Trade Tax: Basics for Investors

Trade tax in Germany: what investors need to know

Trade tax (Gewerbesteuer) is a municipal tax on the income of commercial businesses in Germany and, for most companies, accounts for roughly half of the total tax burden on profits. It is levied on top of corporate income tax or personal income tax. The calculation starts from the profit determined under income tax rules, adds back certain financing and rental costs, deducts certain items, and applies a federal base rate of 3.5% to the result. Each municipality then applies its own multiplier (Hebesatz). With a typical multiplier of 400%, the tax amounts to 14% of trade income. Because multipliers vary widely, the location of a business and its permanent establishments has a direct impact on its tax rate.

For international investors, Gewerbesteuer is often the least familiar part of the German tax system. Its add-backs can create a tax burden even for loss-making businesses with high financing costs, its rules for real estate companies shape property investment structures, and its treatment of holding companies and partnerships affects acquisition structures. This article explains the basics that matter for investment decisions, from the calculation to location planning.

Who pays trade tax

The tax is levied on every commercial business (Gewerbebetrieb) operated in Germany, to the extent it is carried on through a German permanent establishment. Corporations such as GmbHs, AGs and SEs are always treated as commercial businesses in their entirety (§ 2(2) GewStG), regardless of their actual activity. Partnerships are subject to it if they carry on a commercial activity or are deemed commercial, for example a GmbH & Co. KG in which only the corporate general partner manages the business.

Freelance professionals, such as lawyers, physicians and architects, and agriculture and forestry businesses are not subject to it. Individuals and partnerships that merely manage their own assets, such as private real estate investors, are also outside the scope unless their activity is commercial in nature, for example where they trade properties on a large scale.

A foreign company is liable only if it has a permanent establishment in Germany. Income attributable to foreign permanent establishments is excluded from the German trade income. Branches, warehouses and construction sites can all qualify. Our article on permanent establishment risk explains when a German permanent establishment arises.

How trade tax is calculated

The starting point is the profit as determined for income or corporate income tax purposes (§ 7 GewStG). To this profit, certain add-backs are made and certain deductions are subtracted. The resulting trade income, rounded down to full EUR 100 and, for individuals and partnerships, reduced by an allowance of EUR 24,500 (§ 11(1) GewStG), is multiplied by the base rate of 3.5% (§ 11(2) GewStG) to obtain the tax base amount (Steuermessbetrag). The municipality applies its multiplier to that amount.

Illustration: a GmbH in a municipality with a 450% multiplier earns a profit of EUR 5 million and pays EUR 2 million of interest. One quarter of the interest above the EUR 200,000 allowance, EUR 450,000, is added back, so trade income is EUR 5.45 million. The tax base amount at 3.5% is EUR 190,750, and the Gewerbesteuer due is EUR 858,375. Without the add-back, it would have been EUR 787,500.

Procedure and payment

The tax office determines the tax base amount in an assessment notice, and the municipality issues the actual tax assessment by applying its multiplier. Objections against the base amount must be directed to the tax office, while objections concerning the multiplier or payment go to the municipality. Quarterly prepayments are due on 15 February, 15 May, 15 August and 15 November, based on the last assessment. Where several municipalities are involved, the tax office also issues an allocation notice. Because the base amount notice binds the municipalities, disputes about add-backs, deductions or the existence of a permanent establishment must be pursued against the tax office, if necessary before the finance courts.

The tax is a non-deductible expense for income and corporate income tax purposes. Companies therefore calculate their overall burden by simply adding corporate income tax, solidarity surcharge and the municipal tax, without any interaction between them. Companies with permanent establishments in several municipalities should also keep payroll data per site, because wages drive the allocation.

Add-backs: financing and rental costs

The add-backs in § 8 no. 1 GewStG reflect the idea that the tax should capture the yield of the business regardless of how it is financed. A share of interest expense, rents, leasing rates and licence fees is therefore added back to profit.

