08 July 2025 EU Commission recommends tax incentives to support Clean Industrial Deal
On 2 July 2025, the European Commission (Commission) released a nonbinding Recommendation on Tax Incentives (Recommendation) to European Union (EU) Member States in support of the Clean Industrial Deal, which was adopted on 26 February 2025. The Recommendation aims at stimulating private investment in clean technologies and industrial decarbonization and supplements the Clean Industrial Deal State Aid Framework, adopted on 25 June 2025. The Commission suggests two primary instruments that Member States can consider in encouraging clean investment: (1) targeted tax credits and (2) accelerated depreciation (up to immediate expensing). On 29 January 2025, the Commission published the Communication "A Competitiveness Compass for Europe," which follows up on the so-called Draghi Report and sets out priority actions to revive economic dynamism in the European Union. It proposes the flagship actions for three "transformational imperatives" or "pillars" to boost competitiveness and complementary actions on horizontal enablers that should be taken across all the sectors. It sets out three transformational imperatives to strengthen competitiveness: (1) closing the innovation gap; (2) establishing a joint roadmap for decarbonization and competitiveness; and (3) reducing excessive dependencies and increasing security. (For background, see EY Global Tax Alert,European Commission announces initiatives to improve competitiveness and adopts 2025 Work Programme, dated 25 February 2025.) On 26 February 2025, the Commission released the Clean Industrial Deal (CID) along with a Q&A and a factsheet with the aim of supporting the competitiveness and resilience of the EU industry and accelerating decarbonization, with a particular focus on energy-intensive industries and the clean-tech sector. The CID is based on six core business drivers, which shall all be supplemented through simplification measures: (1) affordable energy, (2) lead markets, (3) financing, (4) circularity and access to materials, (5) global markets and international partnerships and (6) skills. These should be complemented by actions on horizontal enablers with the aim of enhancing the competitiveness of the economy, such as cutting red tape and fully exploiting the scale of the Single Market. In the CID, the Commission notes that tax policies are a key incentive to reach the objectives of the deal. More specifically, the Commission recognized that tax incentives are a key instrument to encourage companies to invest in clean assets and technologies that are strategic for the transition towards a decarbonized and circular economy. Therefore, the Commission committed to "recommend to Member States that their corporate tax systems support a clean business case," including the introduction of targeted tax incentives. Also, to ease the introduction of tax and non-tax incentives, the Commission developed a CID State Aid Framework (CISAF) to enable simplified and quicker approval of State aid measures for the roll-out of renewable energy, while preserving a level playing field. The Commission recommended the announcements and proposals included in the CID are implemented by Member States by 2025 — 2026. As part of the CID implementation package, the Commission took several actions, including the following. On 25 June 2025, the Commission adopted a new State aid framework, complementing the CID, which aims to accelerate the EU's shift toward clean energy and decarbonization. The CISAF replaces the Temporary Crisis and Transition Framework (TCTF) aligning with the Net-Zero Industry Act. CISAF adds to the existing general EU State aid rules and essentially set out the conditions under which Member States can grant aid for clean energy, industrial decarbonization and clean tech manufacturing. Specifically, the framework lists conditions under which the Commission will consider State aid compatible with the internal market under Article 107(3)(c) TFEU. CISAF covers five main sectors: (1) the rollout of renewable energy and low-carbon fuels; (2) temporary electricity price support for energy-intensive users; (3) decarbonization of existing industrial facilities; (4) expansion of clean technology manufacturing capabilities within the EU; and (5) de-risking investments in clean energy, decarbonization and energy infrastructure, as well as supporting the circular economy. Although the Framework itself does not include tax recommendations, CISAF encourages the use of nonselective tax incentives (e.g., accelerated depreciation). Additionally, selective tax advantages must comply with State aid rules and be notified. As for all forms of aid under the relevant rules, transparency rules require Member States to publicly disclose aid exceeding €100k within one year of the tax filing. Member States are also encouraged to consider tax solidarity factors and may exclude from State aid measures entities that use tax havens for tax purposes. The CISAF is in force as of its publication and will remain in force until 31 December 2030, with the aim to offer businesses and Member States greater predictability. On 2 July 2025, the Commission released a Recommendation on Tax Incentives to support the CID, analyzed below in further detail. The Commission considers tax incentives as one of the key elements, among other policy measures, to establish a business case for decarbonized products. The content of the Recommendation has been informed by targeted consultations with the Member States, stakeholders from specific sectors that are important for delivering on the objectives of the CID and responses to the public consultation carried out for CISAF, which included feedback on the tax incentives set out in this Recommendation. This Recommendation sets out common guiding principles to guide Member States when introducing tax incentives to contribute to the objectives of the CID, focusing primarily on policy options linked to corporate income tax. These guiding principles aim at increasing legal certainty and enabling a level playing field between companies across the internal market. Based on these guiding principles, the tax incentives that the Recommendation suggests using should (1) be cost effective, (2) be well targeted, (3) be simple for companies and administrations to understand and use, and (4) provide certain and timely support to firms making clean investment decisions. When State aid is involved, Member States should refer to CISAF's compatibility rules, as CISAF also covers tax measures. The Recommendation should be interpreted alongside CISAF and any future amendments or related State aid regulations. Member States are encouraged to reduce administrative burdens related to the use of tax incentives, while designing them in a way that ascertains that companies will be able to take advantage of the full value of the incentive in a timely fashion when making their investment decision. The Recommendation suggests two primary instruments that Member States can consider in stimulating private investment in clean technologies and industrial decarbonization.
