The trade tax basically affects all businesses in Germany. But there are regional differences, tax exemptions and the consequences of the trade tax. We will bring you closer to all of these aspects in detail in this post. In particular, we go into the trade tax multiplier, which is determined directly by the respective municipalities and thus significantly influences the amount of trade tax, but also the location decision of companies.
Business tax multiplier – definition
The business tax is collected directly from the municipality in which the business is located. This freedom of choice, which is given by the individual assessment rate, which must be over 200 percent, creates regional differences. For companies, this means that the trade tax rate is not the same everywhere and that there may be minor advantages or disadvantages depending on the location. The tax must be paid directly by the entrepreneurs and can be calculated quickly and easily.
Who determines the business tax multiplier?
Since the trade tax multiplier is one of the most important sources of income for the municipalities, they can determine the trade tax multiplier themselves. At the same time, this creates a certain tax competition, whereby a lower limit has been set so that there are no municipalities that cannot apply a tax rate at all. In addition, there is an allowance of 24,500 euros per year for which no trade tax is levied, which means that the regionally different assessment rates lose their importance for smaller companies.
Trade tax multiplier in the calculation of trade tax
First, let’s take a look at who has to pay all business tax. In general, all companies are included, whereby the aforementioned allowance means that small companies do not have to pay trade tax. In addition, freelancers are not affected, as they do not have to register a business. For everyone else, the question arises, how is business tax calculated?
Calculate business tax – step by step
The starting point for calculating the trade tax is the company’s profit, whereby the aforementioned tax exemption must be observed. The profit is multiplied by 3.5 percent. This is the trade tax index, which is standardized. The result of this calculation is now multiplied by the trade tax multiplier. This rate must be at least 200 percent for all municipalities. The lower limit would therefore be to first multiply the profit by 3.5 percent and then with 200 percent as the minimum assessment rate. In other municipalities that do not apply the minimum rate, this number can also be in the range of 300, 400 or even 500 percent.
Significance of the tax base
- The tax base is the calculation base and is generally set at 3.5%. There is no leeway for the municipalities here, because this is a uniformly defined sentence.
- The companies must pay the expected amount in advance on a quarterly basis. The final settlement takes place at the end of the year with the trade tax return.
- The assessment rate therefore only has an effect in the next step of the calculation and is, so to speak, the multiplier of the tax base. The best way to outline this is with a practical example.
Practical example – calculate business tax
If your company has made a profit of 100,000 euros (taking into account the tax exemption) and the municipality applies a tax rate of 300%, the following calculation results:
100,000 euros x 3.5% = 3,500 euros x 300% assessment rate = 10,500 euros trade tax
The total amount is then to be paid directly to the municipality.
This example shows that the individual assessment rate of the municipalities can have a major impact on the level of business tax. If the assessment rate in the municipality in our example were at the minimum of 200 percent, the trade tax to be paid would be 7,000 euros – a considerable difference.
The time when the payments are due is also important here, because the trade tax must always be paid quarterly in advance. The exact billing will only take place at the end of the year. At this point in time, the advance payments made so far and the amount actually due this year are compared. This then results in either a credit or a corresponding additional payment for the company.
Business tax calculator
If you don’t want to bother calculating the business tax yourself, you can simply use a free online business tax calculator to determine the business tax. Due to the simple calculation method, this is usually not necessary, but the online tools are uncomplicated and helpful.
Anyone who is faced with an important location decision should definitely compare the business taxes of the different municipalities directly and make appropriate calculations. Finally, adequate liquidity must be available in good time for the quarterly advance payment of the amounts .
Why is there a trade tax multiplier?
The trade tax multiplier creates a certain competition between locations, despite the lower limit that has been introduced. At the same time, the taxes paid to the municipality help to ensure that those municipalities that are particularly attractive for businesspeople are appropriately rewarded through these taxes. On the other hand, municipalities wishing to locate additional businesses can increase their attractiveness with a low assessment rate. Overall, the assessment rate means that the municipalities themselves can influence how they want to position themselves vis-à-vis companies. On the one hand, the assessment rate brings with it freedom for the municipality and income, on the other hand it exposes the municipalities to a certain degree of competition.
As a company, however, you shouldn’t just locate your business where the tax rate is as low as possible. Locations with higher rates of assessment can be very attractive because there is a reason why they can afford to charge a higher rate of assessment. Reasons for this can be, for example, exceptionally good infrastructure or the better availability of qualified staff (through university locations, etc.).
Trade tax rate in Germany
The trade tax rate in Germany was partially regulated a few years ago by the minimum tax rate of 200%. This value is therefore the lowest trade tax multiplier in all of Germany, even if the number may sound high at first. Individual municipalities charge significantly higher rates of assessment of up to 900%, whereby these are absolute individual cases, such as very small municipalities with very few companies that want to contribute more to the municipality voluntarily and deliberately.
Average trade tax multiplier
A look at the individual regions shows that the assessment rate is between 300 and 400 percent on average almost everywhere. In Frankfurt, for example, the assessment rate is well over 400 percent and therefore well above the average. The simple explanation for this is that Frankfurt is very attractive as a location for various industries. The companies based here are happy to pay more for the excellent infrastructure and the other advantages of the city. It is therefore evident that the business tax must also offer a good price-performance ratio from the point of view of the company.
Trade tax as a location factor for companies
In the previous paragraphs you have already recognized that the adjustable rate has advantages and disadvantages. For the municipalities as well as for the companies themselves. As a location factor, the assessment rate is a major influencing factor. If a company is looking for a new place of business, the lifting factor there must be taken into account in any case, after all, the trade tax could possibly even double compared to the trade tax currently paid.
On the other hand, it must always be countered that only those municipalities that have convincing arguments will choose a higher rate of assessment. In addition to the infrastructure, other factors also play a role, such as whether the city is generally also popular for residential purposes and whether there are good universities. This ensures that future personnel requirements can be met and that important employees do not quit because the company is moving to a less attractive city. For companies, this means that the pros and cons of the location must be weighed and the local assessment rate is certainly a relevant influencing factor that must be precisely planned financially.
Summary: business tax multiplier
In principle, all companies have to pay trade tax, whereby the tax exemption must be taken into account and the fact that freelancersOf course, you do not have to pay any business tax without a business registration. Due to the individual assessment rate, municipalities can charge very different local business taxes. This leads to competition among the municipalities, whereby in the course of a location decision, significantly more factors have to be taken into account than just the amount of local business tax. The assessment rate is always at least 200 percent throughout Germany and the tax base is defined as 3.5 percent. The starting point for calculating the tax allowance is always the profit made from the business. Companies have to pay the trade tax quarterly in advance, at the end of the year an exact billing takes place. It follows that this tax expense, which flows directly to the respective municipalities.