Trade Taxation

Almost all businesses resp. freelancers are subject to trade tax. I describe here who is subject to this tax and how the tax burden is computed.

Who is subject to trade tax?

Trade tax or business and operation tax is levied on the objective earning power of a company of a trade (§15 II EStG). Such is understood as a business – and not professional services. The exact definition is: A trade means

  • working independently (for one’s own account and on one’s own responsibility),
  • enduring activity (for certain period and repetitive, i.e. permanent source of income),
  • intention to make profit,
  • in participation in general commercial activities
    and neither
  • as an activity from agriculture and forestry
    nor
  • as professional services
    nor
  • another kind of self-employment.

Who gets this tax?

This tax is levied by your local tax office for the benefit of the municipality of where your business is located.
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When is my business subject to pay such tax?

The tax liability starts for sole business persons or private companies when they start working. Corporations will have to pay trade tax starting the day they are entered into the commercial registry.
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When the business ceases to exist. This is not necessarily the formal deregistration but usually after all the business capital has been distributed to the owners. The tax authorities will consider the business of a one person as ended when the last invoice has been paid or it is certain that it will not be paid.
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How much is trade tax?

Trade tax due is computed by following grid. The trade profit will be determined by rules and regulations pertinent to income or corporate tax law – supplemented by several additions and subtractions.

Profit from Trade (§7 GewStG)

+ Addtions (§8 GewStG) i.a.

1.    100% fees for debts

2.    100% Retirement funds and continuing costs

3.    100% profit share of silent partner

4.    20% of rental or lease fees for using own moveable assets,

5.    65% of rental or lease fees for use of own immovables,

6.    25% of costs for franchise grants

- exempt amount of €100,000 (§8 Nr. 1 GewStG)

= Subtotal, hereof 25%

- Subtractions (§9 GewStG)

= relevant trade profit (§10 GewStG)

- trade loss (§10a GewStG)

= trade profit

rounded to next € 100 (§11 Abs.1 S. 3 GewStG)

- resp. exempt rate of € 24,500 / 3,900 / 0 (§11 Abs. 1 GewStG)

= remaining amount

x 3.5 % tax assessment number (§11 Abs.2 GewStG)

= tax assessment amount

x municipality’s factor (§16 GewStG)

= trade tax debt

 

What is this trade loss?

A trade loss is accumulated when the trade profit is negative. When you accumulated a tax loss in the current year, you will not pay any trade tax for the current year. The trade loss from previous years will be deducted at this step. Since 2004, the maximum deductible is € 1 mio. (§10 a GewStG).
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According to the above table, it seems that I can choose the exempt rate. Cool! I’ll tax zero. The authorities are already taking out so much money.

Har. Har. Har. The exempt rate depends on your legal structure. Physical persons or non-incorporated firms (oHG, KG, GbR) are eligible for the exemption of € 24,500. Corporations (AG, GmbH) have no exemption. Other legal entities like (like e.V.) have an exemption of 3,900.
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Gee, all this is really expensive for a little small-timer like me. Wait, I heard something about crediting trade tax. How does that work?

Since the company law reform in 2008, as the corporate tax was reduced to 15% and trade tax payments were not a deduction anymore, the German government decided to grant sole entrepreneurs and business partnerships a tax relief in their income tax assessment (§35 EStG).
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Super! How much trade tax is credited to my income tax bill?

The credit pursuant to §35 EStG is limited to the share of income tax that is allotted to trade income.  This credit is computed by the factor 3.8%. It will not create an income tax loss; the income tax can at most be reduced only to € 0. You can only then reduce your income tax to zero when your trade profit exceeds the exempt rate of € 24,500. In other words, when you are not paying trade tax you will not be able to reduce your income tax amount.
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With this tax being so high, is there any chance to pay advances?

Yes, you can pay in advance. Better said, you have to pay every February 15, May 15, August 15, November 15 an advance as has been determined in your last trade tax assessment. The advance amounts to one quarter of the last trade tax bill.
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