The Commission recommends that Member States provide tax relief in the form of a tax credit for investment projects that create additional manufacturing capacity for final products, main specific components and critical raw materials. The Recommendation specifies that tax credits may not exceed €150m per project and the maximum aid intensity (i.e., total aid as a percentage of eligible costs) of 15% of eligible costs for projects outside assisted areas, with higher limits for projects in specific assisted areas. The Commission also encourages Member States to consider "enhanced tax credits" if their investment projects contribute to resilience policy objectives. The Commission equally recommends that Member States create incentives for and provide tax relief in the form of a tax credit for investments that reduce greenhouse gas emissions or improve the energy efficiency of industrial activities. The tax credit for eligible costs should first reduce the taxpayer's corporate tax liability. If unused in the relevant tax year, Member States are encouraged to allow a four-year carryforward of the remaining credit and, where possible within their national system, allow offsets against other national taxes. If the carryforward is applied and the tax credit is still not exhausted within four years, due to a loss or reduced taxable profits in the relevant period, Member States are encouraged to refund the outstanding amount to the taxpayer. Where applicable, such refunding must respect the provisions regarding qualified refundable tax credits set out in the Minimum Tax Directive. (See EY Global Tax Alert, EU Member States unanimously adopt Directive implementing Pillar Two Global Minimum Tax rules, dated 15 December 2024.)
The Commission also recommends that Member States provide relief for income taxation purposes in the form of accelerated depreciation, up to full and immediate expensing, of costs incurred in a tax period for the acquisition or lease of clean technology equipment, as defined under the CISAF. When implementing this particular recommendation, Member States are encouraged to prioritize the full and immediate depreciation of such costs or the highest depreciation rate allowed under the national taxation (primary option). Through immediate expensing taxpayers are entitled to recognize the whole depreciable amount as a deduction for taxation purposes in the tax year in which the investment is made. This reduces the company's taxable base in the tax year of the investment, thus leading to a lower tax liability and providing additional cash flow for possible investments. Where the primary option (full immediate expensing) is not allowed, Member States are recommended to allow that an amount equal to at least 30% of the eligible costs can be expensed in the year of acquisition. Member States are encouraged to provide the most generous form of accelerated depreciation for the referred acquisition or lease costs. Where applicable, accelerated depreciation should be accompanied by appropriate rules for carrying losses forward. The Commission also recommends Member States to grant taxpayers flexibility in the form of "discretionary depreciation," allowing them to opt to apply either the standard depreciation rules, accelerated depreciation to the total depreciable amount of those assets, or accelerated depreciation to only a fraction of that amount. The Commission has also added a specific recommendation for Member States to consider making zero-emission vehicles for corporate fleets eligible for accelerated depreciation. Finally, the Commission encourages Member States to provide the most generous form of accelerated depreciation where the acquisition or lease contributes to resilience. The Commission has also made suggestions to reduce "tax gaps" caused by temporary or permanent fiscal costs derived from the use of tax incentives. The Commission suggests conducting tax-benefit assessments of existing tax expenditures, with a possible focus on measures that may not align with European environmental commitments. As for next steps, Member States are invited to inform the Commission of national measures taken to implement this Recommendation and on their actual use by taxpayers by 31 December 2025. An evaluation of the effectiveness of tax incentives should be carried out regularly. The Commission will facilitate best practice exchanges and monitor and report on how tax incentives promote clean investment and support the CID's goals to enhance effectiveness of the tax incentives. The attention paid to tax incentives seems to reflect the Commission's acknowledgement that these incentives are crucial to facilitating decarbonization of European industry as well as enhancing EU businesses' competitiveness. In fact, tax incentives can help mitigate the risk of investment leakage to jurisdictions with more favorable conditions, encourage innovation and support strategic sectors in line with EU policy goals such as the green and digital transitions. In this way, the Commission seeks to balance the integrity of the single market and fair competition with the practical necessity of supporting EU businesses in a highly competitive global environment. At the same time, Commission Recommendations are issued under Article 292 Treaty on the Functioning of the European Union and are not legally binding on Member States. It will be up to the Member States to consider adoption of tax incentives to support the CID ambitions. As the Commission indicates, Member States will also have to consider the treatment of tax incentives under the minimum tax rules.
Document ID: 2025-1398 | ||||||
