What is the investment tax credit (ITC) for photovoltaic systems?

The investment deduction under Section 7g of the German Income Tax Act (EStG) is one of the most powerful—and at the same time most frequently misunderstood—tools in German tax law, especially when it comes to photovoltaics. This article explains what the investment deduction really is (and what it is not), who can use it, and why it plays a special role in the context of PV systems.

As of May 2026.

This article is intended solely for general informational purposes and does not constitute investment, tax, or legal advice. For advice specific to your individual situation, please consult a licensed tax advisor. All information is provided without warranty.

  • The investment deduction (IAB) is a tax incentive under Section 7g of the German Income Tax Act (EStG) that allows business owners and self-employed individuals to deduct up to 50 percent of the estimated acquisition costs of a planned investment from their taxable income—before they have even made the purchase. For photovoltaic systems, it can be used without legal restrictions as long as the system is designated for business use as a movable asset and does not fall under the tax exemption provided for in Section 3 No. 72 of the German Income Tax Act (EStG)—typically for commercial systems exceeding 30 kWp per residential or commercial unit. Requirements: active operation generating business income, a profit threshold of €200,000 in the year of deduction, at least 90% business use, and an investment made within three years. If you are a business planning to install your own PV system or an investor who wants to know how the IAB turns a €100,000 investment into a tax deferral, you can find the detailed mechanics in our article on PV depreciation.

Table of Contents

  1. What is the investment deduction (IAB) under Section 7g of the Income Tax Act (EStG)?

  2. IAB, Special Depreciation, and Straight-Line Depreciation: A Comparison

  3. Who is eligible to use the IAB under Section 7g(1) of the Income Tax Act?

  4. IAB and Photovoltaics: The Unique Legal Situation

  5. Who, specifically, is the IAB suitable for in the field of photovoltaics?

  6. Three-year grace period before installing a photovoltaic system

  7. Current Legislative Developments 2024–2026

  8. Frequently Asked Questions (FAQ)

  9. Sources

Solar panels in the foreground in front of a farm with silos in the background; black-and-white photograph.

What is the investment deduction (IAB) under Section 7g of the Income Tax Act (EStG)?

The investment deduction is an off-balance-sheet reduction in taxable income, as provided for in Section 7g of the German Income Tax Act (EStG), of up to 50% of the estimated acquisition or production costs of a planned investment. It takes effect prior to the purchase and is therefore not a depreciation instrument in the technical sense, but rather an advance deferral of tax expenses.

The legal basis for the investment deduction for photovoltaic systems and other business assets is found in § 7g(1) of the Income Tax Act (EStG). The text of the law itself states in paragraph 1, sentence 1—slightly abridged—as follows: Taxpayers may deduct up to 50 percent of the expected acquisition or production costs for the future acquisition or production of depreciable movable fixed assets from their taxable income.¹ Thus, any company considering the purchase of a photovoltaic system in the near future can save on taxes by establishing the IAB as early as the current fiscal year—before a single module has even been installed.

Three Key Features of Education at the IAB

Three points are key here:

  • "Future" purchase: The IAB is established before the asset exists. You plan the investment—and reduce your taxable income right now.

  • “Up to 50 percent”: This deduction is a maximum limit, not a mandatory amount. Taxpayers may also set up the IAB at a rate of only 30% or 20% under Section 7g of the Income Tax Act (EStG)—depending on how much of their tax burden they wish to defer in the year the IAB is established.

  • “Deduction reducing profit”: The deduction is recorded off-balance-sheet as an adjusting entry—it is therefore not a straight-line depreciation within the meaning of § 7 of the German Income Tax Act (EStG), which reflects an actual loss of value.