The percentages differ: 25% of financing costs, including interest and certain discounts; 20% of rents and leasing rates for movable fixed assets, reduced by half for electric vehicles and certain other low-emission vehicles and bicycles; 50% of rents for immovable fixed assets; and 25% of licence fees, with exceptions for licences that only entitle the licensee to sublicense. The aggregate is added back only to the extent that it exceeds an allowance of EUR 200,000 per year.

For leveraged acquisitions, heavily leased retail and logistics businesses and companies paying high royalties, the add-backs can be significant. A company that makes no profit after interest can still owe Gewerbesteuer because of the add-back. Debt-financed acquisition structures should therefore model the municipal tax separately from corporate income tax, and the choice between leasing and purchasing assets, or licensing and owning intellectual property, should take the add-backs into account.

The extended reduction for real estate companies

Real estate is a special case. Commercial businesses that hold real estate can deduct the property tax expense on business property (§ 9 no. 1 sentence 1 GewStG). Much more important is the extended reduction (erweiterte Kürzung) under § 9 no. 1 sentence 2 GewStG: companies that exclusively manage and use their own real estate, possibly alongside their own capital assets and certain housing construction activities, can on application deduct the entire part of their trade income attributable to the management and use of their own real estate. In practice, a qualifying property-holding GmbH pays no Gewerbesteuer on its rental income.

The requirement of exclusivity is strict. Ancillary activities such as providing operating equipment, operating a hotel or parking garage with services, or supplying energy can jeopardise the extended reduction for the whole year. The legislature has relaxed some restrictions: income from generating electricity from renewable sources and from operating charging stations for electric vehicles is harmless if it does not exceed 20% of rental income under the conditions of the statute. Structuring property holdings, including the separation of operating activities into separate companies, therefore requires careful planning; see our page on real estate transactions and our article on real estate transfer tax on share deals.

Trade tax in holding structures and partnerships

Dividends received by a corporation from a domestic corporation in which it held at least 15% at the start of the assessment period are deducted for trade tax purposes (§ 9 no. 2a GewStG), with similar rules for foreign subsidiaries. As for corporate income tax, 5% of the dividends is treated as a non-deductible expense, so that a small part remains taxable. Dividends from portfolio participations below 15% are fully subject to Gewerbesteuer, which matters for investment holdings and minority stakes. Capital gains on shares are exempt as under § 8b KStG, with the 5% rule.

A fiscal unity (Organschaft) for trade tax purposes exists where a corporate subsidiary is financially, organisationally and economically integrated into the parent and a fiscal unity for corporate income tax exists; the subsidiary is then treated as a permanent establishment of the parent (§ 2(2) sentence 2 GewStG). This allows offsetting profits and losses within the group and avoids double counting of add-backs on intra-group financing.

For individual partners of commercial partnerships, the income tax burden is reduced by a credit of four times the tax base amount attributable to them (§ 35 EStG), which largely neutralises the municipal tax at multipliers of up to around 400%. Corporations receive no such credit; for them, Gewerbesteuer is an additional cost that will form a larger part of the overall burden as corporate income tax falls to 10% by 2032, as explained in our article on the corporate tax rate cut.

Location decisions and the minimum multiplier

Municipal multipliers differ widely. Large cities often apply multipliers well above 400%, while some smaller municipalities have attracted holding and financing companies with multipliers close to the statutory minimum. The legislature has responded by raising the minimum multiplier from 200% to 280% from the 2027 assessment period. Where a company has permanent establishments in several municipalities, the tax base amount is allocated between them, generally in proportion to wages paid. A move of a company's seat alone does not shift trade income if the business is actually managed and operated elsewhere, and the tax authorities check whether a low-tax location has genuine substance.

Investors should therefore treat it as a site-specific cost and include it in location comparisons alongside real estate, labour and infrastructure costs. More on our tax work is available on our corporate and transaction tax page.

How TRW & Co helps with trade tax

We advise investors and companies on Gewerbesteuer in acquisitions, financings and reorganisations: modelling add-backs in leveraged structures, structuring real estate holdings to secure the extended reduction, designing holding and fiscal unity structures and assessing permanent establishment and location questions. We represent clients in tax audits and in disputes with municipalities and tax offices on trade tax assessments. To discuss your structure, contact us. This article provides general information and is not tax or legal advice.