The Trade Tax Allowance: What Does It Mean?

How does this allowance specifically affect your tax calculation? What additional aspects do you need to bear in mind with regard to trade tax? We address these questions in the following advisory article.

The first question to consider is whether you are required to pay trade tax at all. If you work as a freelancer, you can disregard this tax entirely! Freelancers and members of the liberal professions are only subject to the following taxes:

• Income tax (sole traders and partners in partnerships) or corporation tax (companies)
• VAT (exception: small businesses making use of the small-business (Kleinunternehmer) scheme)

Agricultural and forestry businesses are also exempt from trade tax. All other commercial enterprises — such as retailers, tradespeople, and industrial companies — are required by the tax office, acting on behalf of the relevant local authority, to pay trade tax.

Is there no doubt in your case that you fall within the scope of trade tax? Then the next step is to consider the potential tax burden. This is relevant for all business owners, including start-ups. Many founders do not have to pay trade tax in their first year of trading because high levels of investment mean they show no profit, or an insufficient one. Nevertheless, they should familiarise themselves with this tax in order to plan their finances effectively over the medium and long term.

The good news: many business owners benefit from a generously calculated allowance of 24,500 euros. This applies to the following groups:

• Sole traders
• Partnerships such as the OHG (general commercial partnership) and KG (limited partnership)

In addition, other legal entities such as associations carrying on a commercial activity are entitled to an allowance of 5,000 euros. There is no allowance for companies such as a GmbH (private limited company).

The term "allowance" (Freibetrag) means that no trade tax is payable on your trading income up to the relevant threshold. Only amounts above this allowance are subject to tax.

For example, suppose your taxable trading profit amounts to 30,000 euros per year. As a sole trader or responsible party in a partnership, you deduct the allowance of 24,500 euros. Trade tax is then payable only on the remaining sum of 5,500 euros.

Trade tax is restricted to profits from your commercial business; other income is not taken into account. This distinguishes trade tax from income tax. If you earn income as a sole trader or co-entrepreneur, the tax office uses your total income to calculate income tax. This includes, among other things, income from your business, capital income, rental income, and wages from employment. The calculation of trade tax, by contrast, is carried out separately and relates exclusively to the income you declare in Annex G (Anlage G) of your income tax return.

The amount of trade tax is based on trading income including the additions and deductions provided for under the Trade Tax Act (Gewerbesteuergesetz). These additions and deductions are complex: it is best to leave this task to experienced tax advisers!

The tax authority then rounds the trading income down to the nearest 100 euros and deducts the allowance of 24,500 euros where the trader is entitled to it. The resulting sum is multiplied by the standard trade tax assessment rate of 3.5%, giving the tax assessment amount. Finally, this amount is multiplied by the local multiplier (Hebesatz) applicable in the relevant municipality, which must be at least 200%. In many municipalities it is significantly higher and can exceed 400%.

Your tax specialists will help you with all questions and issues that arise in connection with trade tax and the grant of the allowance. If you are thinking of setting up a business, seek advice on this topic: the choice of the appropriate legal form is heavily influenced by trade tax and the potential allowance! Your tax adviser will also ensure that trading losses from previous years reduce your future trade tax payments. In addition, we check tax assessments for possible errors and lodge objections where necessary.