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.

Sole Trader or Limited Company: What Trade Tax Really Changes | Trade Tax Calculator

Sole Trader or Limited Company: What Trade Tax Really Changes

The choice of legal form is rarely decided by tax alone — liability, external perception, financing and administrative effort often weigh more. Even so, a close look pays off, because sole traders and corporations differ in two fundamental respects when it comes to trade tax: the allowance and the credit. Both differences pull in the same direction, and both are substantial at small to medium profits.

Difference one: the allowance

Sole traders and partnerships deduct €24,500 from the rounded trade income; corporations do not. At €40,000 of trade income that means the sole trader is taxed on €15,500 and the GmbH on €40,000. The base amount is €542.50 against €1,400, and the trade tax at a 400 per cent multiplier €2,170 against €5,600. The allowance alone costs the GmbH €3,430 a year here.

Difference two: the credit

Sec. 35 EStG weighs even heavier. The sole trader may deduct four times their base amount from their income tax; the GmbH cannot, because it pays corporation tax and sec. 35 EStG concerns income tax only. For the sole trader in the example that means 4 × 542.50 = €2,170 of credit, exactly the trade tax paid. Effective extra burden: nil. For the GmbH, €5,600 stays definitively.

The full calculation at €80,000 profit

Let us work it through completely, with €80,000 of profit and a multiplier of 400 per cent. Sole trader: trade income €80,000, less the €24,500 allowance leaves €55,500, base amount €1,942.50, trade tax €7,770. Income tax under the 2026 basic tariff on €80,000 of taxable income is around €22,464, of which €7,770 is credited — leaving €14,694. Total burden: 7,770 + 14,694 = €22,464, or a good 28 per cent.

GmbH: trade income €80,000 with no allowance, base amount €2,800, trade tax €11,200. On top come 15 per cent corporation tax, that is €12,000, plus the 5.5 per cent solidarity surcharge on it, another €660. Total burden at company level: €23,860, or around 29.8 per cent. Up to this point the two forms are remarkably close — the decisive difference only comes afterwards.

The second step: distributions

For a sole trader the after-tax profit is freely available. For a GmbH it belongs to the company first. If the shareholder takes it out, the distribution attracts 25 per cent withholding tax plus the solidarity surcharge and, where applicable, church tax. Of the roughly €56,140 remaining after company taxes, a full distribution would leave only about €41,300 — pushing the overall burden to a good 48 per cent. Anyone who instead leaves the profit in the company and reinvests it does better with the GmbH, because retention at around 30 per cent sits well below the top income tax rate.

Where the threshold lies

As a rough orientation: as long as the entire profit is needed to live on, the sole proprietorship is usually ahead in tax terms — allowance and credit work immediately, and there is no second layer of taxation. As soon as a substantial part of the profit is meant to stay in the business permanently, the calculation tips towards the corporation. Very high multipliers worsen the corporation's position further, because it has no credit buffer: every percentage point hits it in full, whereas for a sole trader it only bites above 400 per cent. Both variants can be compared directly in the Trade Tax Calculator.

What is often overlooked

Three points regularly get lost in the discussion. First, trade tax is no longer deductible as a business expense in any legal form (sec. 4 para. 5b EStG), so it reduces the profit nowhere. Second, a GmbH counts as a commercial business by virtue of its legal form alone — even when it carries out an activity that would otherwise be freelance. A doctor operating as a sole trader pays no trade tax; the same activity inside a GmbH does. Third, changing legal form is itself a taxable event with contribution rules and blocking periods, and should never be done without professional support.

Conclusion

In trade tax terms the sole proprietorship is clearly ahead at small and medium profits: a €24,500 allowance and a credit that neutralises the entire tax up to a multiplier of 400 per cent. The GmbH scores where profits are meant to stay in the business or where liability questions dominate. Run both scenarios with your real figures and your real multiplier — the Trade Tax Calculator takes care of the arithmetic. The final decision belongs in a conversation with a tax adviser; this article is non-binding orientation.

Sole Trader or Limited Company: What Trade Tax Really Changes

Sole Trader or Limited Company: What Trade Tax Really Changes

Difference one: the allowance

Difference two: the credit

The full calculation at €80,000 profit

The second step: distributions

Where the threshold lies

What is often overlooked

Conclusion

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