diff --git a/test/e2e/config/azure-dev.yaml b/test/e2e/config/azure-dev.yaml
index bcd9f6f6db5..64261a7a6e3 100644
--- a/test/e2e/config/azure-dev.yaml
+++ b/test/e2e/config/azure-dev.yaml
@@ -63,6 +63,8 @@ providers:
       targetName: "cluster-template-md-remediation.yaml"
     - sourcePath: "../data/infrastructure-azure/cluster-template-kcp-remediation.yaml"
       targetName: "cluster-template-kcp-remediation.yaml"
+    - sourcePath: "../data/infrastructure-azure/cluster-template-kcp-scale-in.yaml"
+      targetName: "cluster-template-kcp-scale-in.yaml"
     - sourcePath: "${PWD}/templates/test/ci/cluster-template-prow-machine-pool.yaml"
       targetName: "cluster-template-machine-pool.yaml"
     - sourcePath: "${PWD}/templates/test/ci/cluster-template-prow-nvidia-gpu.yaml"
diff --git a/test/e2e/data/infrastructure-azure/cluster-template-kcp-scale-in.yaml b/test/e2e/data/infrastructure-azure/cluster-template-kcp-scale-in.yaml
new file mode 100644
index 00000000000..ee3aa91b145
--- /dev/null
+++ b/test/e2e/data/infrastructure-azure/cluster-template-kcp-scale-in.yaml
@@ -0,0 +1,220 @@
+apiVersion: cluster.x-k8s.io/v1alpha4
+kind: Cluster
+metadata:
+  labels:
+    cni: ${CLUSTER_NAME}-crs-0
+  name: ${CLUSTER_NAME}
+  namespace: default
+spec:
+  clusterNetwork:
+    pods:
+      cidrBlocks:
+        - 192.168.0.0/16
+  controlPlaneRef:
+    apiVersion: controlplane.cluster.x-k8s.io/v1alpha4
+    kind: KubeadmControlPlane
+    name: ${CLUSTER_NAME}-control-plane
+  infrastructureRef:
+    apiVersion: infrastructure.cluster.x-k8s.io/v1alpha4
+    kind: AzureCluster
+    name: ${CLUSTER_NAME}
+---
+apiVersion: infrastructure.cluster.x-k8s.io/v1alpha4
+kind: AzureCluster
+metadata:
+  name: ${CLUSTER_NAME}
+  namespace: default
+spec:
+  additionalTags:
+    creationTimestamp: ${TIMESTAMP}
+    jobName: ${JOB_NAME}
+  location: ${AZURE_LOCATION}
+  networkSpec:
+    vnet:
+      name: ${AZURE_VNET_NAME:=${CLUSTER_NAME}-vnet}
+  resourceGroup: ${AZURE_RESOURCE_GROUP:=${CLUSTER_NAME}}
+  subscriptionID: ${AZURE_SUBSCRIPTION_ID}
+---
+apiVersion: controlplane.cluster.x-k8s.io/v1alpha4
+kind: KubeadmControlPlane
+metadata:
+  name: ${CLUSTER_NAME}-control-plane
+  namespace: default
+spec:
+  machineTemplate:
+    infrastructureRef:
+      apiVersion: infrastructure.cluster.x-k8s.io/v1alpha4
+      kind: AzureMachineTemplate
+      name: ${CLUSTER_NAME}-control-plane
+  kubeadmConfigSpec:
+    clusterConfiguration:
+      apiServer:
+        extraArgs:
+          cloud-config: /etc/kubernetes/azure.json
+          cloud-provider: azure
+        extraVolumes:
+          - hostPath: /etc/kubernetes/azure.json
+            mountPath: /etc/kubernetes/azure.json
+            name: cloud-config
+            readOnly: true
+        timeoutForControlPlane: 20m
+      controllerManager:
+        extraArgs:
+          allocate-node-cidrs: "false"
+          cloud-config: /etc/kubernetes/azure.json
+          cloud-provider: azure
+          cluster-name: ${CLUSTER_NAME}
+        extraVolumes:
+          - hostPath: /etc/kubernetes/azure.json
+            mountPath: /etc/kubernetes/azure.json
+            name: cloud-config
+            readOnly: true
+      etcd:
+        local:
+          dataDir: /var/lib/etcddisk/etcd
+    diskSetup:
+      filesystems:
+        - device: /dev/disk/azure/scsi1/lun0
+          extraOpts:
+            - -E
+            - lazy_itable_init=1,lazy_journal_init=1
+          filesystem: ext4
+          label: etcd_disk
+        - device: ephemeral0.1
+          filesystem: ext4
+          label: ephemeral0
+          replaceFS: ntfs
+      partitions:
