Germany’s coalition government has announced a significant extension of the tax exemption for new electric vehicles until 2035, aiming to bolster the automotive industry amidst rising global competition and industry restructuring.

Germany’s coalition government has announced a significant extension of the tax exemption for new electric vehicles (EVs). This move aims to support the country’s vital automotive industry as it continues its transition toward cleaner technologies. According to Maximilian Kall, a spokesperson for the finance ministry, Finance Minister Lars Klingbeil will soon introduce a draft law to keep the current EV tax exemption in place until 2035. This aligns with the coalition agreement reached between Chancellor Friedrich Merz’s conservatives and Klingbeil’s Social Democrat Party (SPD), signaling a strong governmental commitment to promoting electric mobility across Germany.

Klingbeil, who is also vice chancellor, emphasized the need for effective incentives to increase EV adoption. Speaking to the dpa news agency, he stated: “To get significantly more electric cars on the road in the coming years, we need to set the right incentives now.” This announcement comes ahead of an upcoming “car summit” scheduled for October 9, where government officials, automotive industry leaders, and labor representatives will convene at the chancellery. The summit will explore ways to help the industry navigate challenges such as rising Chinese competition, U.S. trade tariffs, and escalating energy costs.

Recently, several major industry developments have raised concerns about Germany’s auto sector health. Volkswagen AG has announced plans to reduce production, while Robert Bosch GmbH intends to cut around 13,000 jobs. Additionally, ZF Friedrichshafen AG revealed it will eliminate approximately 7,600 jobs in its electrified drivetrain division as part of a restructuring effort prompted by declining demand. These developments underscore the impact of industry slowdowns on Europe’s largest economy. Klingbeil framed the policy extension as part of a broader strategy to ensure Germany’s automotive industry remains competitive and that jobs are protected. He noted, “We want the best cars to continue to be made in Germany.” The government estimates that extending the EV exemption could result in a revenue loss of about €600 million through 2029, but officials see this as a worthwhile investment in industry sustainability.

However, the policy has sparked debates within the coalition. Some SPD members, including Environment Minister Carsten Schneider, have expressed reservations about prolonging the exemption. Despite this, expectations are that the SPD will support the measure in upcoming coalition discussions. Olaf Lies, the SPD premier of Lower Saxony and a VW shareholder, has voiced skepticism regarding the 2035 deadline for phasing out combustion engines. He argues that it’s probably unrealistic to rely solely on electric vehicles by then, advocating instead for continued permits for hybrid systems and vehicles with range extenders, as well as the inclusion of alternative fuels beyond 2035. Such positions reflect industry concerns about whether sufficient infrastructure and technology will be ready for a full EV transition within the established timeframe.

In the broader international context, Germany faces stiff competition from China, especially as Chinese autonomous vehicle and EV firms expand rapidly into Europe. Chinese companies like QCraft, DeepRoute.ai, and Momenta are establishing European headquarters, forming partnerships with local and Chinese automakers, and conducting road tests of autonomous systems. With over half of new cars on Chinese roads featuring autonomous technologies, China aims for global leadership in this field. While Europe offers a more fragmented regulatory environment—creating both opportunities and challenges—certain startups call for stronger regulations and protective measures. The recent Munich auto show showcased several Chinese autonomous tech companies alongside EV makers, demonstrating their low-cost, advanced offerings. Driven by a saturated domestic market and price advantages, Chinese firms are leading in high-level autonomy already operational within Chinese cities. Conversely, Europe’s autonomous infrastructure remains under development, with strict regulations limiting public deployment. The European Commission is working toward harmonized regulations to facilitate broader rollouts and enhance Europe’s competitive position globally. European firms are under pressure to accelerate development or risk falling behind in the autonomous vehicle race.

Meanwhile, Germany has launched a €6 billion industrial decarbonization program to complement its automotive sector efforts. The initiative includes promoting carbon capture and storage (CCS) technology, targeting energy-intensive sectors such as steel, chemicals, cement, and glass manufacturing. The program offers 15-year contracts to subsidize firms transitioning to cleaner processes, aiming to buffer them from volatile energy and carbon costs. Companies can apply for the upcoming 2026 bidding round until December 1, pending approval by parliament and the EU. Industry groups have welcomed the move, praising its pragmatic approach to balancing environmental goals with industrial competitiveness. Overall, these measures form part of a wider plan to modernize and green Germany’s industrial landscape, safeguarding jobs and fostering innovation.

The government led by Chancellor Friedrich Merz is also implementing broad reforms to improve bureaucratic efficiency and digitalization. These reforms aim to streamline vehicle registration, business formation, visa procedures, and court processes through increased use of AI and digital services. The agenda is projected to save up to €16 billion by reducing bureaucratic burdens by 25%. Additionally, legislation to develop a nuclear fusion reactor with €1.7 billion in funding has been approved, alongside measures to accelerate hydrogen infrastructure development. Merz’s administration emphasizes shifting toward proactive investments in infrastructure and technology to restore Germany’s economic leadership, moving beyond traditional fiscal conservatism.

Within the coalition, discussions are ongoing about protective measures for European industry. The SPD has called for a stronger “buy European” policy and the adoption of tariff quota systems to curb excess steel imports, especially from China and Russian sources via Turkey. These proposals aim to promote fair competition without resorting to full protectionism, addressing concerns over unfair global trade practices. This stance reflects broader fears over industrial decline in regions where the SPD has lost electoral support to far-right parties. The upcoming steel summit, convened by Merz involving industry, unions, and regional officials, is expected to shape policy in this area.

In economic policy, the German Bundestag recently approved a nearly €46 billion tax relief package, dubbed the “Investment Booster,” designed to revitalize growth after two years of contraction. The law includes incentives such as improved depreciation options—up to 30% for general investments and 75% for electric vehicles—and a planned reduction in corporate tax rates from 2028 to a flat 10% by 2032. While some federal states have raised concerns over potential tax shortfalls, support from the federal government and coalition partners suggests parliamentary approval is forthcoming, with final approval expected on July 11. To address revenue concerns, the government has committed to covering a significant portion of shortfalls, demonstrating a proactive approach to economic recovery.

In sum, extending the EV tax exemption to 2035 is a key element within Germany’s broader strategy to balance climate goals, industrial competitiveness, and job security amid a rapidly shifting technological and geopolitical landscape. The upcoming car summit will be a critical moment for defining the country’s future direction in the global automotive industry, as Germany aims to remain a leading player in the electrified and autonomous vehicle sectors.

Source: Noah Wire Services