Business enterprises are subject to the trade tax with their profit or so-called trade income. Individuals and partnerships have a trade tax free allowance of EUR 24,500, which is always deducted from the trade income.Corporations have no such allowance.
The trade tax rate is calculated by applying a rate of 3,5% to a local levy rate
Example: 3.5% x local levy rate of 490% = Trade tax rate of 17.15%
The local levy rate is determined by each municipality, from the legal minimum of 200% up to 490% which leads to trade tax rates from 7% to 17.15%! The trade tax expense therefore is directly related to the place of the business and the local levy rate which is set by the municipality.
There are often huge differences in the local levy rates around large cities. In the Munich area there are levy rates between 240% and 490%:
Pullach and Grünwald are acutally subburbs of Munich and enable significant trade tax savings. The same differences in trade tax levy rates can be found in the large areas in Hamburg, Frankfurt or Berlin.
Formally, a trade tax return has to be submitted to the tax office. The tax office then sets the trade income and calculates the trade tax amount by 3.5% which is then communicated to the municipality. The municipality calculates the trade tax with its collection rate and then sends out the trade tax statement to the businesses.
In the case of individuals, the trade tax reduces the income tax. For levy rates of up to 380% the trade tax is fully neutralized. If the business is located in a municipality with a levy rate of up to 380% the trade tax burden is zero for the individual. If the local levy rate is above 380% then there is a real trade tax burden for that individual as the trade tax is not fully neutralized by the income tax.
Corporations also have to pay corporation tax. Trade tax is not an expense for corporation tax purposes.