+        - device: /dev/disk/azure/scsi1/lun0
+          layout: true
+          overwrite: false
+          tableType: gpt
+    files:
+      - contentFrom:
+          secret:
+            key: control-plane-azure.json
+            name: ${CLUSTER_NAME}-control-plane-azure-json
+        owner: root:root
+        path: /etc/kubernetes/azure.json
+        permissions: "0644"
+    initConfiguration:
+      nodeRegistration:
+        kubeletExtraArgs:
+          cloud-config: /etc/kubernetes/azure.json
+          cloud-provider: azure
+        name: '{{ ds.meta_data["local_hostname"] }}'
+    joinConfiguration:
+      nodeRegistration:
+        kubeletExtraArgs:
+          cloud-config: /etc/kubernetes/azure.json
+          cloud-provider: azure
+        name: '{{ ds.meta_data["local_hostname"] }}'
+    mounts:
+      - - LABEL=etcd_disk
+        - /var/lib/etcddisk
+  replicas: ${CONTROL_PLANE_MACHINE_COUNT}
+  version: ${KUBERNETES_VERSION}
+---
+apiVersion: infrastructure.cluster.x-k8s.io/v1alpha4
+kind: AzureMachineTemplate
+metadata:
+  name: ${CLUSTER_NAME}-control-plane
+  namespace: default
+spec:
+  template:
+    spec:
+      dataDisks:
+        - diskSizeGB: 256
+          lun: 0
+          nameSuffix: etcddisk
+      osDisk:
+        diskSizeGB: 128
+        managedDisk:
+          storageAccountType: Premium_LRS
+        osType: Linux
+      sshPublicKey: ${AZURE_SSH_PUBLIC_KEY_B64:=""}
+      vmSize: ${AZURE_CONTROL_PLANE_MACHINE_TYPE}
+---
+apiVersion: cluster.x-k8s.io/v1alpha4
+kind: MachineDeployment
+metadata:
+  name: ${CLUSTER_NAME}-md-0
+  namespace: default
+spec:
+  clusterName: ${CLUSTER_NAME}
+  replicas: ${WORKER_MACHINE_COUNT}
+  selector:
+    matchLabels: null
+  template:
+    spec:
+      bootstrap:
+        configRef:
+          apiVersion: bootstrap.cluster.x-k8s.io/v1alpha4
+          kind: KubeadmConfigTemplate
+          name: ${CLUSTER_NAME}-md-0
+      clusterName: ${CLUSTER_NAME}
+      infrastructureRef:
+        apiVersion: infrastructure.cluster.x-k8s.io/v1alpha4
+        kind: AzureMachineTemplate
+        name: ${CLUSTER_NAME}-md-0
+      version: ${KUBERNETES_VERSION}
+---
+apiVersion: infrastructure.cluster.x-k8s.io/v1alpha4
+kind: AzureMachineTemplate
+metadata:
+  name: ${CLUSTER_NAME}-md-0
+  namespace: default
+spec:
+  template:
+    spec:
+      osDisk:
+        diskSizeGB: 128
+        managedDisk:
+          storageAccountType: Premium_LRS
+        osType: Linux
+      sshPublicKey: ${AZURE_SSH_PUBLIC_KEY_B64:=""}
+      vmSize: ${AZURE_NODE_MACHINE_TYPE}
+---
+apiVersion: bootstrap.cluster.x-k8s.io/v1alpha4
+kind: KubeadmConfigTemplate
+metadata:
+  name: ${CLUSTER_NAME}-md-0
+  namespace: default
+spec:
+  template:
+    spec:
+      files:
+        - contentFrom:
+            secret:
+              key: worker-node-azure.json
+              name: ${CLUSTER_NAME}-md-0-azure-json
+          owner: root:root
+          path: /etc/kubernetes/azure.json
+          permissions: "0644"
+      joinConfiguration:
+        nodeRegistration:
+          kubeletExtraArgs:
+            cloud-config: /etc/kubernetes/azure.json
+            cloud-provider: azure
+          name: '{{ ds.meta_data["local_hostname"] }}'
+---
+apiVersion: v1
+data: ${CNI_RESOURCES}
+kind: ConfigMap
+metadata:
+  name: cni-${CLUSTER_NAME}-crs-0
+  namespace: default
+---
+apiVersion: addons.cluster.x-k8s.io/v1alpha4
+kind: ClusterResourceSet
+metadata:
+  name: ${CLUSTER_NAME}-crs-0
+  namespace: default
+spec:
+  clusterSelector:
+    matchLabels:
+      cni: ${CLUSTER_NAME}-crs-0
+  resources:
+    - kind: ConfigMap
+      name: cni-${CLUSTER_NAME}-crs-0
+  strategy: ApplyOnce