- What is Gewerbesteuer (trade tax)?
- Who has to pay trade tax?
- Trade tax exemptions
- Is there a trade tax allowance?
- How to pay trade tax
- How to account for trade tax
- The highest trade tax districts
- The lowest trade tax districts
- Reducing trade tax
- Trade tax calculators
- TLDR: The key facts
Gewerbesteuer (trade tax) is a tax on gewerbliche Einkünfte (commercial income). It is levied by the city or municipality in which a commercial enterprise has its Sitz (registered office). If a business has more than one location, its income is divided between these locations in order to calculate the trade tax payable to the relevant municipality. Trade tax is a Realsteuer (real tax) according to § 3 AO and is regulated by the GewStG (trade tax act).
Trade tax in a nutshell
The trade tax rate is a composite of a uniform tax rate of the basic rate of 3.5% and a Hebesatz (municipal assessment rate), depending on where the company’s PEs are located. Municipalities with a population of at least 80,000 currently levy trade tax at a rate of between 8.75% (250% Hebesatz) and 20.3% (580% Hebesatz).
The basis for this tax is the profit adjusted for corporation tax purposes: in particular, 25% of all financing costs exceeding €200,000, including implicit financing costs in leasing, rental and licence payments, are added back to taxable income.
All businesses that generate gewerbliche Einkünfte (commercial income) have to pay Gewerbesteuer (trade tax). Freiberufler (liberal professionals) are not considered to be gewerblich tätig (commercially active) and therefore do not have to pay trade tax, no matter how much profit they make. Conversely, all the Gewerbebetriebe (commercial enterprises) that are not considered to be gewerblich tätig (commercially active), such as:
- Einzelunternehmen (sole proprietorships),
- Personengesellschaften (partnerships), and
- Kapitalgesellschaften (corporations/limited companies),
are liable for trade tax as soon as they’re active.
As you might have read above, Freiberufler (liberal professionals) are exempt from trade tax. And, of course, businesses that do not make a profit don’t have to pay trade tax either, because there is no tax base.
Yes, there is. There is a €24,500 Freibetrag (tax-free allowance) for natürliche Personen (individuals), Einzelunternehmen (sole proprietorships) and Personengesellschaften (partnerships) and €5,000 for Vereine (associations). There is no allowance for Kapitalgesellschaften (corporations).
- Like VAT, Gewerbesteuer (trade tax) is paid in advance. As a trader, you inform the tax authorities of your profit forecast. When you do your Gewerbeanmeldung (trade registration), you’ll be sent a tax registration questionnaire in which, among many other things, you can enter your expected profit.
- On the basis of this information, the tax office calculates the amount of your trade tax advance payments. Your local tax office will send you a trade tax notice stating how much you have to pay and when.
- You have two options to pay it: Either give the tax office a direct debit authorisation or pay the trade tax by bank transfer.
- After the end of your business year, you file a trade tax return. The tax office will then calculate the final trade tax bill for the year and offset your Vorauszahlungen (advance payments) against it. If the advance payments exceed your trade tax liability, you will receive a refund – a small consolation for the small profit.
Other important types of tax for entrepreneurs:
When you pay your trade tax, you record in your accounts as per trade tax to a bank. Hopefully, you’ve thought ahead and have set aside some cash for paying taxes. If so, record the provision for trade tax to the bank in your tax accounting (§ 4 para. 5b EStG).
How do you calculate my trade tax liability?
How much is Gewerbesteuer (trade tax)? To calculate this, you need four variables:
- Gewinn: The profit forecast
- Freibetrag: What your tax-free allowance is (this is usually €24,500)
- Steuermesszahl: The tax rate (the national rate is 3.5%)
- Gewerbesteuer-Hebesatz: The trade tax assessment rate for your place of business (each municipality sets its own rate)
How to calculate a business’s trade tax burden
This example refers to a sole proprietorship or partnership. For these, a trade tax allowance of €24,500 applies. The example is based on an operating profit (income minus operating expenses) of €75,000 and a trade tax assessment rate of 360%.
|x 3.5 % measurement figure = measurement amount
|x 360 % Assessment rate = trade tax burden
If you were to locate your business in a municipality with a tax rate of 200%, your trade tax would be reduced to €3,353; with a tax rate of 500%, it would rise to €8,837.50. The location of your business therefore plays a significant role in the subsequent tax burden due to trade tax.
This can be heavy but stay with us: We’ll be breaking down how you can save on trade tax later.
