Trade tax is an unavoidable cost for many businesses in Germany. But because it’s calculated on a variable basis, the amount a business owes can vary depending on its location and its structure. This is why it’s important for business owners to understand how trade tax is calculated, the risks that are involved, and how they can adapt their business strategies accordingly.

In this article, we’ll discuss what trade tax is, what makes it different from other kinds of taxes, and how to calculate it. We’ll also explain the practical challenges that come with trade tax—including for ecommerce and software-as-a-service (SaaS) enterprises—as well as the risks of violating trade tax laws.

What’s in this article?

• Trade tax: What it is and what’s special about it
  
• Calculating trade tax
  
• Double tax burden: Trade tax plus corporation tax
  
• The practical challenges of trade tax
  
• The risks of violating trade tax laws
  

Trade tax: What it is and what’s special about it

Trade tax is a property or asset tax levied by local municipalities. Every company conducting business in Germany must pay trade tax. This includes corporations, such as limited liability companies (GmbHs) and stock corporations (AGs), as well as partnerships, including general partnerships (OHGs) and limited partnerships (KGs). Freelancers are exempt from trade tax, as are agricultural and forestry enterprises (see Section 2 and Section 3 of the German Trade Tax Act (GewStG).

Trade tax is calculated based on what’s known as the “trade income” of a business. Trade income is the profit from business operations determined in accordance with the regulations of the German Income Tax Act (EStG) and the German Corporation Tax Act (KStG). Trade income is calculated for the respective trade tax period, and then adjusted for specific additions and deductions.

This trade income is then multiplied by the standardized basic federal rate, and also by the trade tax rate in the relevant municipality. This is what makes trade tax different from other kinds of taxes: each municipality sets its own tax rate. Municipality rates are largely determined by local factors and therefore vary widely from one region to the next. So, while levies such as corporation tax are standardized at a federal level, trade tax can fluctuate massively. Trade tax is a major source of income for municipal governments and is used to finance public spending.

When do I have to start paying trade tax?

Trade tax is due as soon as a company achieves earnings from its business operations and a so-called “stationary enterprise”—as defined by Section 2 of the GewStG—is established. What matters here is when commercial activities actually start, not when trade registration occurs. This is what makes the business liable for trade tax, unless it can claim one of the legal exemptions under Section 3 of the GewStG.

Calculating trade tax

As a business owner, you’re not required to calculate your own trade tax—the German Tax Office takes care of it for you. However, it’s still important to understand how your tax bill breaks down. There are several steps involved, and we’ve summarized them below.

Calculating trade income

Trade income is what is used to calculate trade tax. This figure is based on the taxable profits of the business, less certain items stipulated in the GewStG. For example, additions are made for lease expenses or compensation of liabilities, in accordance with Section 8 of the GewStG. Deductions are made for certain tax benefits, loss carryforwards, and more, outlined in Section 9 of the GewStG. The amount left over after these additions and deductions is what is used to calculate the amount of trade tax owed.

Considering the trade tax allowance

The trade tax allowance is an important factor when calculating trade tax. Natural persons and partnerships benefit from an allowance of €24,500 under Section 11 of the GewStG. If a business’s annual trade income before rounding to the nearest €100 falls below this amount, no trade tax is due. If the trade income exceeds the allowance, only the amount above the allowance is subject to trade tax. This rule does not apply to corporations, which must pay trade tax on their full trade income.

Calculating your trade tax base

The tax base for trade tax is calculated using the basic federal rate of 3.5%, which applies to all businesses in Germany across the board. This tax base constitutes the basic value, which is subsequently multiplied by the tax rate applied by the respective municipality. This means that if you have trade income of €100,000, then your trade tax base would be €3,500.

How the trade tax rate is applied

The tax rate is the deciding factor in trade tax, playing a major role in how much tax is levied. Each municipality in Germany sets its own rate, which is then multiplied by a business’s trade tax base. This rate can vary enormously from one municipality to the next. While Berlin currently applies a rate of 410% and Munich has a rate of 490%, some municipalities located very close to major cities apply significantly lower rates. For example, Monheim has a rate of 250% and Unterhaching’s rate is 295%.

Example calculation

Below, we’ll look at an example of how trade tax is calculated.

Let’s say a partnership achieves a trade income of €120,000 after additions and deductions. The trade tax allowance of €24,500 is subtracted from this amount.

The calculation would be:

€120,000 – €24,500 = €95,500

Only the amount exceeding the allowance is subject to trade tax—in this case, €95,500. The basic federal rate of 3.5% is then applied to the remaining trade income to determine the trade tax base. That is:

€95,500 x 3.5% = €3,342.50

Finally, this tax base is multiplied by the municipal tax rate. Let’s assume the partnership is domiciled in Munich, which has a rate of 490%.

€3,342,50 x 490% = €16,378.25

In this example, therefore, the partnership owes €16,378.25 in trade tax.

