Basics of Trade Tax
What is Trade Tax?
Trade tax (GewSt for short) is a tax on commercial income. It therefore relates to the profit of your business. It is classified as a real or property tax.
Trade tax is a municipal tax.
It is levied by the municipality in which your company is based on the objective earning power, i.e., on your profit. The amount of trade tax is then calculated from the profit per business year.
The trade tax rate is set by each municipality itself, which means that there are large regional differences. How much trade tax you must pay is regulated by the Trade Tax Act (Gewerbesteuergesetz, GewStG).
The Most Important Facts in a Nutshell:
- Every business operator must pay business tax. Freelancers are exempt (e.g. lawyers, doctors, journalists and artists).
- This is a tax on income. The amount of tax depends on the income or profit of the company.
- The trade tax rate is 3.5% of taxable income. The municipal assessment rate varies but is at least 200%.
- Corporations must pay tax on their full income. Partnerships, including sole proprietorships, have a tax-free allowance of 24,500 euros.
- The trade tax return is due by 31 July of the following year.
- Trade tax is a municipal tax: the tax recipient is the municipality responsible for your company's registered office.
Who Has to Pay Trade Tax?
If you register your business, you are automatically liable for trade tax. You are a trader in any case if you have to apply for a trade licence for your business. Sole proprietorships, partnerships and corporations are also obliged to pay trade tax. Differences arise with regard to the tax allowance and the regional assessment rate of the municipalities for trade tax.
Freelancers (e.g. lawyers, doctors, journalists and artists) are exempt. Agricultural and forestry businesses are also exempt from paying trade tax. However, you can always ask your local tax office whether your activity belongs to the free market or not.
Trade Tax and the Tax-Free Allowance
There is an allowance not only for income tax, but also for trade tax. This is currently 24,500 euros according to the Trade Tax Act. Basically, you only pay tax on the amount that exceeds the tax-free amount. If your annual trade income is below this amount before rounding off to a full 100 euros and before deducting the tax-free amount, you do not have to pay trade tax.
Only sole proprietorships and partnerships are entitled to this tax allowance. Corporations, on the other hand, are not allowed to deduct anything tax-exempt from their profits. If you run an AG or a GmbH/UG, the trade tax rate applies to your total profit.
How High is the Trade Tax Rate?
The individual trade tax in your company is determined using the tax rate and the trade tax multiplier. The tax rate is 3.5% nationwide. In practice, this means that you pay 3.5% of your trade income to the tax office.
Section 11 of the Trade Tax Act (GewStG) sets the trade tax rate. The trade tax amount, including and minus various additions and deductions, is the basis for the calculation (§ 7-9 GewStG).
What is the Trade Tax Assessment Rate?
In addition to the tax rate, you should know what the trade tax assessment rate is. Trade tax is a municipal tax that calculates an assessment rate in addition to the tax rate of 3.5%. This can vary from municipality to municipality but is always at least 200%. This means that your total business tax will be at least 7 per cent. On average, however, depending on the location of your business, you can expect a total of about 15 per cent.
You can find out how to calculate your individual trade tax yourself in Part II of this article series.