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Gewerbesteuer-Hebesatz: What is the trade tax assessment rate?
The Gewerbesteuer-Hebesatz (trade tax assessment rate) is set by the municipalities by law. It is a multiplier for calculating Gewerbesteuer (trade tax). In simple terms, it is calculated as profit multiplied by the tax rate multiplied by the assessment rate. If you want to delve deeper into the topic, the Statistisches Bundesamt (federal statistical office) publishes data on the average trade tax assessment rate in Germany on its website. To find out the current assessment rate for your municipality, check out its website or talk to your local Gewerbeamt (trade office).
FYI: The federal government has set a minimum trade tax assessment rate of 200% to prevent tax havens being set up in Germany that attract businesses with tax dumping.
Highest trade tax assessment rates in Germany*
The following table shows the ten municipalities with the highest rates. Contrary to expectations, the top municipality is not one of the big cities, but the quiet village of Dierfeld in Rhineland-Palatinate, with a whopping 900%. The village is part of the Wittlich-Land municipality and has just ten inhabitants. Attracting commercial industries is probably a lower priority there. These are the top 10 highest assessment rates in Germany:
|Hessisch Lichtenau, City
*Source: Federal Statistical Office, as of 2017
Lowest trade tax assessment rates in Germany*
The most favourable Gewerbesteuer-Hebesätze (trade tax assessment rates) exist in the younger federal states. But, two Bavarian municipalities are among the top ten ‘cheaper places to do business’.
|Rettenbach am Auerberg
*Quelle: Statistisches Bundesamt, Stand 2017
Location competition through tax rates
Trade tax is one of the most important sources of income for many cities and municipalities. Currently, there are two opposing strategies at the municipal level: some set the rates as high as possible in order to collect as much tax as possible. Others try to attract new businesses through low business rates and increase business tax revenues through the number of businesses.
When the candy manufacturer Haribo moved from Bonn to the neighbouring municipality of Grafschaft, the trade tax assessment rate was undoubtedly a factor. In 2016, this rate was 490% in Bonn, but only 330% in Grafschaft.
Businesses should carefully weigh up the pros and cons of their location. Taxes may be lower in rural areas, but skilled workers are scarce.
How can I reduce my trade tax burden?
The best tax advice is always tailored to your individual case and comes from your trusted accountant. However, there are a few common sense things you can do to save tax:
- Choose the right legal form for your business’s economics
- Find the best district to register in
- Keep your “freiberuflich” & “gewerblich” businesses separate
- Set up a holding company
- Use investment deductions & loss carryforwards
- Credit trade tax against income tax
Corporations, such as the UG or GmbH, are not eligible for trade tax relief and cannot claim a tax reduction under § 34 EStG. That is, depending on the economics of your business, forming a UG or GmbH might not be the most optimal tax strategy. Make sure you crunch the numbers (that is, do some basic financial modelling) when choosing your legal form and discuss it with your tax adviser.
When you start a new business, of course, you need to decide where to locate it. This decision will have multi-dimensional implications. For one, you should check the local trade tax rates. Smaller municipalities often offer lower trade tax rates, and local business and economic development agencies will do their best to help you.
However, you should also consider other factors when deciding where to locate your business, such as where your customers are, where you can find good staff, what transport links are available, affordable working space, and whether the internet bandwidth is sufficient for your purposes.
To avoid tax issues, it’s important to keep your ‘freiberuflich‘ activity separate from your ‘gerwerblich‘ activity (that is, commercial activity not classified as the activity of a Freiberufler). If you mix them up in your accounts, you will usually have to pay tax on all your business income.
A fail-safe way to avoid this pitfall is to set up a separate business structure for the commercial part, with its own name, bank account, etc. Many a doctor has been ruined for tax reasons by selling diet products or supplements ‘on the side’. And many a translator has had to rub their eyes when the tax office used their part-time agency work as an excuse to treat all her income as commercial. Even retroactively. This is the Finanzamt way.
If the gewerblich part of the income is very small, the tax courts sometimes decide that it does not affect the total income. But it is better not to get into trouble in the first place.
To avoid tax issues, it’s important to keep your commercial business separate from your freelance business. If you mix them up in your accounts, you may end up owing taxes on all of your business income. To prevent this, consider setting up a separate company for your commercial business with its own name and business account. It’s not uncommon for people to get in trouble with the tax office for not keeping their businesses separate.
