How is German trade tax calculated?

In four steps. First, the profit from the business is increased by additions under sec. 8 GewStG and reduced by reductions under sec. 9 GewStG — the result is the trade income. Second, it is rounded down to full 100 euros and natural persons and partnerships deduct the allowance of 24,500 euros. Third, the remaining base is multiplied by the base rate of 3.5 per cent, giving the tax base amount. Fourth, the municipality multiplies that amount by its multiplier. With 60,000 euros of trade income and a multiplier of 400 per cent that is (60,000 − 24,500) × 3.5% × 4.0 = 4,970 euros.

From what profit do I start paying trade tax?

As a sole trader or partnership you only pay from a trade income above 24,500 euros. Below that the allowance applies, capped at the trade income itself — so it never creates a loss carry-forward. At 24,600 euros of trade income the base is 100 euros, the base amount 3.50 euros and the trade tax at a 400 per cent multiplier 14 euros. Corporations such as a GmbH or UG have no allowance and pay from the first euro of trade income.

What is the multiplier and who sets it?

The multiplier is the percentage by which the municipality multiplies the tax base amount. Every municipality sets it by by-law; the statutory minimum is 200 per cent (sec. 16 para. 4 GewStG) and there is no upper limit. In large German cities rates are typically between 410 and 540 per cent, and the average for municipalities above 20,000 inhabitants was most recently 438 per cent. Because municipalities can change their multiplier at the turn of the year, check the current figure with your municipality before relying on it.

How does the credit under sec. 35 EStG work?

Sole traders and partners may deduct four times the trade tax base amount from their income tax. Three caps apply simultaneously and the lowest wins: four times the base amount, the trade tax actually paid, and the maximum relief amount, i.e. the income tax attributable to the business income. Up to a multiplier of 400 per cent the trade tax equals exactly four times the base amount — the burden is then arithmetically neutral, provided your income tax is high enough.

Why is the credit worth less at high multipliers?

Because the credit is firmly capped at four times the base amount while the trade tax keeps rising with the multiplier. At 400 per cent the two match exactly. At 500 per cent you pay five times the base amount but only four times is credited — one fifth remains as a real additional burden. With a base amount of 1,500 euros that is 1,500 euros of trade tax that is no longer offset. This excess is exactly what the calculator shows as your effective burden.

Do freelancers have to pay trade tax?

No. Trade tax only covers a standing commercial business. Freelance activities under sec. 18 EStG — doctors, lawyers, architects, tax advisers, journalists or teaching activities — are outside its scope, as are agriculture, forestry and purely asset-managing activities. Take care when freelance and commercial activities are mixed: in a partnership even a small commercial activity can taint all income as commercial. Have this checked professionally if in doubt.

What are additions and reductions?

They turn the taxable profit into the trade income, because trade tax is meant to capture the yield of the business regardless of how it is financed. Under sec. 8 no. 1 GewStG one quarter of the sum of certain financing components is added back — interest in full, 20 per cent of rents for movable and 50 per cent of rents for immovable assets, and 25 per cent of licence fees. That sum is exempt up to 200,000 euros. Reductions include 1.2 per cent of the assessed value of business real estate (sec. 9 no. 1 GewStG).

How accurate is this trade tax calculator?

The calculator reproduces the statutory route exactly: rounding down to full 100 euros, the 24,500 euro allowance for natural persons and partnerships only, the 3.5 per cent base rate and multiplication by the municipal multiplier. For the credit under sec. 35 EStG it makes one simplification: it assumes your business income is your only income and that the profit equals your taxable income. If you have other income, special expenses or loss carry-forwards, the maximum relief amount shifts. The result is a non-binding estimate and does not replace tax advice.

The €24,500 Allowance — Who Gets It and Who Does Not | Trade Tax Calculator

The €24,500 Allowance — Who Gets It and Who Does Not

The trade tax allowance is the friendliest rule in the whole Trade Tax Act: €24,500 of trade income stays entirely tax free. For many small businesses that simply means no trade tax at all. But the allowance has a hard boundary — it does not apply to every legal form, and anyone who loses it notices immediately on the assessment.

Who gets the allowance

Sec. 11 para. 1 sentence 3 no. 1 GewStG grants the €24,500 allowance to natural persons and partnerships. In practice that means registered sole traders, the GbR, OHG and KG, and the GmbH & Co. KG in its capacity as a partnership. Corporations are excluded — a GmbH, UG (limited liability), AG or cooperative pays from the first euro of trade income. Certain public-sector operations and tax-exempt bodies receive a smaller allowance of €5,000.

How the allowance works

The allowance is a genuine deduction, not a cliff-edge threshold. It does not vanish once you exceed it but permanently reduces the taxable base. A business with €24,600 of rounded trade income has a base of €100, a base amount of €3.50 and pays a grand total of €14 in trade tax at a multiplier of 400 per cent. At €30,000 of trade income the base is €5,500, the base amount €192.50 and the tax €770. Only with larger profits does the allowance lose relative weight: at €200,000 of trade income it still saves the same €24,500 of base, but that is barely twelve per cent.

The cap matters: the allowance is deducted "at most up to the rounded trade income". At €15,000 of trade income it is therefore €15,000, not €24,500. No negative remainder ever arises, and no carry-forward loss is created either. If you want to know what the allowance is worth in your case, switch the legal form in the Trade Tax Calculator and the difference appears immediately.

Once per business, not per person

The allowance belongs to the business, not to the entrepreneur. Anyone running two separate businesses that are genuinely independent in substance and organisation receives it twice — a restaurant and an unrelated trading agency, for instance. If the activities are economically intertwined, jointly financed and run with shared staff, the tax authorities treat them as a single business with a single allowance. The distinction is a matter of individual facts and is regularly picked up during tax audits.

For partnerships too the allowance applies only once to the partnership, not per partner. A GbR with four partners does not have €98,000 free, it has €24,500. That is one reason why several separate sole proprietorships can work out better than a joint partnership purely in trade tax terms — although liability, administrative effort and external perception may point the other way.

Why corporations miss out

That a GmbH gets no allowance looks unfair at first glance but follows the system: for a corporation the profit is the company's income, not the shareholder's. The shareholder takes money out as a managing director's salary — which reduces the profit and therefore the trade tax — or as a distribution, which is taxed at their own level. The subsistence-minimum idea behind the allowance simply does not apply at company level.

In practice that means: at €30,000 of trade income a sole trader pays €770 of trade tax at a 400 per cent multiplier, whereas a GmbH with identical trade income pays €4,200. For small profits that is a solid argument against the corporation — unless liability considerations clearly outweigh it.

The allowance in the first and final year

The allowance is not reduced pro rata for part-year periods. If you register your business in October and generate €20,000 of trade income by year-end, you pay no trade tax for that year — the full allowance is available even for a short assessment period. The same applies in the year the business is wound up. A change of legal form during the year is more complicated, because two assessment periods each with their own allowance can arise; that should be checked case by case.

Conclusion

The €24,500 allowance decides for many small businesses whether any trade tax arises at all. It applies per business rather than per person, is not reduced pro rata and never produces a negative remainder. Corporations do not get it — a point worth knowing when choosing a legal form. Run both variants with your own figures in the Trade Tax Calculator; the values shown there are a non-binding estimate and do not replace tax advice.

The €24,500 Allowance — Who Gets It and Who Does Not

The €24,500 Allowance — Who Gets It and Who Does Not

Who gets the allowance

How the allowance works

Once per business, not per person

Why corporations miss out

The allowance in the first and final year

Conclusion

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