Executive summary

On 18 July 2025, the Act for an immediate tax investment program to strengthen Germany as a business location was published in the German Federal Gazette, thereby enacting the law, which is effective upon enactment. The law aims to boost investment by providing declining balance depreciation and a gradual reduction of the corporate income tax rate. Both measures, along with several others, are intended to make investments in German more attractive and accelerate investment.

The most significant measures implemented include:

• Reduction of corporate income tax rate over five years by one percentage point per year, starting in the 2028 tax period to a final rate of 10% as of 2032
• Expansion of the research allowance as of 2026:
• Expansion of the maximum assessment basis by €2m to €12m
• Introduction of a flat-rate overhead surcharge of 20%
• Increase in the hourly rate for own contributions
• Introduction of a declining balance depreciation rate of up to 30% for investments in movable fixed assets made between 1 July 2025, and 31 December 2027
• Reduction of the (optional) retention tax rate for non-withdrawn partnership profits in three steps to 25% from the 2032 tax year
• Increase in the cap for the gross list price from €70k to €100k for company car taxation for electric vehicles (rate of 0.25%)
• Introduction of a temporary accelerated declining balance depreciation for electric vehicles

Detailed discussion

Reduction of corporate income tax rate & implication on deferred taxes

The corporate income tax rate is reduced by one percentage point per year over the course of five years, starting in the 2028 tax year. This will reduce the corporate income tax burden by five percentage points in the long term, resulting in a 10% corporate rate on taxable income from 2032 onward.

Overall, the relief for companies will actually be slightly higher, as the solidarity surcharge is based on the corporate income tax assessed in the same assessment period. Combined, companies will see a reduction of approximately 5.3% from 2032 onward, resulting in an average overall tax rate of approximately 24.55% including Trade Tax.

The gradual reduction in corporate income tax will also affect deferred taxes. This means that the reversal date of the temporary difference must be forecasted and, based on this, existing deferred taxes must be revalued. Hence, a significant increase in the complexity of calculating deferred taxes is to be expected in practice.

The adjustments must also be made on short notice. From the perspective of the German Commercial Code (HGB), changes to individual tax rates must be taken into account if the Bundesrat (i.e., the Federal Counsel) has given its approval before or on the balance sheet date. Under International Financial Reporting Standards (IFRS), deferred taxes must generally be revalued as soon as the relevant law has been "substantially enacted" (see IAS 12.47 ff.). In this case, too, the approval of the Bundesrat on 11 July 2025 is decisive.

Expansion of the research allowance

With the Growth Opportunities Act, enacted in 2024, the maximum base for the research allowance was recently increased to €10m for eligible expenses incurred after 27 March 2024. The maximum assessment basis is now further increased to €12m for eligible expenses incurred after 31 December 2025. This increases the maximum research allowance that can be obtained per year to €3m. Small and medium-sized enterprises (SMEs) within the meaning of the SME definition in Annex I of the General Block Exemption Regulation ((EU) No. 651/2014) may apply for up to €4.2m in research allowances per year going forward due to the increase in the maximum assessment basis in conjunction with the 10% SME bonus introduced in the Growth Opportunities Act.

In addition, research and development projects beginning after 31 December 2025 will, for the first time, be eligible for a flat-rate surcharge for certain overhead and other operating costs. If a taxpayer claims, for example, €1m in eligible personnel expenses, this would be included in the calculation of the research allowance at a value of €1.2m due to the surcharge (although the maximum assessment basis of €12m cannot be exceeded).

Furthermore, adjustments are made to eligible contributions of sole proprietors and to the remuneration of partners in a partnership. The hourly wage that may be taken into account in this context will be increased from €70 to €100 per hour as of 1 January 2026. In both cases, the remuneration remains limited to a maximum of 40 hours per week.

Declining balance depreciation rate of for investments in movable fixed assets

A declining balance depreciation rate of up to 30% will be introduced for 2025, 2026 and 2027. As in the past, declining balance depreciation will be granted for depreciable movable fixed assets. This means that operating equipment, vehicles, office equipment and similar assets purchased or manufactured after 30 June 2025 and before 1 January 2028 are eligible, but real estate and intangible assets are not. In contrast to straight-line amortization, declining balance depreciation is calculated using a fixed percentage of the residual book value of the asset. The percentage cannot not exceed three times the respective straight-line depreciation rate and cannot exceed 30%.

Declining balance depreciation is generally advantageous for assets with a useful life of four years or more, as deductions are accelerated. Extraordinary impairments may not be claimed if the declining balance method of depreciation is used.

Changes in reinvestment allowance for partnership profits

The aim of the reinvestment allowance in Section 34a of the German Income Tax Act (EStG) is to achieve a tax burden on income for sole proprietors and partnerships that is comparable to that of corporations. To relieve partnerships from being taxed on undistributed profits in line with the reduction of the corporate tax rate, there will be a parallel reduction in the tax rate for partnerships from 2028.

For simplification reasons and because the retained earnings' tax relief is not taken into account in the advance payment procedure, the reduction is planned here in three stages instead of five. The retained earnings tax rate is:

1. 27% for the 2028 and 2029 assessment periods
2. 26% for the 2030 and 2031 assessment periods
3. 25% from the 2032 assessment period onward

In addition, if the relevant income thresholds are exceeded, a solidarity surcharge applies. It remains to be seen whether further changes will be made to this rule during the legislative period or whether the federal government views the reduction in the retained earnings tax rate as fulfilling the agreement made in the coalition agreement (which outlines key policies and objectives agreed upon by the governing parties CDU/CSU and SPD) to significantly improve the regulation.

Promotion of e-mobility

The law implements measures to increase the attractiveness of e-mobility (i.e., development and promotion of electric vehicles and other sustainable transportation). Both measures were contemplated in a similar form within in the 2024 Tax Development Act but were removed from the bill during the legislative process.

When using, for private purposes, a company car that does not emit CO2 (fully electric vehicles, fuel cell vehicles), only 25% of the assessment basis (gross list price) is used to calculate the fringe benefit when applying the 1% rule and when applying the logbook rule, only 25% of the acquisition costs or comparable expenses are used.

This price limit for vehicles subject to the beneficial treatment of electric vehicles has been increased from €70,000 to €100,000 for vehicles purchased after 30 June 2025 but before 1 January 2031. For vehicles exceeding the price limit, a tax advantage compared to vehicles with combustion engines is still available and reduces the assessment basis to 50% (rather than 25% for vehicles within the limit).

Implications

The recent tax reforms in Germany, including the reduction of the corporate income tax rate and enhanced research allowances, present significant opportunities for multinational enterprises to improve their tax positions and enhance investment strategies, with the goal of making Germany a more attractive location for future business operations.