Special depreciation allowance for e-vehicles: an opportunity or a risk for leasing companies?

Will the special depreciation allowance become an investment incentive for e-mobility?

Germany has passed a law intended to provide targeted investment incentives. A key element of that law is tax incentives for companies to switch to electric vehicles.

The new law lays down the so-called “investment booster”, a new special depreciation allowance for battery-electric vehicles that are purchased between July 1, 2025 and December 31, 2027 and allocated to a company’s fixed assets. This special depreciation allowance will enable companies to write off a significant proportion of the acquisition costs as early as in the first year after purchase. This is supposed to substantially boost the willingness to invest in zero-emission mobility.^[1]

In more concrete terms, the law allows companies to write off the acquisition costs of an e-vehicle used for business purposes as follows^[2]:

• 75% in the year of purchase
• 10% in the following year
• 5% each in the third and fourth year
• 3% in the fifth year and 2% in the sixth year

The government’s goal is to boost net investments through tax incentives, especially among corporate customers. The measure is being introduced in an environment in which the previous funding instruments (e.g. the environmental bonus) have already expired.^[3]

Market distortion, risk exposure and impact on the balance sheet

For leasing companies and captives, however, the new special depreciation allowance presents not only opportunities but also challenges – both of a structural and accounting-related nature:

I) What impact will the depreciation allowance have?

The special depreciation allowance is only available to the beneficial owners of a vehicle. For traditional leasing contracts, this means:

• The lessees have no direct tax advantage, as the vehicle is not capitalized on their balance sheet.
• The lessors (i.e. the leasing companies themselves), on the other hand, are eligible for the special depreciation if the vehicle is capitalized as part of their fixed assets on their balance sheet.^[4]

This initially gives the leasing company an intertemporal tax advantage. However, the challenge is to translate this advantage into favorable terms for their customers in order to remain competitive compared to outright or hire purchase options. The extent to which the advantage can be passed on to the customers is illustrated by the following sample calculation.

Sample calculation:

In 2025, the most frequently registered electric passenger car in Germany is the VW ID.7,^[5] which currently costs around EUR 59,000 (gross) with mid-range trim.^[6] This corresponds to capitalized net acquisition costs of EUR 49,580. Based on the special depreciation allowance, a leasing company that purchases this VW ID.7 model at the beginning of the year would be able to write off the following amounts based on an average leasing term of 36 months^[7]:

1^st year: 75% of EUR 49,580 = EUR 37,185

2^nd year: 10% of EUR 49,580 = EUR 4,958

3^rd year: 5% of EUR 49,580 = EUR 2,479

Based on an average corporate tax rate of 30%^[8] (Note: the envisaged gradual reduction in corporate tax from 2028 onwards was not taken into account in the sample calculation) the following tax savings could be achieved:

1^st year: 30% of EUR 37,185 = EUR 11,155.50

2^nd year: 30% of EUR 4,958 = EUR 1,487.40

3^rd year: 30% of EUR 2,479 = EUR 743.70

Over the entire three-year period, this amounts to total tax savings of EUR 13,386.60. The carrying amount at the end of the term is EUR 4,958.

Under the previous regulation, the regular depreciation period for cars was six years, regardless of the type of drive,^[9] which corresponds to a straight-line depreciation rate of 16.67 % per year. In the above example, EUR 8,264.99 could be written off per year, resulting in annual tax savings of EUR 2,479.50. Over the overall leasing term of 36 months, this amounts to tax savings of EUR 7,438.49 and a carrying amount of EUR 24,785.04.

Over the 36-month term, the special depreciation therefore leads to different liquidity effects (tax advantages or disadvantages), depending on the year:

1^st year: EUR 11,155.50 – EUR 2,479.50 = EUR 8,676.00

2^nd year: EUR 1,487.40 – EUR 2,479.50 = EUR -992.10

3^rd year: EUR 743.70 – EUR 2,479.50 = EUR -1,735.80

If the vehicle is subsequently sold, residual value risks and the so-called depreciation recapture must be taken into account. According to the German automobile association ADAC, a comparable model (e.g. the VW ID.5 Pro Performance E2) with a mileage of 30,000 kilometers per year lost around 51% of its value between June 2022 and June 2025^[10] – from EUR 48,970 to EUR 23,800. By applying this ratio to the above example, we can estimate the market value of the ID.7 after three years: EUR 24,294.20.

