Trade tax (Gewerbesteuer) is a tax charged by the local municipalities. The tax rate is different between the different municipalities, the national average is 14%.
Who has to pay trade tax?
In Germany, there are two types of self employment - freelancer and sole-trader.
Trade tax has to be paid by sole-traders (Gewerbetreibende).
How is the trade tax calculated?
The trade tax is based on your profit, which is calculated in your yearly profit and loss report (EÜR).
This is how your trade tax is calculated from your profit:
€24.500 are deducted from your profit. If you are a sole-trader with less than €24.500 you will be exempt from trade tax
The resulting amount is multiplied by the "tax base rate", which is 3.5% throughout Germany, this gives us the "Trade tax base amount".
The trade tax base amount is then multiplied by the local municipality trade tax rate, this rate is determined by each municipality. This gives us the trade tax total amount.
Trade tax is deducted from your Income tax
Some of the trade tax can be deducted from the private income tax. The amount that can be deducted is 3.8 times the trade tax base amount. As a reminder:
Trade tax base amount = (Profit - €24.500) * (3.5% base tax rate)
Let's say that your yearly profit was €40.000, and you live in Berlin, where the local trade tax rate is 410%
Reducing the €24.500 allowance will result in €15.500
The trade tax base amount will be €15.500 * 3.5% (Tax base rate) = €542,50.
The trade tax amount will be 542,50 * 410% (Berlin trade tax rate) = €2.224,50
The deduction to the income tax from the trade tax will be €542,50 * 3.8 = €2.061,50.
This means that the "extra" tax burden from trade tax on top of the income tax is just €163.
Annual trade tax return
An annual trade tax return should be submitted annually to the tax office.
The deadline for submitting the trade tax return is the 31st of July of the following year, or the 28th of february of the second following year if the report is submitted by a certified tax advisor.
Similarly to income tax, the trade tax is paid in 4 quarterly prepayments along the year, and is based on your profit estimation from previous years.
After submitting your trade tax return, you will either pay the Finanzamt or get reimbursed for the difference between the prepayments and the final trade tax amount.
How are the prepayments determined for new businesses?
When registering as a sole-trader, as part of the tax registration form (Fragebogen zur Steuerlichen Erfassung), you will have to provide the Finanzamt estimations for your expected yearly income, the prepayments will be based on those estimations.
Sorted tax guides are provided without liability and do not replace a tax advisor.
To get an accurate answer for your specific case, please consult a tax advisor.
You can always ask one of tax advisors on the Sorted platform.