German Business Tax Guide

German Trade Tax German Trade Tax

Trade Tax (Gewerbesteuer) in Germany

The German Trade Tax, known as Gewerbesteuer, is a municipal tax on business income. Unlike the Value Added Tax (VAT), which is harmonized at the EU level, trade tax is a nationally regulated but locally levied tax. It represents one of the most important sources of revenue for German municipalities.

Key Features of the German Trade Tax

Trade tax applies to all commercial business activities carried out in Germany. It is imposed in addition to corporate income tax or personal income tax.

Taxable Entities

  • Corporations (e.g., GmbH, AG)
  • Partnerships (e.g., OHG, KG)
  • Sole proprietorships engaging in commercial activities

Certain professions, such as freelancers (lawyers, doctors, architects), are exempt from trade tax.

Tax Base

The tax base is determined from the profit as calculated under income or corporate tax law, with specific adjustments:

  • Add-backs (e.g., interest, rent, license fees)
  • Deductions (e.g., income from foreign permanent establishments)

Tax Rates

  • The basic federal trade tax rate is 3.5%.
  • Each municipality applies its own multiplier (Hebesatz), usually between 200% and 900%.
  • Example: With a municipal multiplier of 400%, the effective trade tax rate is 14% (3.5% × 400%).

Trade Tax in Relation to Income and Corporate Tax

Trade tax is not deductible as an expense for tax purposes. However:

  • For individual entrepreneurs and partnerships, a partial credit against personal income tax is granted.
  • For corporations, no such credit is available, meaning trade tax is an additional burden.

Cross-Border Aspects of Trade Tax

Permanent Establishments

Foreign companies operating in Germany through a permanent establishment (PE) are generally subject to German trade tax on the profits attributable to the PE.

Double Taxation Agreements (DTAs)

Most DTAs signed by Germany allocate taxing rights in line with the OECD Model Convention. While DTAs cover income taxes, they do not explicitly cover trade tax, since it is a municipal tax. However, German law typically ensures that profits already taxed abroad are not subject to trade tax in Germany if no German permanent establishment exists.

U.S. Companies in Germany

For American businesses:

  • If they operate through a subsidiary in Germany, that entity is fully subject to trade tax.
  • If they only provide cross-border services without a permanent establishment, no trade tax is due.
  • Proper structuring is essential to avoid unwanted PE risks and unexpected tax exposure.

Practical Considerations for Businesses

Location Choice

Because the trade tax burden depends heavily on the municipality’s multiplier, location plays a key role in overall tax planning. Large cities like Munich or Frankfurt often have higher multipliers than smaller towns.

Tax Planning and Compliance

  • Businesses must file an annual trade tax return with the local tax office.
  • Accurate allocation of profits between German and foreign operations is essential.
  • Professional tax advice is strongly recommended, especially for international structures.