Clean Industrial Deal – tax incentive recommendations

Potential tax changes to drive business decarbonisation 

The EU Commission recently published its recommendations on tax incentives to support the Clean Industrial Deal – a welcome development.

Its overall objective is to stimulate private investment in clean technologies and industrial decarbonisation. The provisions are not binding on member states but can be used as a basis to introduce tax incentives.  

(Learn more about the Clean Industrial Deal in our recent article, The Clean Industrial Deal: What does it mean for tax.)

When and why should governments seek to introduce tax incentives based on the Clean Industrial Deal? This article outlines some of the key reasons.

Tax incentives are an important element of an evolving policy mix to build a business case for decarbonised products.

Tax incentives and environmental tax savings are often forgotten in building investment business cases, but they typically improve the return on investment.

It is welcome that tax policy is specifically called out in the recommendations as a vital element of the policy mix to build a business case for decarbonised products.

Any tax incentives introduced to support proposals in the Clean Industrial Deal should be:

1. cost-effective
2. well targeted
3. simple for companies and administrations to understand and use, and
4. give certain, timely support to firms making clean investment decisions.  

In an era of increasing tax complexity, this is a welcome recommendation. Tax policy is more successful when it’s targeted and gives companies a clear way to access the incentives and show their compliance.

Member states are encouraged to introduce targeted tax credits to ensure sufficient manufacturing capacity for clean technologies and for investments that reduce greenhouse gas (GHG) emissions or improve the energy efficiency of industrial activities.

The recommendations also encourage flexibility on the use of tax credits, including:

• carry-forward mechanisms over four years,

• an ability to offset against national taxes other than corporate tax, and 

• making the tax credits refundable (if unused in a four-year period). 

A tax credit directly reduces a company's corporation tax liability for the year. If the tax credit exceeds the company's corporation tax liability for the year (and where permitted), the tax credit can be set against other tax liabilities of the company (such as payroll taxes or VAT) or can be refunded to the company in cash.

The refundable nature of the credit should ensure Pillar Two rules don’t negate the benefit of the tax credit (see footnote 1).

Accelerated depreciation is also recommended for the acquisition or lease of clean technology equipment. Accelerated depreciation allows an upfront tax deduction (or, from an Irish tax perspective, a tax deduction over a period of less than 8 years) for the qualifying cost of plant and equipment.

Clean tech equipment can include:

• wind and solar
• battery and energy storage
• heat pumps and geothermal
• hydrogen
• CCS
• electricity grid
• sustainable biogas and biomethane
• sustainable alternative fuels.

Accelerated depreciation is also encouraged for zero emission vehicle corporate fleets.

The EU is also encouraging flexibility around tax deductions. For example, a member state such as Ireland could allow a taxpayer to choose between immediate expensing, or a tax write-off over 8 years, in line with our existing plant and machinery capital allowances provisions.

Accelerated depreciation will allow a company to deduct the full qualifying cost of eligible clean technologies (where immediate expensing is introduced) in arriving at the taxable profit or loss for the year.

This could provide a cashflow benefit to companies through lower corporation tax liabilities, helping to improve the investment business case.  

Any tax incentives introduced must comply with EU state aid regulations, including the new provisions under the Clean Industrial State Aid Framework (CISAF).

This framework simplifies state aid rules for five key target areas, including:

• the roll-out of renewable energy and low-carbon fuels
• temporary electricity price relief for energy-intensive users to ensure the transition to low-cost clean electricity
• decarbonisation of existing facilities
• the development of clean tech manufacturing capacity, and
• de-risking support for private investment across clean energy, decarbonisation, clean tech, energy infrastructure projects and projects supporting the circular economy.

_{¹Pillar Two aims to ensure that in-scope businesses (those with consolidated group revenues of €750m or more in at least two of the four preceding fiscal years) pay at least a 15% effective tax rate on their profits in each jurisdiction they operate in.} 

Key takeaways

If well designed and successfully implemented in Ireland, the tax incentives should encourage more private investment in clean technologies and industrial decarbonisation. This would help Ireland move closer to achieving our legally binding climate targets. It should also help to promote Ireland as a centre for green innovation.

Companies with a wider European footprint should also monitor changes in other European countries.

Member states have until 31 December 2025 to inform the European Commission of measures introduced or announced as well as any similar measures already in place and changes made to these measures. We’re waiting for the Department of Finance to indicate how Ireland will proceed. 

We’re here to help you

Our tax experts are ideally positioned to help you navigate the complex intersection of tax policy and sustainability. They can:

• share tailored insights with you on how the Clean Industrial Deal’s proposals may affect your business
• identify potential tax opportunities and risks, and
• help you to develop strategies to optimise your position in the evolving regulatory landscape.

We’re here to help if you encounter barriers to decarbonisation or circular economy initiatives, and you believe tax policy could be a lever to help address some or all the barriers.

The business community must engage early and work with governments and, if applicable, at EU level to ensure all relevant business concerns are considered.

Contact us today to explore how we can support your business in turning climate-related tax challenges into opportunities for growth and innovation.