After years of weak capital spending, Germany is taking steps to revive its investment momentum. The government’s new €46bn tax package, part of a wider programme that also channels hundreds of billions of euros into infrastructure and defence, marks its most ambitious effort in more than a decade to reverse sluggish corporate investment.
Announcing the passage of the reforms through Germany’s upper house earlier this year, chancellor Friedrich Merz declared that the aim was to ‘make Germany attractive and competitive again’. So will this be enough to rekindle growth?
The centrepiece is a temporary 30% ‘degressive’ depreciation allowance for new machinery and equipment
Recent data reveals the extent of the challenge facing Germany. Investment in machinery and vehicles – a key indicator of corporate confidence – was still around 9% below pre-pandemic levels in late 2024, according to most recent data from development bank KFW. In the same period, similar investment was 11.5% higher in the US and 1% higher across the EU. Germany has also trailed in technology and research spending: investment in intellectual property such as software and R&D was 11% above pre-pandemic levels, compared with 27% in France and 36% in the US.
Germany industry is also facing rising competition from China and the US, particularly in electric vehicles and digital technologies. Energy costs remain high, while slow permitting and bureaucracy have deterred private investment.
So will Merz’s package be sufficient to restore the solid growth that the German economy enjoyed until around 2019?
The centrepiece is a temporary 30% ‘degressive’ depreciation allowance for new machinery and equipment purchased between July 2025 and the end of 2027. Degressive, or declining-balance, depreciation allows companies to deduct a larger share of an asset’s cost upfront, with smaller deductions in later years. The aim is to lower taxable profit sooner, improving near-term cashflow and providing an incentive to invest earlier.
Impact so far
Carsten Harborth, who leads EY’s Tax Accounting and Risk Advisory Services practice in Germany, says the measure has already begun to influence behaviour. ‘In the first half of 2025, discussions around the new investment booster led to some investments being temporarily put on hold,’ he explains. ‘Since the introduction of the declining-balance depreciation on 1 July, we have observed a catch-up effect from previously deferred investments. I expect this incentive will continue to stimulate further investments until the end of 2027.’
He notes that the advantage is greatest for long-lived assets such as heavy machinery or production lines. ‘For assets with a useful life of 10 to fifteen years, the cash flow and, in combination with decreasing corporate income tax rates overall, tax benefit of an up to 30% write-down in year one can be significant,’ he adds.
‘The new rules are a move in the right direction and the boldest step for some time’
A second measure targets corporate fleet electrification. Companies can deduct 75% of the cost of new electric vehicles in the first year, a provision that applies to cars purchased between July 2025 and January 2028. Harborth says this aligns with an ongoing shift among clients.
‘We have already seen many firms transforming their car fleets to electric vehicles,’ he notes. ‘This enhanced depreciation will accelerate that process.’
Dr Jan Wendland, partner at KPMG Germany, calls the new rules ‘a move in the right direction and the boldest step for some time’. But he adds that it remains too early to judge whether they will spur genuinely new investment or mainly bring forward spending that would have happened anyway.
R&D and innovation
The reform also makes Germany’s R&D tax credit more generous. The R&D tax credit, first expanded under the previous government in 2024, now includes a 20% flat-rate surcharge to cover overhead and other operating costs. From 2026 to 2030, the maximum annual benefit will rise from €2.5m to €3m, and depreciation of goods used directly in qualifying R&D projects will count towards the base for the credit. This brings Germany closer to international practiceand offers finance teams a predictable annual reduction in tax payable for qualifying innovation activities.
EY’s German Tax & Legal Quarterly notes that broadening the R&D credit base helps narrow one of Germany’s long-standing weaknesses: comparatively low investment in intangible assets such as software, patents and artificial intelligence.
For accountants and finance teams, the reform introduces new complexity
A further measure will gradually reduce the federal corporate-tax rate from 15% today to 10% by 2032. Including the solidarity surcharge and an average municipal trade tax of around 14%, the combined effective rate is currently close to 30%. By 2032, it is expected to fall to around 24.6%, broadly in line with the OECD average.
Wendland describes the reduction as ‘a significant cut welcomed by our clients’, though he notes that many had hoped it would take effect sooner. The phased approach means companies will face multiple applicable rates in deferred-tax calculations over the coming years.
Accounting implications
For accountants and finance teams, the reform introduces new complexity. Harborth warns that revaluing deferred-tax assets and liabilities to reflect the lower rate will distort effective tax rates in current reporting periods. ‘If deferred taxes are reversed over several years, multiple tax rates may have to be used for valuation,’ he explains. ‘Many systems are not designed for this level of complexity, so companies will need to apply workarounds.’
For CFOs, the challenge is strategic rather than purely technical
The changes also coincide with Germany’s upcoming digital tax transition, including mandatory e-invoicing for business-to-business transactions from 2025. Accountants are helping clients integrate these compliance requirements while modelling the cashflow impact of accelerated depreciation and R&D incentives.
For CFOs, the challenge is strategic rather than purely technical. Because the incentives are temporary, investment timing will be crucial. Finance teams must decide whether to bring forward capital spending to take advantage of the allowances or spread it to suit longer-term plans. For advisers, the opportunity lies in helping clients identify eligible assets, document R&D activities, and adjust depreciation schedules to optimise cashflow.
Will tax reform be enough?
Most economists see the measures as a welcome stimulus, but not a cure-all. Germany’s competitiveness issues extend beyond taxation, encompassing energy costs, skills shortages, and regulatory hurdles. The newly created Federal Ministry for Digital and State Modernization (BMDS) faces the task of ensuring that fiscal incentives are matched by practical improvements in permitting and administration.
Still, the policy shift is significant. After years of incremental change, Germany is signalling a clearer intent to reward investment and innovation. Accountants and advisers are likely to play a central role in translating that intent into results – ensuring that firms understand both the opportunities and the compliance requirements.
As Wendland puts it: ‘The jury is out on Germany’s tax plans. But it’s a move in the right direction – a sign that policymakers finally want to make investment pay again.’
Germany’s ‘growth booster’ tax package at a glance
- Degressive depreciation: Temporary 30% declining-balance allowance for new machinery and equipment bought between July 2025 and December 2027. Allows firms to write-off more of an asset’s cost upfront to improve cashflow.
- Electric vehicle fleets: 75% first-year deduction for the cost of new EVs purchased between July 2025 and January 2028, encouraging firms to accelerate electrification.
- R&D tax credit expansion: Maximum annual benefit increased from €2.5m to €3m from 2026 to 2030; depreciation of materials used directly in R&D now qualifies.
- Corporate tax rate reduction: Federal rate to fall gradually from 15% to 10% by 2032, bringing Germany’s overall combined rate (including trade tax) to about 24%, close to the OECD average.
- Digital compliance: Introduction of mandatory e-invoicing for B2B transactions from 2025, part of wider efforts to digitalise the tax system and improve transparency.