Double tax burden: Trade tax plus corporation tax

The tax burden on German businesses is roughly 30%, significantly higher than the Organisation for Economic Co-operation and Development (OECD) average of around 23%. This mainly affects corporations, since they are required to pay 15% corporation tax on top of trade tax. Freelance professionals or partnerships, on the other hand, are exempt from paying corporation tax.

Many industry associations, as well as liberal parties and lobbyists, believe that this double taxation hampers German businesses’ ability to compete internationally. That’s why the German Chamber of Commerce and Industry, for example, is calling for a gradual reduction of the corporation tax rate to 10%, plus a scheme for offsetting trade tax against corporation tax. The Union of Medium-Sized Enterprises and Economists (MIT) is advocating for reform in municipal finances and for modernization of the trade tax regime, stating in July 2024, “In its current form, the German trade tax is an anomaly internationally and places a significant burden on businesses.”

The tax obligations businesses in Germany are liable for are diverse and complex. While trade tax and corporation tax are assessed by the financial authorities, businesses are responsible for correctly billing and complying with other kinds of taxes, such as value-added tax (VAT) or sales tax. Stripe Tax can help you comply with these requirements efficiently by automating the calculation and capture of VAT and sales tax for physical and digital products—making it easier for you to keep track of your tax obligations, so that you can focus on growing your business.

The practical challenges of trade tax

Trade tax entails a number of different practical challenges for businesses, especially in regard to profitability. Trade tax also affects companies differently depending on their business models. In some cases, it might be necessary to adjust your business strategy.

Impact on profitability

Anyone conducting business in Germany will most likely be required to pay trade tax, including SaaS and ecommerce companies. Since a company’s tax burden can have a significant impact on its cash flow and profitability, online businesses also need to take trade tax into account when running their calculations.

One of the main advantages for many ecommerce and SaaS companies is that they often have greater flexibility to choose their locations versus traditional business models. While brick-and-mortar businesses primarily look at footfall, logistics, and infrastructure when choosing their locations, ecommerce and SaaS providers are far less restricted when it comes to picking sites for their premises or headquarters. This flexibility allows them to target locations that have particularly favorable municipal tax rates.

A business that is headquartered in a municipality with a relatively low tax rate can enjoy significant tax breaks compared to a similar business located in a town or city. That’s why online businesses should specifically factor trade tax into their location strategy, so as to optimize their overall tax burden and secure their profitability long-term.

The impact your business model has

For pure service companies, such as consulting firms or software providers, the tax base for trade tax is generally the profits earned from the rendering of services. Since these businesses don’t tend to sell any physical products—meaning they don’t have any warehouses or sales floors—they don’t have any additions for lease expenses or other infrastructure costs. That means their tax burden is concentrated almost entirely on the profits they generate.

Retailers that sell physical goods often have more extensive infrastructure and therefore a higher tax burden. This is due to additions for the costs of leasing sales floors and warehouse space. When it comes to pricing, these companies have to take extra care to ensure that their cost structures also take trade tax into account, since this additional burden can negatively impact profitability.

Businesses that function as marketplaces have to be just as thorough when calculating their tax burdens. This is especially true in the case of trade tax, where a common issue is how to factor in earnings from platform usage and associated expenditures. These sorts of business models can make calculating trade tax more complex, as there are multiple parties involved and a variety of different sources of revenue impacting trade income.

Adapting your business strategy

Businesses with a high trade tax bill should adapt their business strategies accordingly. This includes choosing a location for the business and optimizing pricing, in order to compensate for the additional tax burden.

It might also be a good idea to review the structure of the business to take advantage of any allowances or deductions. In some cases, it might make sense to use holding structures or to shift certain business units to locations with lower trade tax rates. Seeking tax advice at an early stage can help businesses identify the best options, and ensure they remain competitive long-term.

The risks of violating trade tax laws

As a rule, the tax office with jurisdiction over a business’s headquarters assesses how much trade tax is due, with businesses making payments on account quarterly. However, it is still the responsibility of the company to ensure that the information they provide to the tax office for this tax assessment is correct. Providing false information on trade income—such as by ignoring necessary additions or deductions—can result in significant tax arrears, which are frequently accompanied by high late fees and interest, potentially placing an additional burden on the liquidity of the business.

Another way a business might violate trade tax law is if it fails to file its tax return on time or forgets to file entirely. In these cases, the companies risk not only the financial burden of tax arrears, but also legal implications, such as administrative fines or criminal investigations regarding potential tax avoidance. Even minor errors on a tax return allow the tax office to conduct an in-depth audit, costing a business additional time and money. Tax returns must be filed electronically via ELSTER by July 31 of the following year. This deadline is extended to April 30 of the year after that if the company engages the services of a tax advisor.

As a business owner, make sure you fulfill your trade tax obligations regularly and correctly. Keeping accurate financial records, recording all relevant data correctly, and seeking tax advice at an early stage are all key to correctly calculating your tax bill, and avoiding risks and penalties.