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Profit determination8 min read

Depreciation (AfA)

Short definition

Depreciation – in tax law called "Absetzung für Abnutzung" (AfA) – spreads the cost of an asset over its useful life across several years. It reduces taxable profit without consuming liquidity.

Also known as:AfATax depreciationCapital allowance

Depreciation is probably the most misunderstood lever in German tax law. It is neither a subsidy nor a gift from the tax office – it merely distributes when an expense becomes deductible. Once you understand it, you stop planning investments, liquidity and tax burden separately and start treating them as one system.

What is AfA – and why does it exist?

If a company buys a machine for €60,000, the cash has fully left the account in the purchase year – but the machine lasts ten years. If the entire cost were booked as an immediate expense, the financial picture would be distorted. AfA therefore spreads the acquisition cost over the useful life (€6,000 per year in the example). This aligns with the accounting principle of matching expenses to the period.

Straight-line and declining-balance AfA

Straight-line AfA is the default: the same amount each year, evenly across the useful life. Declining-balance AfA has been reintroduced repeatedly on a temporary basis – most recently for movable assets acquired between 04/2024 and 12/2024. It allows larger deductions in the early years and is attractive whenever your current tax burden is high.

Useful life and the AfA tables

The standard useful life is published by the Federal Ministry of Finance in the so-called AfA tables. Typical values:

  • Computer hardware and software: 1 year (BMF letter 2021, immediate deduction available).
  • Office furniture: 13 years.
  • Passenger cars: 6 years.
  • Machine tools: 8–14 years.
  • Commercial real estate (new builds from 07/2023): 3 % per year.
  • Residential real estate (new builds from 01/2023): 3 % per year (declining-balance available for permits 10/2023–09/2029).

Special depreciation under § 7g EStG

Small and mid-sized businesses (profit limit €200,000) can claim an additional 40 % special depreciation in the first five years after acquisition – freely distributable across those years. Combined with straight-line AfA and the investment deduction, this often delivers depreciation rates above 60 % in the year of acquisition.

AfA for real estate

Residential real estate is generally depreciated on a straight-line basis – 2 % for buildings completed from 1925 onward, 2.5 % for earlier ones, 3 % for completions from 2023. Newly built or first-purchased properties additionally qualify for 5 % declining-balance depreciation. Listed buildings and renovation projects under § 7h/§ 7i benefit from 8–9 % over up to 12 years on the qualifying outlays – one of the strongest levers in the entire tax landscape.

Frequent questions

What clients ask about this most often

  • Commercial law gives the company more freedom (e.g. extraordinary write-downs). Under tax law, the AfA tables are binding, elective options are more limited, and there are additional instruments such as special depreciation under § 7g.
  • No. For second-hand assets, you can apply a shorter, appropriate remaining useful life – but the burden of proof lies with the taxpayer.
  • The residual book value is recognised as expense in the year of disposal. Sales proceeds reduce that expense – a sale above book value produces a taxable disposal gain.

Your next step

How does Depreciation (AfA) impact your business specifically?

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