Registering a Small Trade Business (Kleingewerbe): Guide, Advantages and Tax

But what does Kleingewerbe actually mean? The term is widely used, yet there is no clear definition. This distinguishes it from the concept of the Kleinunternehmer (small-business scheme). Do not confuse the two. Some Kleingewerbetreibende also meet the criteria for Kleinunternehmer status, but this does not apply to all. Whilst different conditions apply to Kleingewerbetreibende depending on the context, there is a clear statutory definition for Kleinunternehmer.

In this article we explain the concept of the Kleingewerbe and the advantages it brings. We also set out transparently how to register a Kleingewerbe. It is best to contact an experienced tax adviser before starting your business: the legal position for Kleingewerbetreibende is complex — seek professional advice.

The term is composed of the two words "klein" (small) and "Gewerbe" (trade). Let us first consider "Gewerbe": this is a precisely regulated status. You act as a trader (Gewerbetreibender) unless you fall within the category of the liberal professions (Freiberufler). Typical traders are retailers and tradespeople. Freelancers in the liberal professions include, amongst others, architects, engineers and journalists. § 18 of the Income Tax Act (EStG) lists the recognised liberal professions: these catalogue professions and similar occupations are classed as liberal professions. Most other occupations fall under the category of trade.

In many cases, classification as a trader or a freelancer is straightforward. However, borderline cases do arise — for example with advisory occupations such as consulting engineers. If the advisory work departs from the content of the professional training, it may constitute a trade even though the occupational profile corresponds to a catalogue profession under § 18 EStG. If in doubt, consult your tax adviser.

Let us turn to the second element, "klein" (small): here the assessment is considerably more complex. Many laypersons assume that precise criteria exist, such as a turnover threshold. On closer examination, this turns out to be a misconception.

First, it depends on the context in which the term Kleingewerbe arises. Many use it as a synonym for a side occupation. This usage often has no legal consequence: it simply indicates that the Kleingewerbetreibende pursues another activity as their main occupation.

The position is different in the commercial law sense. Kleingewerbetreibende, for example, are not required to register in the commercial register. Classification as a Kleingewerbetreibender or an ordinary trader has concrete legal consequences. However, even commercial law does not provide a detailed definition. Instead, § 1 of the Commercial Code (HGB) contains a general statement: every commercial business is a full trading business — with one exception: where an enterprise, by its nature and scale, does not require a commercially organised business operation. If you keep the nature and scale of your future business activity small, there is a good chance it will qualify as a Kleingewerbe. The HGB offers no more specific guidance.

The responsible authorities assess on a case-by-case basis whether a trader falls within the Kleingewerbe rules. Officials look at the business as a whole; they do not focus on a single figure such as annual turnover. What matters is whether, in overall terms, a business qualifies as a Kleingewerbe. In practice, the following set of criteria has become established — bear in mind that the indicative figures below serve only as a rough guide and do not represent binding values:

• annual turnover: less than 250,000 euros
• annual profit: less than 50,000 euros
• number of employees: no more than five
• number of products / scope of offering: few products, suppliers and customers
• locations: no more than one

The indicative figures differ between industries. Further criteria may include the number of business transactions and the volume of credit. Individual circumstances are always decisive.

Can you expect the authorities to classify your activity as a Kleingewerbe? Obtain a well-founded assessment from tax advisers. Your Guhr Steuerberatung in Berlin is on hand to advise you competently.

If you qualify as a Kleingewerbetreibender under these criteria, you are not required to register your business in the commercial register. This also means there is no obligation to keep double-entry accounts. Important: this exemption from the registration obligation applies only to sole traders and partnerships under civil law engaged in trade.

The term Kleingewerbe is used in a further context: accounting obligations. In the previous section we established that Kleingewerbetreibende in the strict sense (no commercial register entry) are not required to keep double-entry accounts. The same applies to Kleingewerbetreibende who are entered in the commercial register, provided they meet the following conditions:

• They have an annual profit of no more than 60,000 euros.
• They achieve annual turnover of no more than 600,000 euros.

The removal of the obligation to keep accounts and prepare a balance sheet represents a considerable reduction in administrative burden.