By setting up a holding structure in a certain way, you can optimise your company’s trade tax burden. If there is a profit transfer agreement, the taxation of the subsidiaries is shifted to the parent company. Conversely, losses of subsidiaries are offset against profits of other subsidiaries with a profit transfer agreement.
A holding company structure also offers other interesting tax structuring options, which can be worthwhile even for smaller companies. For example, when a subsidiary is sold, 95% of the sales proceeds are tax-free. Only 5% is used as the tax base. If this is taxed at around 30%, only 1.5% of the proceeds are taxed (Section 8 (1) KStG).
To be exempt from trade tax under this provision, the holding company must hold a 15% stake in the subsidiary (see § 9 (2a) GewStG).
As an entrepreneur, you can reinvest the money remaining in the holding company in subsidiaries or pay it out to yourself in tranches, thus taking advantage of tax allowances and other tax benefits. The entire profit from the sale is taxed at only about 1.5%. So if you are planning to sell your business in the next few years, you would be well advised to set up a holding company.
The Investitionsabzugsbetrag (IAB) is an investment allowance that allows entrepreneurs to postpone income to a future financial year. This has a profit-reducing effect and therefore also reduces trade tax. Conversely, a Verlustvortrag can also be used. This is when losses are postponed to future years by carrying them forward.
If you have a partnership or sole proprietorship get to know what the term Anrechnung. This is a trade tax credit that has a net tax-reducing effect. Partnerships and sole proprietorships can reduce their standard income tax by 3.8 times the amount of the trade tax assessment. In principle, this is a credit of trade tax against income tax (§ 35 EStG.). The credit does not apply to corporations.
Prerequisite for the trade tax credit
- It is the income tax due for business Einkommensteuer (income).
- It is the income tax actually paid.
Note: The former graduated tax rate for partnerships and sole proprietorships has now been abolished, as has the deductibility of trade tax as a business expense.
Basis of assessment, additions and deductions
According to § 8 GewStG, trade income is increased by certain additions and reduced by certain deductions. Losses carried forward from previous years can also be deducted from profits. The aim is to determine the Gewerbeertrag – the actual amount of profit from a business’s commercial activities. That is, a business’s Bemessungsgrundlage (basis of assessment).
This basis of assessment has to do with the fact that trade tax is what’s called a Realsteuer (literally: real tax). Realsteuer are a group of taxes – including property tax and trade tax – linked to tax objects that don’t take into account the personal circumstances of the owner or other beneficiary. It’s opposite is personal taxes.
Hinzurechnungen: Additions to the trade tax base
The additions include, for example, one-quarter each of the company’s financing costs (interest expenses, pensions and permanent charges).
Also included are expenses for the temporary transfer of rights and profit shares of silent partners, as well as 20% of the rent for using movable assets and 50% of the rent for using immovable assets, subject to an annual allowance of €100,000. You would therefore have to pay very high rent to exceed this amount.
Kürzungen: Trade tax base reductions
Note that the rules for reducing the Gewerbesteuer-Bemessungsgrundlage (trade tax base) are complex.
Here are some examples of possible exemptions:
- Income from permanent establishments abroad
- Donations and grants
- Shares in the profits of domestic and foreign partnerships or corporations
- 1.2% of the standard value of the company’s own property under certain circumstances.
These items may be exempt from trade tax up to a certain limit. Details are set out in § 9 GewStG.But, probably best to talk to a tax adviser that has a level of expertise in this area.
Some IHKs (and also other organisations and companies) provide trade tax calculators on the Internet. For example, you can order a trade tax calculator for the whole of NRW from the Cologne IHK. This not only contains the assessment rates of all 396 cities and municipalities in North Rhine-Westphalia, but also shows how the trade tax assessment rates have developed over the last 30 years.
- If you run a business, you must pay Gewerbesteuer (trade tax) on your profits. The amount of this tax depends on the trade tax rate, which is set by the cities and municipalities by law. In most cases, this rate is between 300 and 600%.
- The formula for calculating trade tax is: profit minus tax allowance times 3.5% times the trade tax multiplier.
- Sole proprietorships and partnerships can deduct a tax-free allowance of €24,500 from their profits. There is no allowance for corporations.
- Like Vorsteuer (input tax), trade tax is collected by the tax office as an advance payment on your expected trade income. At the end of the financial year, you complete a trade tax return and receive notification as to whether you have to pay trade tax arrears or whether any overpayments will be refunded.
- There are many tax planning options. These range from choosing a tax-efficient legal form and location to minimising taxable profits.