Firms Liable to Trade Tax
Any commercial business with operates in Germany is liable to pay trade tax (Gewerbesteuer) regardless of the businesses legal form. The trade tax which they pay is set locally by the authorities meaning that the rate can vary from one area to another. However, the trade tax is often the same rate for any business within one area, regardless of how they operate or their legal structure. The trade tax rate in Germany is currently between 7% and 17%.
Determining the Trade Tax Rate
The rate of trade tax paid depends on two factors:
- The base tax rate (3.5% across Germany)
- The multiplier (Hebesatz) which is decided by each areas local government
The taxable income of the business is multiplied first by the base tax rate, 3.5%, resulting in the tax base amount. This tax base amount is then multiplied by the individual multiplier which applies to the location where the business operates; which will result in the total trade tax which is due. Generally, the individual municipal multiplier is between 350 and 400 percent but cannot be less than 200 percent. While there is a lower limit of 200 percent, there is no upper limit for the multiplier. It is often higher in urban areas than rural areas, although it’s no higher than 490 currently in any large cities. In the case of a partnership they have an annual trade tax free allowance of EUR 24,500. However, it’s important to note that the solidarity surcharge for partnerships is NOT levied on the trade tax.
Offsetting Trade Tax against Personal Tax
If your business is legally structured as a partnership then you may be able to offset some of the trade tax against each partners own personal income tax – to the sum of 3.8 times the trade tax base amount. This essentially means that for any municipalities with a multiplier under 380 percent there is no trade tax burden for partnerships. However, trade tax still has to be paid by the partnership, it just means that each partner can offset that as an expense against the personal income tax they would have paid.