This results in the following hidden reserves:

• For special depreciation: EUR 24,294.20 – EUR 4,958 = EUR 19,336.20
• For straight-line depreciation: EUR 24,294.20 – EUR 24,785 = EUR -490.84

These amounts are taxable as extraordinary income or expenses upon sale. Based on a 30%^[11] tax rate, this results in a depreciation recapture tax liability:

• Special depreciation: 30% of EUR 19,336.20 = EUR 5800.86
• Straight-line depreciation: 30% of EUR -490.84 = EUR -147.25

Comparing the liquidity effects over the entire term (Note: no intertemporal discounting was taken into account), the following effects can be calculated for the overall period:

• Special depreciation: EUR 13,386.60 – EUR 5800.86 = EUR 7,585.74
• Straight-line depreciation: EUR 7,438.49 + EUR 147.25 = EUR 7,585.74

As expected, the model calculation shows that the new special depreciation allowance for electric vehicles used for business purposes offers no permanent tax advantage. The early tax relief in the first few years is canceled out by a correspondingly higher taxable gain when the vehicle is sold later on. The depreciation recapture fully offsets the initial tax benefit. Over the period under review, the total tax burden remains identical to that of straight-line depreciation.

The only relevant factor is the postponement of the tax payment, i.e. the special depreciation allowance provides liquidity relief in the early phase.

This temporarily freed-up liquidity can be strategically used by capital market-oriented companies or leasing companies, e.g. for:

• short-term investments (interest advantage)
• reducing refinancing costs
• optimizing internal cash flow planning

For example, the additional tax savings in the first year amount to EUR 8,676 (EUR 11,115.50 for special depreciation compared to EUR 2,439.50 for straight-line depreciation). If this money is used for refinancing rather than external financing, an interest advantage of EUR 694.08 can be achieved over the remaining term of 24 months at a refinancing interest rate of 4% p.a. (EUR 347.04 per year). From the second year onwards, the higher straight-line depreciation (EUR 2,479.50 compared to EUR 1,487.40) results in an interest disadvantage of EUR -39.68.

Over the entire term of 36 months, these figures amount to a total interest advantage of EUR 654.40.

II) Does the special depreciation allowance increase the residual value risks?

In addition, the new special depreciation allowance is expected to lead to a sharp increase in commercial e-vehicle registrations starting in mid-2025. As a consequence,

• a large number of used e-vehicles will enter the market in 3–5 years.
• volatility in the residual value of electric vehicles is already evident today – particularly for vehicles whose technology does not really stand out or whose batteries are outdated.^[12]

For leasing companies that bear the residual value risk, this increases the uncertainty in the calculation of their leasing rates and thus also the need for risk buffers and remarketing strategies.

III) What effects will the special depreciation allowance have on prices for new cars and will it distort the market?

Another effect of the special depreciation allowance is the potential stabilization of prices for new cars: the greater attractiveness of new vehicles from a tax perspective should reduce the pressure on OEMs to offer discounts. Conversely, this means: fewer price reductions, higher entry costs – however, all things considered, the depreciation allowance reduces the buyers’ net burden on paper.

This has a critical consequence for leasing companies:

• Higher prices for new cars increase the initial investment.
• At the same time, future (residual) market values remain largely unaffected – as they are based on real used car prices, which are unaffected by tax effects.
• This results in a widening gap between the prices for new vehicles and the respective residual value, which significantly increases the residual value risk.

IV) Is there a shift in demand between leasing, buying, financing or hire purchase options?

With the prospect of a 75% special depreciation allowance, many companies might want to reassess their financing preferences. After all, only those who capitalize the vehicle on their own balance sheet – i.e. through direct or hire purchase or traditional financing – can benefit directly from the tax effect.

