Investment Allowance and Special Depreciation also Available to Foreign Entrepreneurs in Germany

Many small and medium-sized companies in Germany can benefit from tax incentives for investments. The two most important instruments are regulated in § 7g of the German Income Tax Act (EStG). The investment allowance (Investitionsabzugsbetrag – IAB) can be claimed before the investment, while the special depreciation (Sonderabschreibung) is available after the investment. Both tax reliefs are subject to a profit limit of € 200,000.

The Tax Incentives

With the investment allowance, up to 50% of the anticipated acquisition or production costs can be deducted from profit before the actual purchase. The special depreciation additionally allows up to 40% of the acquisition or production costs to be deducted in the year of acquisition and in the following four years. However, not all investments qualify. Only depreciable movable fixed assets are eligible.

Which investments qualify?

Eligible assets include machinery, vehicles, tools, shelves, technical equipment, and office furniture. Used assets can also qualify. Immovable assets and intangible assets such as software, licences, brands, or patents are generally not eligible. An important exception applies to so-called trivial software programs, which are treated as movable assets for tax purposes.

The €200,000 profit threshold

Both the investment allowance and the special depreciation are generally limited by a profit threshold of €200,000. For the investment allowance, the relevant year is the one in which the allowance is claimed. For special depreciation, the threshold must have been met in the year preceding the acquisition or production. This limit remained unchanged in 2026.

It is important to note that the decisive figure is not the commercial profit (handelsrechtlicher Jahresüberschuss), but the tax profit. According to a ruling by the Federal Fiscal Court (Bundesfinanzhof – BFH), extra-balance-sheet adjustments must also be taken into account — in particular, non-deductible trade tax. Companies whose profit is close to the €200,000 limit should therefore calculate very carefully.

Tax relief for foreign companies

In principle, foreign companies can also claim these incentives. The decisive factor is not the legal form, but how the company is treated for tax purposes in Germany. § 7g EStG applies to taxpayers with business income and can therefore also be used by sole proprietors, partnerships, and corporations.

This is particularly relevant for foreign companies with their place of management in Germany (Ort der Geschäftsleitung im Inland).

Limited Liability Companies (LLC)

An LLC can also benefit from § 7g EStG if it is classified in Germany not as a corporation but as a sole proprietor or partnership (Personengesellschaft). In this case, the same rules generally apply as for other partnerships. The key factor is the tax classification in Germany.

Important note

The decisive criterion is not the legal form, but the use of the asset. The law requires that the eligible asset must be used almost exclusively for business purposes in a domestic permanent establishment (inländische Betriebsstätte) at least until the end of the following financial year, or must be leased out accordingly. If a company is managed from Germany but the asset is actually used abroad, the tax relief cannot be claimed.

Simplification rule

There is also a small but practical relief: If the reduction in acquisition or production costs results in the asset being treated as a low-value asset (geringwertiges Wirtschaftsgut) or as part of a collective item (Sammelposten), the tax authorities will, for reasons of simplification, no longer separately examine the retention and use requirements. This can save considerable documentation effort in individual cases.

Author: Peter Scheller, Tax Advisor, Master of International Taxation, Specialist Advisor for Customs and Excise Duties

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