Business Tax – What Entrepreneurs Need to Know

If you run a business, there’s a good chance the government will require you to pay taxes on your business income. New business owners often wonder whether their company has to pay business tax and, more importantly, what the tax rate is. In this article, our tax advisors have summarized everything you need to know.

What is business tax?

Trade taxes are income-based taxes. Accordingly, they are levied on the company’s profits. The tax is collected by the respective municipalities. It is therefore also referred to as a municipal business tax or property tax. Of course, trade tax is not levied without reason. Locally based businesses represent a financial burden for municipalities. To offset this, tax authorities levy trade tax. All important legal provisions can be found in the Trade Tax Act (GewStG).

Who has to pay trade tax?

Anyone who starts a business may have to pay trade tax. Whether you are subject to trade tax depends first and foremost on the type of business you operate. Freelancers such as doctors, tax advisors, journalists, or architects are exempt from this tax. Forestry and agricultural businesses also do not pay trade tax. If your business does not fall under any of these exemptions, your company is subject to trade tax.

However, even if you are required to pay trade tax based on your activities, this does not mean that taxes are actually due. Business owners are only required to pay once an exemption threshold of 24,500 euros is exceeded. Accordingly, trade tax is only due if the annual profit exceeds 24,500 euros. Unfortunately, this exemption does not apply to everyone. Only individuals and partnerships remain tax-exempt up to this limit. Corporations always pay trade tax in full. Many new business owners therefore do not pay trade tax at the outset, despite being subject to the tax.

Why don’t freelancers have to pay trade tax?

Freelancers are not granted tax relief without reason. While business owners may have to pay high trade tax amounts in some cases, they can claim these on their income tax return. As a result, business owners pay less income tax than freelancers and are ultimately treated more or less equally for tax purposes.

How is trade tax paid?

The first trade tax payment is determined by the tax office after the annual financial statements are finalized. The trade tax amount is communicated via a trade tax assessment notice. This notice details how the tax was calculated and when it is due. The amount is simply transferred to the tax office.

Once the amount has been determined, advance payments must be made in the following year. Similar to income tax or corporate income tax, trade tax advance payments must be made quarterly. Payments are due in the middle of each quarter, i.e., on February 15, May 15, August 15, and November 15.

How is trade tax calculated?

The basis for calculating trade tax is annual income minus operating expenses. In addition, the Trade Tax Act provides for certain additions and deductions. This trade income is reduced by the tax-free allowance of 24,500 euros. Please note! Corporations are not allowed to deduct an exemption.

The remaining amount is multiplied by the uniform nationwide percentage rate (tax assessment rate) of 3.5 percent. The result is referred to as the trade tax assessment amount.

Example for a sole proprietorship:

• Business income: 50,000 euros
• Taxable business income: 50,000 euros – 24,500 euros = 25,500 euros
• Trade tax assessment base: 25,000 euros x 0.035 = 875 euros

However, the amount calculated so far does not yet correspond to the actual tax burden. The trade tax base must still be multiplied by a multiplier rate. This multiplier rate varies from municipality to municipality. A minimum multiplier rate of 200 percent applies. A significantly higher rate is to be expected, particularly in large cities. In Düsseldorf, a multiplier of 440 percent applies. Oberhausen even charges 550 percent. The tax base is therefore multiplied by, for example, 4.4. The result is the trade tax to be paid.

Example:

• Trade tax: 875 euros x 4.4 (example: Düsseldorf) = 3,850 euros

The determination of the assessment rate is reserved for the municipalities. Therefore, the rate can vary significantly and is frequently adjusted.

Questions about trade tax?

This article has provided you with an overview of trade tax. If you have any further questions about trade tax or starting a business, our tax advisors in Düsseldorf and Oberhausen are here to assist you. Contact us.