BERLIN - The German government decided to introduce tax benefits for electric vehicles on Wednesday, aiming to counter sluggish sales in the emerging industry and offer more purchasing incentives.

The federal government's tax reductions are estimated to total 585 million euros ($649 million) next year and could increase to 650 million euros by 2028, when the aid is set to expire, according to German newspaper Handelsblatt.

As per the draft proposed by the Federal Ministry of Finance, companies that purchase EVs would benefit from more generous tax depreciation rules, allowing for an up to 40 percent deduction in the first year and falling progressively to 6 percent over the next five years. The ministry noted that the introduction of this depreciation option is expected to provide significant tax incentives, particularly aiding the ramp-up of the EV market in the corporate sector.

The tax benefits also extend to preferential tax treatment for electric and zero-emission company cars. Employees who use these vehicles generally pay much lower car taxes compared with fuel vehicles. Previously, this benefit only applied to cars valued at less than 70,000 euros. The new aid raises this threshold to 95,000 euros.

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Germany's Economics Minister Robert Habeck said on Tuesday that the government would continue to support the car industry and assist in its transition to electrification. His remarks followed an announcement by automotive giant Volkswagen on Monday that it is considering closing local production sites in Germany, a potential first for the carmaker since its founding more than 80 years ago.

Volkswagen noted that as simple cost-cutting measures were unable to address the current challenges, factory closures and possible layoffs in Germany can no longer be ruled out. The automaker launched a 10-billion-euro cost-cutting drive at the end of last year, which includes staff reductions, faster development and shorter production time. Data shows the group's personnel costs reached 50 billion euros last year, up from 40 billion euros in 2020.

The potential site closure at one of Germany's leading carmakers serves as a wake-up call for the country's auto industry, which has long been threatened by rising costs, a challenging transition to EVs, weak demand from abroad, and declining business attractiveness due to insufficient government response and barriers to free trade.

According to the ifo Institute for Economic Research on Wednesday, business sentiment in Europe's largest economy's automotive industry further worsened in August, with the relevant indicator falling to minus 24.7 points from minus 18.5 points in the previous month. Companies expressed particular pessimism about their business expectations for the next six months.

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"Companies in the German automotive industry are suffering from a lack of new orders, especially from abroad. That is now also reflected in the personnel planning," said ifo expert Anita Woelfl, adding that the indicator for export expectations has dropped to its lowest level in a long time.