German Trade Tax (Gewerbesteuer): Guide for Freelancers

If you're freelancing in Germany, you've probably heard of Gewerbesteuer (trade tax). But do you have to pay it? How much? And can you deduct it? This guide explains everything IT freelancers need to know about German trade tax.

What is Gewerbesteuer?

Gewerbesteuer is a tax on commercial businesses in Germany. It goes to the municipality where your business is located. Unlike income tax (which goes to federal/state level), trade tax finances your local community.

Important: Not every self-employed person pays Gewerbesteuer!

Freiberufler vs. Gewerbetreibender

The first question: Are you even subject to trade tax?

Freiberufler (No Trade Tax)

If you're a "Freiberufler" (liberal profession), you pay no Gewerbesteuer. Liberal professions according to § 18 EStG include:

• Doctors, dentists
• Lawyers, tax advisors
• Architects, engineers
• Journalists, translators
• Scientists, artists
• And: Certain IT activities

IT Freelancers: Freiberufler or Gewerbetreibender?

This is where it gets complicated. It depends on your specific activity:

More likely Freiberufler:

• Software development (creative, original work)
• High-level IT consulting
• System architecture
• Scientific programming

More likely Gewerbetreibender:

• Hardware trading
• Standardized web development
• Hosting/provider services
• Pure brokerage activities

When in doubt: The tax office decides. Many IT consultants are classified as commercial businesses even if they see themselves as freelancers. Get a binding ruling.

The Trade Tax Formula

If you're subject to trade tax, here's how to calculate it:

Trade Tax = (Profit - Allowance) × Tax Rate × Municipal Rate

The Components:

1. Profit Your profit from commercial activity (before taxes).

2. Allowance: €24,500 Sole proprietors and partnerships have an allowance of €24,500. Trade tax only applies above this profit.

Example: With €30,000 profit, only €5,500 is taxed.

Note: Corporations (GmbH, UG) have no allowance!

3. Tax Rate (Steuermesszahl): 3.5% The tax rate is uniformly 3.5% across Germany.

4. Municipal Rate (Hebesatz): Varies (200-900%) The municipal rate is set by your local municipality. It varies significantly:

City	Rate
Munich	490%
Frankfurt	460%
Hamburg	470%
Berlin	410%
Düsseldorf	440%
Cologne	475%
Stuttgart	420%
Monheim am Rhein	250%
Grünwald	240%

Calculation Example

Starting point:

• Profit: €80,000
• Location: Munich (rate 490%)
• Legal form: Sole proprietorship

Calculation:

Step 1: Subtract allowance
€80,000 - €24,500 = €55,500

Step 2: Calculate tax base
€55,500 × 3.5% = €1,942.50

Step 3: Apply municipal rate
€1,942.50 × 490% = €9,518.25

Trade Tax: €9,518.25

Credit Against Income Tax

Here's the good news: Trade tax is partially credited against income tax!

According to § 35 EStG, you can deduct 3.8 times the tax base from your income tax.

In our example:

Tax base: €1,942.50
Credit: €1,942.50 × 3.8 = €7,381.50

You can deduct €7,381.50 from your income tax.

Effective trade tax burden:

Trade tax paid: €9,518.25
Credit: €7,381.50
Effective additional burden: €2,136.75

Rule of thumb: With a municipal rate below 400%, trade tax for sole proprietors is almost completely offset by the income tax credit.

Trade Tax by Legal Form

Legal Form	Allowance	Credit Against Income Tax
Sole proprietorship	€24,500	Yes
GbR, OHG, KG	€24,500	Yes
GmbH	No allowance	No
UG	No allowance	No

For GmbH/UG:

• No allowance → Trade tax from the first euro of profit
• No credit against income tax (company pays corporate tax)
• But: Trade tax is a business expense and reduces profit

Trade Tax Prepayments

You don't pay trade tax only at year-end, but in prepayments:

• February 15
• May 15
• August 15
• November 15

The amount is based on the last trade tax return. You can request an adjustment if profits change significantly.

Saving on Trade Tax: Legal Tips

1. Choose Your Location

The municipal rate makes a big difference:

Example with €80,000 profit:

• Munich (490%): €9,518 trade tax
• Grünwald (240%): €4,662 trade tax
• Savings: €4,856 per year

But: You must actually operate there. The tax office recognizes shell companies.

2. Use the Allowance

For sole proprietors: As long as your profit stays below €24,500, you pay no trade tax.

With higher profits: Consider if you can bring forward investments to stay below the allowance (but only if it makes sense).

3. Check Your Legal Form

Sometimes a GmbH is worthwhile despite no allowance – especially with very high profits, where corporate tax (15%) plus trade tax is cheaper than personal income tax (up to 45%).

4. Avoid Add-Backs

Certain costs are added back to profit for trade tax:

• 25% of rent/lease payments
• 25% of leasing rates
• 25% of license fees
• Interest expenses (partial)

Check if buying instead of renting/leasing makes more sense.

5. Aim for Freiberufler Status

If your activity allows flexibility: Document the creative, consulting, scientific portion of your work. An experienced tax advisor can help here.

Trade Tax Return

Deadline: July 31 of the following year (with tax advisor: February of the year after next)

Responsible: Tax office (not the municipality!)

Forms:

• GewSt 1 A: Trade tax return
• For partnerships: Additional assessment return

Frequently Asked Questions

Do I pay trade tax as a Kleinunternehmer?

The Kleinunternehmer regulation (VAT) has nothing to do with trade tax. If you're commercially active and make over €24,500 profit, you pay trade tax – regardless of Kleinunternehmer status.

Can I deduct trade tax as a business expense?

No, not since 2008. Trade tax is not a business expense for income tax purposes. But you have the credit according to § 35 EStG.

What if I barely exceed the allowance?

You only pay on the amount over €24,500. With €25,000 profit, only €500 is taxed.

Do I pay trade tax working from home?

Yes, if you're commercially active. The relevant location is where business management takes place – your home office. Your residential municipality's rate applies.

Summary

Question	Answer
Who pays?	Commercial businesses (not Freiberufler)
From when?	Over €24,500 profit (sole proprietors)
How much?	About 7-17% of profit above allowance
Credit?	Yes, 3.8 × tax base against income tax
Savings potential?	Location, legal form, use allowance

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