Germany faces EU infringement action over tax rules that claw back SME investment deductions when assets are moved to operations in other EU or EEA countries — a restriction the Commission says unlawfully penalises cross-border activity and undermines freedom of establishment across the Internal Market.
The European Commission has issued a letter of formal notice to Germany for non-compliance with EU rules on freedom of establishment, finding that the country’s SME investment deduction allowance may discriminate against cross-border investments within the EU and EEA, as outlined in its infringements package of 3 June 2026.
Commission calls on Germany to end discriminatory conditions of an investment deduction allowance for SMEs investing abroadÂ
The European Commission decided to open an infringement procedure by sending a letter of formal notice to Germany (INFR(2026)4006) for failing to comply with EU rules on freedom of establishment (Article 49 TFEU and Article 31 EEA). The Commission considers that Germany’s investment deduction allowance (Investitionsabzugsbetrag – IAB) discriminates against cross-border investments within the EU and EEA, unlawfully restricting companies’ ability to operate across the Internal Market. Under German tax law (§7g Einkommensteuergesetz), small and medium-sized enterprises (SMEs) can deduct up to 50% of anticipated investment costs for movable assets.
This is only the case if those assets are used exclusively in a domestic establishment. If the asset is transferred to a permanent establishment in another EU/EEA country within three years, the tax benefit is retroactively withdrawn. This penalises businesses that relocate assets or operations abroad, even when their worldwide income remains taxable in Germany.
The automatic reversal of tax benefits when assets are transferred abroad disproportionately affects SMEs, which often lack the resources to navigate complex cross-border tax implications. This negatively impacts economic dynamism, particularly in sectors reliant on mobile assets or international supply chains.
The Commission’s assessment concludes that these rules deter cross-border economic activity and violate the freedom of establishment. Germany’s rules also breach the EEA Agreement, which extends the same freedoms to EEA Member States.
The Commission is therefore sending a letter of formal notice to Germany, which now has two months to respond and address the shortcomings raised by the Commission. In the absence of a satisfactory response, the Commission may decide to issue a reasoned opinion.
