Save Tax with the Investment Deduction Allowance (IAB)

Are you planning to purchase a company car, machinery, a computer or other business assets in the next few years?
If so, you may be able to save tax before making the purchase.

1. What is the investment deduction allowance?

In simple terms, small and medium-sized businesses can deduct part of the anticipated cost of planned investments for tax purposes before making the investment. This reduces taxable profit and, in many cases, the current tax liability.

2. Which assets qualify?

Eligible assets are depreciable, movable fixed assets that:

  • are purchased or manufactured;
  • are expected to remain in a permanent establishment in Germany until at least the end of the financial year following their acquisition; and
  • are used exclusively or almost exclusively for business purposes (at least 90% business use).

Examples include:

  • Machinery
  • Office furniture and business equipment
  • Computers and servers
  • Company vehicles (provided the business-use requirements are met)

Land, buildings and intangible assets, in particular, do not qualify.

3. How much can be deducted?

Up to 50% of the anticipated acquisition or production costs can be deducted from taxable profit (section 7g(1), sentence 1 of the German Income Tax Act, EStG).

Example: A business plans to purchase a production machine costing €80,000.

  • Anticipated acquisition cost: €80,000
  • Potential investment deduction allowance (50%): €40,000

Taxable profit is reduced by €40,000. Depending on the applicable tax rate, this can provide a substantial cash flow benefit.

4. What is the deadline for making the investment?

The investment must be made by the end of the third financial year following the financial year in which the investment deduction allowance was claimed. If the investment is not made within this period, or if the statutory requirements are not met, the deduction must be reversed (section 7g(3) EStG).

Our Innova tip:

Have your eligibility checked early! The investment deduction allowance should be considered well before the annual financial statements are prepared. Early tax planning allows you to structure investments effectively and make full use of the tax benefits available under section 7g EStG.

Personalised tax advice can help you make the most of these benefits and avoid additional tax payments later.

Sources:
German Federal Ministry of Finance (BMF) circular dated 15 June 2022 | Federal Tax Gazette, Part I, 2022, p. 945
Section 7g of the German Income Tax Act (EStG)
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