The trade tax is of particular importance for businesses and entrepreneurs. Knowing the relevant rules on trade tax and income tax not only saves you unnecessary trouble with the tax office, but also helps you save on taxes.
The trade tax as a real tax
The trade tax is a real tax (§ 3 Paragraph 2 Tax Code, AO). In contrast to so-called personal taxes, real taxes are linked exclusively to the taxable object (in the case of trade tax: to the business enterprise) – but not to the individual ability of the taxpayer.
Self-employment: Who does the trade tax apply to?
According to POLYHOBBIES.COM, every domestic business enterprise is obliged to pay trade tax according to the trade tax law. “Operated in Germany” means that a company has a permanent establishment in Germany (Section 2 (1) of the Trade Tax Act, GewStG). The tax payer is the owner of the business (Section 5 (1) GewStG).
The trade tax are therefore subject to individual entrepreneurs as well as corporations and partnerships.
You are only exempt from paying trade tax and sales tax as a freelancer or if self-employment is not carried out commercially.
- A trade requires independent and long-term economic activity that is operated with the intention of making a profit (Section 15 (2) Income Tax Act, EStG).
- A definition of the “liberal professions” (legal definition) is contained in the Income Tax Act and the Partnership Act (Section 18 (1) No. 1 EStG, Section 1 (2) PartGG). You are therefore not obliged to pay trade tax if your self-employment relates to a scientific, teaching, educational, literary or artistic activity or if you work, for example, as a doctor, alternative practitioner, lawyer, notary or architect.
Agricultural and forestry operations are also not subject to trade tax (Section 2, Paragraph 3 of the Trade Tax Act, Section 15, Paragraph 2 of the Income Tax Act).
How much is the trade tax?
Trade income as the basis for calculating trade tax
The basis for calculating the trade tax is the trade income (§ 6 GewStG), which is to be determined in accordance with the provisions of income and corporation tax law.
Correction through additions and reductions
The taxable trade income is initially corrected for the determination of trade tax through additions and reductions. These corrections were originally aimed at a better illustration of the objective profitability of a commercial enterprise. However, the original addition and reduction rules have been changed over the course of time from a more tax-political point of view.
Additions (§ 8 GwStG)
Among other things, a quarter of the finance costs and taxes paid by the company are added to the trade income. Financing expenses include not only interest payments for loans taken out, but also discounts granted.
The items that are added to a quarter also include
- Annuity and pension payments as well as other permanent burdens,
- Profit shares of silent partners,
- 20 percent of the rents, leases and leasing installments for movable fixed assets,
- 50 percent of rents, leases and lease payments for immovable fixed assets as well
- 25 percent of the expenses for licenses and concessions.
However, an allowance of 100,000 euros will be deducted from the total amount of the additions in your favor. This allowance is intended to protect small and medium-sized companies from disproportionately high additions.
Reductions (§ 9 GewStG)
The aim of cuts is to avoid a multiple burden of real taxes. The cuts include, among other things
- 1.2 percent of the unit value of real estate that is part of the business assets of the permanent establishment and is payable on property tax,
- certain profit shares in other companies as well
- Profit shares that are attributable to foreign permanent establishments.
Determination of the tax base – exemptions for trade tax
In a further step, the so-called tax assessment amount is calculated.
For this purpose, the trade income is rounded down to a full one hundred euros and certain allowances are deducted (Section 11 (1) sentence 3 GewStG).
- Partnerships and natural persons receive a trade tax exemption of 24,500 euros, by which the trade income is reduced as a tax base (Section 11 (1) sentence 3 GewStG). Up to an annual business income of EUR 24,500, no business tax is payable.
- Other legal entities and non-legally competent associations that maintain economic business operations are entitled to a tax exemption of 5,000 euros.
- Corporations are not entitled to an allowance.
The reduced trade income is multiplied by the (legally stipulated) tax index, which has been 3.5 percent since the calendar year 2008 (Section 11, Paragraph 2 of the Trade Tax Act). This arithmetical intermediate result is the tax assessment amount.
The tax base is determined at the end of a calendar year for which the trade tax is to be calculated (§ 14 GewStG). The tax base is generally valid for an entire calendar year. However, if your trade tax liability only existed for part of the year (for example in the year your business establishment was founded), a correspondingly shortened collection period applies (Section 14 of the Trade Tax Act).
Assessment rate: multiplied by the tax base
Finally, the tax base is multiplied by the trade tax multiplier set by the municipality responsible for your company’s permanent establishment (§ 16 GewStG). The assessment rate applies uniformly to all companies whose business premises are located within a municipality.
The assessment rate is at least 200 percent (Section 16 (4) GewStG). Therefore, the trade tax is at least 7 percent of the trade income (when multiplying the tax index of 3.5 percent of the trade income with a minimum assessment rate of 200 percent).
Since each municipality determines a tax rate that is valid for the municipality at its own discretion, the amount of the trade tax to be paid for companies with the same trade income varies from municipality to municipality. The municipalities may set the rate of assessment for a single calendar year or for several years. If a municipality wants to increase its trade tax multiplier with effect for the current calendar year (retrospectively from the beginning of the year), it must take a corresponding resolution by June 30 of the calendar year concerned at the latest (Section 16 (3) GewStG).
How is your business tax determined?
First, you submit the trade tax return to the tax office. The deadline for submitting the tax return results from Section 149 (2) AO (“no later than seven months after the end of the calendar year”). When starting a new commercial activity, the amount of your trade tax prepayments will be determined on the basis of your information in the “Questionnaire on tax registration”. You will receive this questionnaire automatically when you register your business with the municipality.
The company tax office determines the tax assessment amount to be applied to your business and issues the so-called commercial tax assessment notice.
After information from the tax office, the municipalities entitled to levy the trade tax – using the rate applicable in their area of responsibility. The business tax assessment can be obtained from the municipality responsible for the permanent establishment.
An exception to this procedure applies to the city-states of Hamburg and Berlin : Since the state and municipal levels are identical in Berlin and Hamburg, the trade tax in these two federal states is determined by the tax offices. In all other federal states (including the city state of Bremen), the municipalities are responsible for setting trade tax.
If the company has branches in several municipalities, the tax office distributes the entire tax assessment amount to the various municipalities by means of a “decomposition notice”.
When do I have to pay business tax?
The trade tax is to be paid as a quarterly advance payment – on February 15, May 15, August 15. and 15.11. (19 paragraph 1 GewStG).
Tips on saving business tax
Anyone who runs a sole proprietorship or a partnership can offset the trade tax against the income tax to be paid . In the income tax return, the tax office recognizes a lump sum of up to 3.8 times the tax base – but up to a maximum of the actual trade tax payable.
This provision means that up to a rate of assessment of around 380 percent there is no need to fear any additional net burden from trade tax. However, this advantageous regulation only applies if the commercial enterprise shows a tax profit. If necessary, appropriate tax structuring options should be used.
The assessment rates in large cities are usually higher than those in surrounding rural communities. Therefore, if the location conditions are otherwise approximately the same (e.g. the same quality of the infrastructure), it can make sense to set up a commercial enterprise in the area of a smaller municipality, which, however, has a lower rate of assessment than the neighboring urban center.
