European Commission's recommendation on tax incentives to support the Clean Industrial Deal

Background – the Clean Industrial Deal

The Clean Industrial Deal aims at reaching the EU’s 2040 climate target of a 90% net reduction in greenhouse gas emissions, while reducing the dependency on non-EU Member States for raw materials. The European Commission announced in the Clean Industrial Deal that it would provide a recommendation on tax incentives for the Member States to achieve these goals. We refer to our earlier publications here and here on this topic for more details.

The recommendation

The recommendation provides practical guidance to Member States on how to align their tax systems with the EU’s climate and industrial objectives. The design of tax incentives is intended to ensure that businesses receive timely and meaningful benefits from investment decisions in support of the green transition.

The European Commission proposes two key tax incentives in the recommendation:

1. Accelerated tax depreciation for clean investments
2. Tax credits for clean investments

These tax incentives are meant to apply only to clean technologies and industrial decarbonization. Consequently, certain investments such as fossil fuel-related investments are explicitly excluded from its scope.

The recommendation is not legally binding, but it is meant to guide tax policy preparations in the Member States. It establishes a set of common guiding principles for Member States to follow when designing and implementing tax incentives for clean investments. The recommendation complements the Clean Industrial State Aid Framework (CISAF), which sets out how Member States can design state aid measures to support the same objectives.

Accelerated tax depreciation for clean investments

A key component of the recommendation is the use of accelerated tax depreciation and immediate expensing in relation to costs incurred in the acquisition or lease of clean technology equipment. Accelerated depreciation provides taxpayers with a cash flow advantage and prevents the negative impact of corporate income tax liabilities on investment decisions (i.e. more cash remains available for new immediate investments in the early phases of a project).

The European Commission suggests Member States should prioritise the full and immediate depreciation of investments or, alternatively, apply the highest depreciation rate allowed under their domestic taxation rules. However, taxpayers could be granted the flexibility in applying accelerated depreciation of relevant investments, allowing them to decide on the depreciation schedule (also referred to as ‘discretionary depreciation’). Where full immediate expensing would not be possible, an amount equal to at least 30% of the eligible investments should be allowed to be expensed in the year of acquisition. Lastly, Member States should consider accelerated depreciation for zero-emission vehicles used in corporate fleets.

To prevent state aid rules from applying to the new accelerated depreciation and immediate expensing measures, the CISAF recommends certain conditions: 

• The investments must be made in new assets and used primarily for the taxpayer’s activities. 
• No gross subsidy or grant equivalent needs to be calculated and the accelerated depreciation can be provided in addition to any other state aid, or support from centrally managed EU funds, in relation to the same eligible costs.
• Immediate expensing should not apply to investments in assets that may only be depreciated over a period of more than 15 years. 

Tax credits for clean investments

Another key component of the recommendation is the introduction of tax relief in the form of a tax credit, aimed at enhancing the attractiveness of clean investments. Member States should incentivize and provide tax credits for investments that contribute to reducing greenhouse gas emissions or improving the energy efficiency of industrial activities. Tax credits should also be provided for initiatives that expand manufacturing capacity in clean technologies and promote industrial decarbonisation.

A “tax credit” is an amount equal to a percentage of the “eligible costs” that can be deducted from the corporate income tax due from the taxpayer in a given tax year (i.e., it should lead to a direct cash saving). Member States may also allow taxpayers to offset tax credits against other national taxes due.

If the tax credit is not fully used in the relevant tax year, a carry-forward of the unused amount of the tax credit should be allowed up to four years. The recommendation also suggests making tax credits refundable if the tax credit is not exhausted within four years (with reference to the treatment of qualified refundable tax credits under the EU’s Pillar 2 Directive). 

Without affecting the existing compatibility rules in the CISAF, Member States are encouraged to design tax credits for investment projects that support resilience goals, provided they comply with EU and international law. These credits may be increased if the project meets certain criteria, such as:

• Producing a net-zero product or key component currently reliant on a single third country;
• Being recognized as a strategic project under EU Regulation 2024/1735 or 2024/1252;
• Being located in a designated net-zero technology acceleration valley; and
• Receiving a ‘Sovereignty Seal’ under the Innovation Fund.

For investment projects that create additional manufacturing capacity for final products, key components, or critical raw materials for clean technologies, the tax credit is subject to conditions by the CISAF to prevent state aid issues: 

• The tax credit should not exceed EUR 150 million per project and the maximum aid intensity of 15% of the eligible costs when the investment project takes place outside assisted areas. 
• The tax credit should not exceed EUR 200 million or EUR 350 million per project and the maximum aid intensity of 20%, or respectively 35%, of the eligible costs when the investment project takes place in certain specific assisted areas. 

The recommendation mentions that the impact of tax credits on boosting productive investment depends on how they are designed (e.g. the level of support and flexibility) and the broader economic context. Because tax credits could function similarly to grants, the European Commission cautions Member States to carefully assess which option is more suitable for supporting investment to support the green transition.

Next steps

As a next step, the European Commission invites Member States to notify them by 31 December 2025 of any recommendation measures they have introduced or announced to implement as well as of any similar measures already in place. We will continue monitoring any relevant developments.