
- The price limit for the tax favorable treatment of electric company cars is increased from EUR 70,000 to EUR 100,000 and a special depreciation allowance for electric vehicles is introduced (75% in the year of acquisition, 10% in the subsequent first year, 5% in the second and third following years, 3% in the fourth following year, and 2% in the last year). The special depreciation allowance applies for electric vehicles that are acquired in the period between 1 July 2025 and 31 December 2027.
- The federal corporate income tax (CIT) rate of (currently) 15% is reduced by 1% annually during the five-year period from 2028 to 2032 to, eventually, 10%. The applicable CIT rate therefore looks as follows:
- Until 2027: 15% (15.825% including solidarity surcharge);
- 2028: 14% (14.77% including solidarity surcharge);
- 2029: 13% (13.715% including solidarity surcharge);
- 2030: 12% (12.66% including solidarity surcharge);
- 2031: 11% (11.605% including solidarity surcharge); and
- 2032 and following years: 10% (10.55% including solidarity surcharge).
The reduction of the federal CIT rate will be the first change in the tax rate since 2008, when the CIT rate was decreased from 25% to 15%. The local trade tax (TT) rate that applies in addition to the federal CIT rate depends on the local municipality and currently is between 7% and 17%. On average, a 14% TT rate should apply (higher in large cities, e.g., Munich, Frankfurt, Berlin). The percentage of the TT rate is set by the respective municipalities and not the federal government. As a result of the planned decrease of the federal CIT rate, the combined CIT and TT rates of (currently) approximately 30% will be reduced to approximately 24.5% in 2032. - The cost basis for calculating the research and development tax incentive is increased from EUR 10 million to EUR 12 million without any time limitation starting from 1 January 2026. The cost basis for eligible projects is broadened in order to include overhead and other operating expenses through a general 20% increase in eligible expenses. This increase in eligible expenses applies for projects that are initiated after 31 December 2025.
The law is now heading to the president for signature and publication in the federal gazette. Both steps should just be formalities.
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