From the previous version to the current version of § 7g of the Income Tax Act

The IAB was introduced in 2008 by the Corporate Tax Reform Act, thereby replacing the older “accumulated depreciation” system, which had previously functioned as a balance sheet reserve. Since then, Section 7g of the Income Tax Act (EStG) has been reformed several times: With the 2020 Annual Tax Act (JStG 2020), the advance deduction rate was raised from 40% to 50% and the profit threshold was uniformly set at 200,000 euros. The Growth Opportunities Act of 2024 increased the separate special depreciation rate in Section 7g(5) of the Income Tax Act from 20% to 40%—but left the IAB itself (paragraphs 1–4) unchanged.² In the wake of the energy transition and the massive expansion of renewable energies, this instrument has gained significant importance for commercial photovoltaic investments and specific PV projects—even a large-scale photovoltaic investment covering several hectares of open land falls within the scope of Section 7g of the German Income Tax Act (EStG).

IAB, Special Depreciation, and Straight-Line Depreciation: A Comparison

The IAB is not a depreciation method, but rather an upfront deduction. It applies before the asset even exists. Special depreciation, declining-balance depreciation, and straight-line depreciation, on the other hand, apply only after the asset is acquired, over its useful life.

The most common misconception is that the IAB is a form of “accelerated depreciation.” While this makes sense linguistically, it is legally incorrect. Anyone who wants to clearly distinguish the various tax instruments related to a photovoltaic system must understand four key terms: IAB, special depreciation, declining-balance depreciation, and straight-line depreciation. A look at the key differences makes it clear why the IAB occupies a special position:

Distinction: IAB vs. Depreciation Methods for Photovoltaic Systems — As of May 2026
Source: § 7g EStG, § 7 EStG, BMF Letter dated June 15, 2022, Growth Opportunities Act (BGBl. I 2024 No. 108), Immediate Investment Program (BGBl. I 2025 No. 161)
Instrument legal norm Effect Date and time
IAB § 7g, paras. 1–4 of the Income Tax Act Off-balance-sheet write-down of up to 50% of the estimated acquisition cost before purchasing
Special Depreciation under Section 7g § 7g(5) of the Income Tax Act Additional depreciation of up to 40% (effective 2024) in the year of acquisition and the following 4 years
Declining-balance depreciation § 7(2) of the Income Tax Act Three times the straight-line depreciation rate, capped at 30%; for PV (20-year useful life), effectively a maximum of 15% per year of the residual value over the useful life (for fiscal year July 1, 2025–December 31, 2027)
Straight-line depreciation § 7(1) of the Income Tax Act Even distribution over the useful life from the date of purchase (typical annual depreciation rate of 5%)
Conceptual Overview. You can find worked examples of tax deferral and the mechanics of combining tax benefits in the article on PV depreciation.

The terminology was chosen deliberately: “investment deduction”—not “investment depreciation.” In 2008, the legislature wanted to emphasize that this is purely an off-balance-sheet deduction, not the recognition of an impairment on the balance sheet. The terms “advance depreciation” or “accelerated depreciation” are therefore common in everyday language but legally imprecise.

Special depreciation under § 7g(5) of the Income Tax Act

The special depreciation allowance is the natural follow-up measure to the IAB: Once the photovoltaic system has been purchased, businesses may deduct up to an additional 40% of the tax base as a special depreciation allowance within the year of purchase and the four subsequent years—distributed at their discretion. Important: The €200,000 profit limit and the 90% utilization rate apply to Section 7g(5) just as they do to the advance deduction under Section 7g(1).

Straight-line depreciation and normal useful life

Straight-line depreciation (Section 7(1) of the German Income Tax Act) constitutes the standard depreciation, which is applied in addition to the initial accelerated depreciation (IAB) and special depreciation. For photovoltaic systems, the official depreciation table assumes a standard useful life of 20 years—which corresponds to a 5% straight-line depreciation rate per year. Only the combination of the upfront deduction, special depreciation, and straight-line depreciation fully leverages the tax benefits of Section 7g of the Income Tax Act (EStG) for photovoltaic systems.

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In practical application for photovoltaic systems, tax advisors regularly combine the IAB with the special depreciation under Section 7g(5) of the German Income Tax Act (EStG) and straight-line depreciation over the standard useful life of 20 years—the ability to use all three instruments in parallel is what makes the leverage provided by Section 7g EStG so attractive for photovoltaic systems. Our article on PV depreciation, featuring a detailed practical example, illustrates how the individual steps interlock.