The Trade Tax Allowance: Amount and Significance

But what does this allowance mean in practice? Who is entitled to it? And how does it affect taxation? We answer these and further questions in the following article.

Trade tax affects all businesses that are classified as a commercial enterprise (Gewerbebetrieb). Typical examples include retailers, tradespeople, and industrial companies. They are liable to trade tax in principle, regardless of their legal form.

However, an allowance means that many business owners neither need to file a tax return nor remit any trade tax. You can claim this allowance of 24,500 euros if you are economically active as a natural person or through a partnership. There is also a reduced allowance for associations and similar organisations. The Trade Tax Act does not provide for any allowance for companies.

The state grants the allowance of 24,500 euros for, among others, the following legal forms:

• Sole traders
• General commercial partnership (OHG)
• Limited partnership (KG)
• Civil law partnership (GbR)

Before we look at the allowance and its effects, let us turn to how trade tax is calculated.

Trade tax is a tax on profit; turnover is not taxed. The starting point for the calculation is therefore the annual profit. However, the basis for calculating trade tax differs from the profit calculation for income tax or corporation tax purposes, as there are specific additions and deductions.

For example, you must add back certain expenses such as interest charges and rents — these were deducted when calculating profit for income tax or corporation tax purposes. In the case of expenses such as rents, an addition is only required if the financing component is at least 20%, 25%, or 50%. Trading losses from previous years give rise to deductions. The calculation is complex — it is best to leave the completion of the tax return to your tax adviser!

This calculation produces the trading income (Gewerbeertrag), which you may round down to the nearest 100 euros. You then deduct the allowance from this figure, provided you are entitled to it. If the result is zero or less, no trade tax is payable. Where this calculation leaves a positive figure, the following two steps apply:

• Remaining amount x 3.5% (assessment rate) = tax assessment amount
• Tax assessment amount x local multiplier (at least 200%) = tax payable

The trade tax allowance for natural persons and partnerships amounts to 24,500 euros per year. For associations and public-law legal entities it is 5,000 euros per year. This rule applies, among others, to public-law corporations.

A special feature of trade tax law is that you are only required to file a tax return if a tax liability actually arises. Do you operate as a sole trader or participate in a partnership, and does the calculation basis amount to 24,500 euros or less? In that case, you are not required to file a trade tax return.

This more relaxed rule differs from the filing obligation for income tax and corporation tax returns. Those returns must be completed even in a year of loss; otherwise the responsible tax office will initiate compulsory measures. This is not necessary in the case of trade tax, because the tax authorities are already familiar with the key figures from the income tax or corporation tax return. Officials can therefore make a well-founded assessment of whether trade tax applies to your business. No separate tax return is required if you show a low profit or even losses.

The tax allowance for natural persons and partnerships means that in many cases business owners are not required to pay any trade tax at all. All others benefit from a significant reduction: trade tax is only due on amounts above the allowance. A business owner who, after taking into account the applicable additions and deductions, shows trading income of 30,000 euros, for example, is only required to remit trade tax on 5,500 euros.

An example illustrates this. Trading income stands at 30,000 euros; the local multiplier is 300%. The following trade tax is due:

• without allowance: 3,150 euros
• with allowance: 577.50 euros

If your business is subject to income tax, there is further good news: the tax office largely takes into account the trade tax you have paid, meaning that the effective additional burden from trade tax is frequently nil. You pay correspondingly less income tax. However, where the local multiplier is high, you may bear a modest additional burden. Ask your established tax adviser for more information!

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