What you need to know about trade tax

The trade tax is a municipal Tax, which is paid by companies and self-employed persons on their business income. It represents a significant source of revenue for local authorities and is used to finance local Infrastructure and public services. The calculation is based on trade income, which is derived from the company's profits.

The trade tax rate is set individually by each municipality and usually varies between 200% and 500%. As a municipal tax, the collection and determination of trade tax is the responsibility of the individual municipalities. As a result, the tax rates can vary from place to place.

Companies are obliged to pay trade tax to the municipality in which their registered office is located. This is a direct Tax, as it is paid directly by the taxpayer to the local authority. Trade tax is governed by the Trade Tax Act (GewStG) and is regulated at federal level, while the assessment rates are determined at local authority level.

To calculate the trade tax, the trade income is multiplied by the tax base rate (3.5%), resulting in the tax base amount. This is then multiplied by the respective municipal assessment rate to determine the trade tax payable.

Key Takeaways

• Trade tax is a tax levied by companies on their profits.
• All traders, i.e. sole traders, partnerships and corporations, are obliged to pay trade tax.
• The amount of trade tax is calculated on the basis of the trade income and the assessment rate of the respective municipality.
• There are allowances and exemptions for trade tax, for example for small businesses and farmers and foresters.
• Trade tax must be paid quarterly in advance, with the exact deadlines varying depending on the municipality.

Who is obliged to pay trade tax?

Companies subject to trade tax

Trade tax liability arises when a company maintains a permanent business operation. A permanent business operation exists when an independent, sustainable activity is carried out for the purpose of generating income.

Requirements for trade tax liability

It does not matter whether the company makes a profit or a loss. Even if a company does not make a profit, it is still obliged to pay trade tax.

Trade tax liability regardless of profits or losses

The trade tax liability is independent of the profits or losses generated. It is sufficient for the company to carry out an independent, sustainable activity in order to be liable for trade tax.

How is the amount of trade tax calculated?

The amount of trade tax is calculated on the basis of the trade income. The trade income is derived from the company's profit, which is adjusted for certain additions and deductions. The additions include, for example, rental and lease interest, leasing instalments and certain financing expenses.

However, loss carryforwards and certain allowances are included in the deductions. Trade income is calculated in accordance with the provisions of the Income Tax Act. Tax profit calculation methods such as the cash basis method or the accrual basis method are used for this purpose.

The trade income determined in this way forms the basis for calculating the trade tax. The rate of assessment, i.e. the percentage by which the trade income is multiplied, varies depending on the municipality and can be between 200 and 400 per cent.

What exemptions and allowances are there for trade tax?

There are certain exemptions and allowances for trade tax that serve to relieve small and medium-sized enterprises. For example, allowances can be claimed that reduce trade income and thus reduce the amount of trade tax payable. There are also various additions and deductions that affect the amount of trade tax.

There are also certain businesses that are exempt from trade tax. These include, for example, agricultural and forestry businesses as well as non-profit organisations such as associations and foundations. Small businesses can also be exempt from trade tax under certain conditions.

It is therefore advisable to find out in advance about possible exemptions and allowances in order to optimise the trade tax burden.

How and when must trade tax be paid?

Trade tax is generally paid quarterly as an advance payment to the relevant tax office. The exact dates for the advance payments are set by the tax office and communicated to the companies. The amount of the advance payments is based on the expected trade income for the current year and is determined on the basis of the last tax assessment notice.

At the end of the financial year, companies must submit a trade tax return in which they disclose their actual trade income. The final amount of trade tax is determined on the basis of this return. If this results in an additional payment, it must be settled within a certain period.

In the event of an overpayment, however, a refund will be made by the tax office.

What are the consequences of non-payment of trade tax?

Failure to pay trade tax can have various consequences. First, interest on arrears will be charged, which will increase the amount owed. In addition, the tax office may issue reminders and initiate enforcement measures to collect the outstanding amounts.

This includes, for example, the seizure of accounts or Receivables as well as the initiation of insolvency proceedings. In the worst case, non-payment of trade tax can lead to the closure of the company. It can also Managing Director and shareholders will be held personally liable if they fail to meet their payment obligations.

It is therefore extremely important to meet the payment deadlines for trade tax and, in the event of payment difficulties, to contact the tax office at an early stage.

Tips for optimising the trade tax burden

Various measures can be taken to optimise the trade tax burden. These include, for example, the use of allowances and reduction options to reduce trade income. Investments in the company can also be claimed for tax purposes in order to reduce the assessment basis for trade tax.

Furthermore, forward-looking tax planning can help to minimise the trade tax burden. This includes, for example, the choice of a suitable legal form or the Optimization of business structures. Tax-optimised structures such as restructuring or company successions can also help to reduce the trade tax burden.

It is also advisable to keep up to date with current tax Developments to obtain information and, if necessary, seek professional advice. A tax advisor can help identify individual options and develop tax-optimised solutions. Through targeted tax planning, companies can reduce their trade tax burden in the long term and improve their economic situation.