The trade tax is a municipal tax on the profit of a business. It is levied by municipalities and applies to all commercial enterprises operating in Germany; its assessment and collection are governed by the Trade Tax Act (Gewerbesteuergesetz, GewStG) and complementary provisions of income tax and corporation tax law.
What is the trade tax?
The trade tax is a tax on trade profit and represents one of the largest tax burdens for many companies. It is not a federal tax but a municipal tax: municipalities determine the actual burden by setting the multiplier (Hebesatz). Legally, the trade tax is a real tax and is not part of income tax or corporation tax.
Legal basis: The GewStG (Trade Tax Act) governs the determination of trade earnings, add-backs and deductions; for the credit against income tax, Section 35 of the Income Tax Act (EStG) is particularly relevant. Self-employed professionals (freelancers) who do not operate a commercial trade are not subject to the trade tax.
Calculation and tax mechanics
The trade tax calculation is carried out in three stages:
- Determination of the trade earnings (from the commercial or tax profit taking into account add-backs and deductions).
- Determination of the tax assessment amount by multiplying the trade earnings by the tax assessment rate (currently 3.5%).
- Application of the municipal multiplier to the tax assessment amount: Trade tax = tax assessment amount × municipal multiplier (Hebesatz).
Key points for determination:
- Trade earnings: The starting point is the taxable profit. Certain payments (e.g. portions of interest, rent or lease expenses) are added back under the GewStG; conversely there are deductions (e.g. proportionate profit shares from certain participations).
- Allowance: A tax-free allowance of EUR 24,500 applies to sole traders and partners in partnerships; corporations do not receive an allowance.
- Tax assessment rate: 3.5% on the (if applicable reduced) trade earnings.
- Municipal multiplier (Hebesatz): Municipalities set the multiplier; it varies widely and affects the effective burden.
Short calculation example
| Item | Amount |
|---|---|
| Trade earnings | 100,000 EUR |
| Tax assessment rate (3.5%) | 3,500 EUR |
| Municipal multiplier (e.g. 400%) | → Trade tax: 3,500 × 4 = 14,000 EUR |
Accounting treatment and practical examples
For accounting, the trade tax is relevant in several respects: liquidity planning, correct posting of advance payments and reconciliation with the trade tax assessment notice.
- Advance payments: The tax office or the municipality usually requires quarterly advance payments (e.g. 15.02., 15.05., 15.08., 15.11.). Record these regularly to avoid liquidity shortages.
- Annual assessment: After filing the trade tax return you receive the trade tax assessment notice (Gewerbesteuermessbescheid) from the tax office; the municipality then applies the multiplier and issues the trade tax assessment. Differences between advance payments and the final tax result in additional payments or refunds.
- Journal entries (simplified examples):
- On payment of the final trade tax: Trade tax expense to Bank (e.g. 14,000 EUR).
- On quarterly advance payment: Trade tax expense to Bank (e.g. 3,500 EUR) — at year-end adjust if necessary against other receivables/liabilities after the assessment.
Note: For companies preparing financial statements, it is advisable to maintain separate accounts for advance payments and additional claims/payables so that year-end positions are reported correctly.
Practical tips for freelancers and small businesses
Planning is crucial: the trade tax can tie up significant funds. Use these practical tips to avoid surprises:
- Keep an eye on your municipality's multiplier; when choosing a location a high multiplier can influence the decision.
- Document rent, lease and interest payments carefully: they can affect the add-backs (Hinzurechnungen).
- As a sole trader or partner in a partnership, review the crediting of trade tax against income tax (Section 35 EStG) with your tax advisor, as this can reduce the effective burden.
- Use forward-looking liquidity planning and, if necessary, coordinate advance payments with the tax office to avoid unnecessary additional payments.
- Consult a tax advisor for complex issues — especially for international matters, fiscal unity (Organschaft) relationships or reorganisations.
Conclusion: Trade tax is complex but manageable for accounting. With correct determination of trade earnings, regular posting of advance payments and proactive liquidity planning, you as an entrepreneur can precisely manage the burden and its effects on your business.