Under the new plans, electric cars will be exempt from paying vehicle tax for ten years with retroactive effect from Jan. 1, 2016. This is up from a previous exemption of five years.
Employees who charge their electric vehicles at work will also pay a reduced tax rate of 25 percent on this non-cash benefit, the Finance Ministry said.
The tax breaks come on top of plans agreed last month between government ministers and the car industry to give buyers of electric cars a 4,000 euro incentive, while buyers of plug-in hybrid cars will get a premium of 3,000 euros.
The costs of about 1 billion euros $1.1 billion will be shared equally between the government and the car industry.
The program includes 300 million euros of spending on charging stations.
"The key for a breakthrough in electromobility is nationwide charging infrastructure," Transport Minister Alexander Dobrindt said in a statement.
Germany, the biggest carmaker in Europe, currently has only about 50,000 purely battery powered vehicles and plug-in hybrids among the 45 million cars using its roads.
The government hopes the new incentives will help sell an additional 400,000 electric cars.
Other countries in Europe already have incentive schemes in place to get more consumers to buy electric vehicles, including Norway, the Netherlands, France and the UK.