Business tax: Definition, calculation & importance | IT-Medienrecht

Definition and Legal Basis of Trade Tax

Trade tax is a real tax levied by municipalities on the objective earning power of a commercial enterprise. It is one of the most important sources of income for municipalities and is regulated in the Trade Tax Act (GewStG).

This tax, introduced in its current form in 1936, has undergone several reforms since then. As part of the German tax system, it contributes to the financing of municipal tasks and influences the attractiveness of a location for companies.

In addition to the Trade Tax Act, the Trade Tax Implementation Ordinance (GewStDV) also forms the legal basis for trade tax. Furthermore, the German Basic Law (in particular Art. 106 Para. 6 GG on revenue sovereignty) and the respective state constitutions play a crucial role in its structure and levying.

Taxable Persons and Trade Tax Base

In principle, all commercial enterprises operating in Germany are subject to trade tax. This includes sole proprietorships, partnerships, and corporations. However, freelancers and agricultural and forestry businesses are exempt from trade tax.

The assessment basis for trade tax is the trade income. This is calculated from the profit determined in accordance with the Income Tax Act or Corporation Tax Act, after accounting for specific additions and deductions.

Key Additions to Trade Income

The most important additions to trade income include:

1. 25% for debt (e.g., interest)
2. 25% for pensions and permanent charges
3. 25% for the silent partner’s share of profits
4. 20% for rent and leasehold interest for movable assets
5. 50% for rent and leasehold interest for immovable assets

Key Deductions from Trade Income

Reductions are made, among other things, for:

1. 1.2% of the assessed value of the real estate belonging to the business assets
2. Profits from shares in other commercial enterprises
3. Foreign income, insofar as this is not subject to domestic taxation

Calculating Trade Tax and Collection Rates

Trade tax is calculated in several distinct steps:

1. Determination of the trade income.
2. Rounding down to the nearest 100 euros and deduction of the tax-free amount (24,500 euros for natural persons and partnerships).
3. Application of the tax assessment rate (which has been 3.5% since 2008).
4. Multiplication of the tax assessment amount by the municipal assessment rate.

The assessment rate is individually set by each municipality and varies significantly across different regions. The national average typically hovers around 400%, with major cities often imposing considerably higher rates. Consequently, trade tax rates can range from 200% in some smaller municipalities to over 500% in large urban centers like Munich or Frankfurt am Main.

For partnerships and sole proprietorships, a reduction in income tax is applied to prevent a double burden. Pursuant to Section 35 EStG, trade tax can be credited against income tax at a flat rate.

Significance for Companies and Municipalities

Trade tax holds dual significance: it serves as a vital source of income for local authorities and represents a substantial cost factor for businesses. For municipalities, trade tax frequently constitutes the largest portion of their tax revenue, enabling the financing of local infrastructure and essential services. Therefore, the level of the assessment rate is a critical instrument in the competition among local authorities.

For companies, trade tax is a key consideration when selecting a location and engaging in tax planning. The overall tax burden for a company in Germany comprises corporation tax, solidarity surcharge, and trade tax, and it can vary significantly depending on the chosen location. This variance sometimes leads to relocations or the strategic use of tax structuring options, such as forming a trade tax group.

Current Developments and Debates Surrounding Trade Tax

Trade tax is consistently a topic of political and economic debate. Several key areas of discussion include:

1. Reform or Abolition: There are frequent proposals to fundamentally reform or even abolish trade tax, perhaps in favor of a higher municipal share of VAT.
2. Expansion of Taxpayers: The inclusion of freelancers in the trade tax liability is actively being discussed.
3. Adaptation to the Digital Economy: The increasing importance of digital business models challenges the traditional linking of trade tax to physical permanent establishments.
4. Volatility of Revenues: Due to their strong dependence on cyclically sensitive trade tax, municipalities are susceptible to significant fluctuations in income.
5. Inter-Municipal Competition: The ability of municipalities to set their own assessment rates fosters tax competition, which is often a subject of critical debate.

Conclusion

In summary, trade tax is a complex and multifaceted component of the German tax system. It plays a central role in municipal financing and is a significant factor in companies' location decisions and tax planning. The future structure of trade tax will undoubtedly remain a focal point of economic policy debates, particularly concerning the challenges posed by globalization and digitalization.