In both variants, the business volume can be impressive: for commercial register purposes, an annual turnover of 250,000 euros applies as an indicative threshold; for accounting obligations, there is a binding threshold of 600,000 euros annual turnover. In everyday usage, few people associate such figures with the term Kleingewerbe. When you encounter this term, always check what is meant by it in the specific context.

Many people confuse the two terms Kleingewerbe and Kleinunternehmer. These are two designations that differ both in their definition and in their consequences.

The term Kleinunternehmer is clearly defined in VAT law — that is the first difference from the Kleingewerbetreibender. The relevant provision is found in § 19 of the VAT Act (UStG). In addition, both traders and freelancers can qualify as Kleinunternehmer. Business status is irrelevant; what matters solely is the level of annual turnover.

The UStG sets the following conditions for the Kleinunternehmer scheme:

• Annual turnover in the preceding calendar year must not exceed 22,000 euros.
• Turnover in the current year is expected to be no more than 50,000 euros.

The same figures apply to new businesses, but the time periods shift to reflect the start-up situation. The 22,000-euro limit applies to the year of establishment; the 50,000-euro limit is relevant for the following year. Both figures may be estimated. What matters is that your estimate is based on a sound foundation. If you can foresee that you will achieve higher turnover, you may not apply the Kleinunternehmer scheme.

Do you exceed the turnover threshold in one year? The VAT exemption then ends in the following year. The tax office will not notify you of this. It is your responsibility to draw the appropriate conclusions. In particular, this means: charge VAT on invoices from 1 January of the relevant year onwards. Your Guhr Steuerberatung will support you with this challenge and handle all formalities such as VAT advance returns and the annual VAT return.

As a Kleinunternehmer you are in principle subject to VAT, but benefit from an exemption. You do not need to charge or remit VAT. This is primarily an administrative relief. It is also an advantage when working with clients who are not entitled to deduct input tax — this applies to private customers and other Kleinunternehmer. Thanks to the VAT exemption, you can offer your services at a lower price. When working with businesses that are entitled to deduct input tax, it makes no difference: in that case VAT is simply a pass-through item.

Bear in mind that as a Kleinunternehmer you may not deduct input tax. Your business expenses attract VAT just as they would for a private customer. This can create a financial disadvantage, depending on the level and structure of your business expenses. Your Guhr Steuerberatung will assess this on a well-founded basis and help you decide whether to apply the Kleinunternehmer scheme.

If you wish to register a Kleingewerbe, the same rules apply as for registering an ordinary trade business. You notify the locally responsible tax office and the trade office (Gewerbeamt). Complete the relevant forms carefully and, if in doubt, contact your tax adviser beforehand.

Unlike freelancers, traders must approach two authorities:

• Send your completed tax registration questionnaire to your tax office. Here you also indicate whether you will apply the Kleinunternehmer scheme. Consider this binding decision carefully.
• Submit the trade registration form to your local trade office (Gewerbeamt). In this document you indicate, amongst other things, whether you will (initially) carry on your self-employed activity as a side occupation.

Whilst notification to the tax office is free of charge, local authorities levy a fee for trade registration. This is, however, modest — expect a low to mid two-digit figure. You may also need to provide further documents, such as a commercial register extract or a certificate of good conduct.

As a trader, you are in principle subject to tax. An exception applies only if you earn a very small profit from a side activity. For annual income of up to 410 euros, there is no obligation to declare the profit in a tax return or to pay tax on it. This presupposes that you are simultaneously pursuing a main occupation.

Beyond that threshold, income from trade is in principle subject to tax. The type of taxation depends on your legal form. Most Kleingewerbetreibende operate as sole traders. In that case, the profit is subject to income tax.

The trade tax rules also deserve mention: sole traders benefit from a tax exemption on annual profits of up to 24,500 euros. They do not need to pay trade tax or file a trade tax return. Most Kleingewerbetreibende do not need to concern themselves with this tax.

This article has shown how complex the rules for Kleingewerbe are. The lack of a clear definition and the different meanings in various areas overwhelm many new businesses and entrepreneurs. Turn to specialist tax advisers — Guhr Steuerberatung is here to support you comprehensively.