This is how trade tax works in Germany

Section 1 of the Trade Tax Act (GewStG) stipulates that municipalities are entitled to levy a trade income tax as a municipal tax. The subject of tax is every standing commercial operation, provided it is located in Germany (Section 2 Para. 1 GewStG) . It is an income-based tax that the company pays to the municipality. It is one of the so-called real taxes and, alongside property tax, represents one of the municipalities' most important sources of income.

An important concept in the context of business taxation is the trade tax assessment rate . This is a factor that increases the tax base . Each municipality determines this factor individually, so there are differences between the regions. The law sets a lower limit of 200 percent ; there is no upper limit. The assessment rate usually ranges between 200 and 450 percent; in exceptional cases, assessment rates of up to 900 percent can be observed.

How attractive a community is for a business depends on the level of the assessment rate. Higher assessment rates mean a higher tax burden , which is why there is sometimes an undercutting competition between the municipalities with regard to the assessment rates. At the same time, municipalities with higher assessment rates sometimes offer better infrastructure, which they can finance from companies using this source of income. If companies would like to take advantage of the advantages of a low assessment rate, they have the option of moving their company headquarters .

The tax figure for trade income tax is 3.5 percent (Section 11 Paragraph 2 GewStG). To calculate the tax base amount, the tax base number must be applied to the business's commercial income. By applying the assessment rate to the tax measurement amount, the tax burden is determined. The tax office determines the measurement amount, and the municipality then applies its assessment rate to it. It sets the assessment rate at the annual budget meeting.

The GewStG provides for exemptions for trade income tax for partnerships and associations. This allowance must be deducted when calculating business income, and only then is the tax figure applied. With the tax allowance, companies reduce the proportion of their income that the municipalities actually tax. This also means that small partnerships whose profits from business operations do not exceed the exemption amount do not have to pay trade income tax.

For natural persons, sole proprietorships and partnerships, an allowance of 24,500 euros (Section 11 Paragraph 1 No. 1 GewStG) . For clubs, the allowance is 5,000 euros. However, there is no allowance for corporations. Forestry and agricultural businesses are also exempt from trade income tax.

Trade income tax is only payable by traders and not by freelancers. Freelancers are not classified for commercial activity, so trade income tax does not apply. However, companies are given the opportunity to deduct trade income tax from their income tax liability. This is intended to ensure that traders are not worse off than freelancers. From the 2020 assessment period, the maximum reduction is up to 4 times the trade tax base amount .


The calculation example illustrates how trade income tax is taken into account in income tax:

‍ After

700 euros trade tax measurement amount * 4.0 = 2,800 euros credit against income tax3,150 euros tax - 2,800 euros credit against income tax = 350 euros debit on balance after crediting

In practice, it should be taken into account that a crediting can never lead to a refund. There is only an advantage for the assessed company if the tax liability is high enough.

As soon as the business income is above the tax-free amount, the trader must pay the tax. The tax is calculated at the beginning of the financial year based on a profit forecast. The actual tax liability is only calculated at the end of the year as part of the mandatory trade tax return.