For leasing companies, this means that

• providers with a broad product range (e.g. financing, hire purchase and leasing) could merely experience an internal shift in demand – away from traditional leasing and towards hire purchase or traditional car financing, for example.
• Companies that only offer leasing, on the other hand, may be facing a considerable decline in business unless they expand their offering with alternative financing options.
• This affects in particular captives or leasing companies without a flexible product architecture that have so far focused exclusively on a pure leasing model.

The law will therefore become a strategic stress test for the product portfolios of many market participants. Those who do not offer alternatives to leasing risk losing market share in the medium term, not because their products are inferior, but because the tax mechanisms and customer benefits no longer align.

Strategic repositioning of leasing companies

Leasing providers are faced with the challenge of strategically adapting their business model in order to remain relevant in the new tax environment. Three strategic questions are of key importance:

I) Should the tax advantages be systematically passed on to the leasing customers via better terms?

Leasing companies should not see their own use of the depreciation allowance as a margin lever, but as a pricing advantage to sharpen their offerings. They could pursue various approaches, such as:

• translating the reduced refinancing costs into reduced leasing rates
• special bonuses or upfront credits to boost their conversion rate
• shorter contract terms to reduce uncertainties regarding the residual value and better reflect technological innovation cycles

Nevertheless, lessors can increase the attractiveness of their leasing offerings by passing on the tax advantages to their customers in the form of better contractual terms.

II) Are hire purchase or financing suitable supplementary business models?

Leasing companies are well advised to actively develop and position hire purchase and financing models alongside traditional leasing products.

Both models, hire purchase and traditional object financing, enable customers to:

• capitalize the vehicle on their own balance sheet and thus use the full write-off incl. the special depreciation allowance.
• securely plan their liquidity burden through regular installment payments
• easily acquire ownership of the car (in the case of hire purchase) or benefit from a clear ownership structure (in the case of financing)

For leasing companies, this opens up additional revenue streams and customer segments, even outside of traditional leasing.

III) Is a professionalization of residual value and remarketing management necessary?

Structured residual value risk management will be indispensable in the future:

• Conservative residual value approaches for calculating offers
• Diversification of marketing channels (e.g. export, secondary marketing, vehicle subscriptions)
• Digital valuation models and stress tests for forecasting resale values

In addition, extending vehicle use through second-life leasing can help to spread losses in value over longer periods and generate higher returns.
As an additional sales argument, lessors can offer their customers to take over the residual value risk and the associated uncertainty. The lessor may even benefit from such an agreement if the vehicle’s value develops in their favor. Nevertheless, for many customers, this is a decisive advantage over financing or hire purchase, as they do not have to bear any risks regarding the vehicle’s resale value.

Is the special depreciation allowance a wake-up call for leasing companies to realign their strategies?

The new special depreciation allowance represents a temporary market change – with immediate consequences for product portfolios, customer expectations and revenue models. For leasing companies, this not only means uncertainty, but also opens up new scope for strategic design.

Those who cleverly integrate the tax effects into their product logic, supplement their own product range with hire purchase and financing models and consistently align their residual value risk management with e-mobility can not only secure their market share, but also tap into new customer segments.

At the same time, one thing is clear: In addition to the financing component, the service offering is also gaining in strategic importance. Corporate customers, who in future are more likely to finance or hire-purchase, continue to expect the service components they’re used to – from maintenance and repair to tire, insurance or telematics services.

For captives and leasing companies in particular, whose business model has so far been strongly geared towards financial income and realization proceeds, this raises the question of the profitability of the service components. Many of these services are not cost-covering on their own or are only viable when bundled. In a market with growing margin pressure, this may necessitate a recalculation or strategic repositioning of the service offering.

The special depreciation allowance does not work in isolation; instead it influences the interplay of financing, product logic and customer benefits. Those who successfully adapt to these factors at an early stage can turn the tax regulation into a structural competitive advantage, not only through tax savings, but also through intelligent portfolio management.