Germany's Tax Overhaul: A Catalyst for Equity Growth or Fiscal Folly?

Germany's €46 billion tax relief package, approved this month, represents a bold fiscal experiment to reignite growth in an economy stagnating under the weight of high energy costs, bureaucratic inefficiencies, and global trade pressures. For investors, the policy's mix of accelerated depreciation benefits and phased corporate tax cuts presents both opportunities and risks. Here's how it could reshape corporate profitability, equity markets, and sector dynamics—and why German equities might warrant a closer look.

The Immediate Earnings Boost: Depreciation Incentives in Focus

The cornerstone of the package is its accelerated depreciation rules, allowing companies to deduct up to 30% of machinery investments annually from 2025 to 2027. For manufacturers, this is a game-changer. A mid-sized engineering firm, for example, could slash its tax liability by millions simply by investing in new equipment—a direct earnings tailwind.

The automotive sector, particularly electric vehicle (EV) producers, gains an even bigger advantage: 75% first-year depreciation on EV purchases. This could supercharge demand for German automakers like BMW (BMW.GR) and Volkswagen (VOW.GR), which are racing to meet EU emissions targets. The depreciation sweetener also lowers the cost of EV adoption for businesses, potentially accelerating supply chain upgrades and boosting aftermarket revenue streams.

The Long Game: Tax Cuts and Global Competitiveness

Starting in 2028, the corporate tax rate will drop by one percentage point annually, falling from 15% to 10% by 2032. While delayed, this reduction targets a persistent sore spot: Germany's tax competitiveness. U.S. firms pay 21%, while China's rate is 25%, putting German exporters at a disadvantage. A 10% rate could make the country a magnet for capital-intensive industries like tech manufacturing and renewable energy.

The phased approach also buffers fiscal stability. By delaying cuts until 2028, Berlin avoids immediate revenue shocks while positioning itself to benefit from stronger growth in later years. For now, the federal government will backstop local governments through 2029, mitigating the €28 billion revenue shortfall projected by 2029.

Sectors to Watch: Manufacturing, Tech, and Infrastructure

The tax package is a clear win for capital-intensive sectors:
1. Manufacturing: Companies with high CAPEX needs, such as machinery makers (Trumpf (TRUMF.GR)) or industrial conglomerates (Siemens (SIE.GR)), stand to gain from accelerated depreciation.
2. Tech and EVs: Firms like Bosch (ROBERT.BOSCH), which supplies EV components, and software companies (SAP (SAP.GR)) could benefit from broader business investment.
3. Infrastructure: The concurrent €500 billion infrastructure fund targets transport and energy networks, creating demand for construction giants like ThyssenKrupp (TKA.GR) and engineering firms (Freightways (FRE.GR)).

Risks: Fiscal Sustainability and Structural Headwinds

Critics argue the plan ignores deeper issues. High energy costs (Germany's industrial electricity prices are 50% above the EU average) and bureaucratic delays—e.g., projects spend 85% of time on permits—threaten to negate tax benefits. The projected €12 billion annual revenue loss by 2028 could strain budgets if growth remains anemic.

Investment Thesis: Overweight German Equities with CAPEX Exposure

The tax package creates a “buy the dip” scenario for German stocks with strong CAPEX plans and domestic exposure. Key picks:
- BMW: EV depreciation incentives + global brand strength.
- Siemens: Infrastructure projects + digital transformation plays.
- ETFs: Consider the iShares MSCI Germany ETF (EWG) for broad exposure.

Risks to Avoid:
- Avoid utilities (E.ON (EOAN.GR)) and energy firms until structural cost issues are resolved.
- Bureaucratic delays could stall projects, so favor firms with strong execution track records.

Conclusion: A Calculated Gamble on Growth

Germany's tax overhaul is a high-stakes bet on corporate investment as a growth lever. While fiscal risks loom, the immediate earnings tailwinds and long-term tax competitiveness could create mispriced opportunities in sectors like manufacturing and tech. For investors, the key is to focus on companies that can convert tax savings into real-world projects—and ignore the noise about short-term revenue losses. This isn't just about taxes; it's about whether Germany can finally break its stagnation cycle.

Actionable Idea: Overweight German equities with high CAPEX needs and domestic exposure. Monitor the June 25 budget draft for clarity on permitting reforms—the final piece to turn policy into profit.

Note: Past performance does not guarantee future results. Consult a financial advisor before making investment decisions.