Business tax

Trade tax is a local business tax levied on the business income of a commercial enterprise (Sections 1 et seq. of the Trade Tax Act). It applies to real estate companies, project developers, commercial real estate brokers, and corporations that manage or sell real estate. Private landlords, on the other hand, who hold residential real estate under the income category “rental and leasing,” are generally not subject to trade tax-unless their rental activities cross the threshold into commercial activity.

Calculation and Tax Rate

Trade tax is calculated based on the trade income (profit plus additions, minus deductions pursuant to Sections 8, 9 of the Trade Tax Act) multiplied by the tax assessment rate (3.5%) and the municipal assessment rate. Each municipality sets its own assessment rate; in Bavaria, it typically ranges between 300% and 500%. In Nuremberg, the assessment rate is currently 467%, in Erlangen 380%, and in Fürth 440%. Corporations are also subject to corporate income tax; however, for sole proprietors and partnerships, trade tax reduces the income tax burden (credit under Section 35 of the Income Tax Act).

The additions under § 8 GewStG are an important detail for real estate companies: financing costs (interest, rent, lease payments) are added back to the business income at a specified rate. This means that the effective trade tax burden can be higher than the profit margin would suggest. This effect is particularly significant for leveraged real estate projects and should be taken into account in project planning.

Trade Tax and Real Estate Trading: Commercial Real Estate Trading

Any natural person who buys and sells more than three properties within five years (three-property limit) is classified for tax purposes as a commercial real estate trader. This has dramatic consequences: Profits are subject to trade tax, the speculation period no longer applies, and the properties are considered current assets. The exact distinction between private asset management and commercial trading is a classic subject of tax dispute.

The three-property limit is not absolute. Even two or even a single sale can be classified as commercial if a commercial intent is evident from the circumstances-for example, if the property was subdivided or renovated shortly after purchase and sold immediately thereafter. Conversely, long holding periods of significantly more than ten years generally protect against classification as a commercial real estate dealer, even if many properties are involved.

Extended Trade Tax Reduction

Real estate management companies may, pursuant to Section 9(1), sentence 2 of the Trade Tax Act (GewStG), reduce their entire trade income attributable to real estate-effectively a complete exemption from trade tax. The prerequisite is that the company manages exclusively its own real estate and does not engage in any impermissible ancillary activities. This provision is a significant incentive for real estate companies and makes structuring through a real estate management GmbH or GmbH & Co. KG very attractive from a tax perspective.

However, the extended deduction is not a sure thing: if shareholders or affiliated companies provide services to the company, so-called harmful ancillary activities can jeopardize the deduction. Photovoltaic systems on leased roofs or the leasing of business facilities can also call the full deduction into question. Ongoing tax advice is therefore essential for property management companies.

Practical Tip for Property Owners in Nuremberg and Franconia

Anyone selling or actively developing multiple properties in the Nuremberg metropolitan region should consult with a tax advisor early on to determine whether a commercial activity exists or is likely to arise. The three-property limit is not absolute-even fewer sales can be classified as commercial if a commercial involvement is evident. Real estate companies (GmbH or GmbH & Co. KG) offer structural options for planning the trade tax burden and benefiting from the extended trade tax reduction (§ 9 No. 1 GewStG).

In Nuremberg, the trade tax rate is high compared to the rest of Bavaria. Anyone establishing a new property management company should consider whether it makes sense to locate the company’s registered office in a municipality with a more favorable tax rate-provided that actual business activity takes place there. Purely nominal companies without economic substance at their registered office may be challenged for tax purposes.

Frequently Asked Questions

Do private landlords have to pay trade tax?

Generally, no. Private landlords who generate income from renting and leasing are not subject to trade tax. Exceptions apply if the management exceeds the scope of private asset management (e.g., through hotel-style accommodation or the provision of additional services).

What is the extended trade tax deduction?

Real estate management companies may, pursuant to Section 9(1) sentence 2 of the Trade Tax Act (GewStG), deduct their entire trade income attributable to real estate-effectively a complete exemption from trade tax. The prerequisite is that the company manages only its own real estate and does not engage in any impermissible ancillary activities.

When is one considered a commercial real estate dealer?

As a rule of thumb, the three-property limit applies: More than three sales within five years can lead to a determination of commercial activity. However, the decisive factor is always the overall assessment of all circumstances-holding period, planning, financing, and renovation. Early tax consultation is strongly recommended.

Can trade tax be offset against income tax?

Yes, for sole proprietors and partnerships, Section 35 of the German Income Tax Act (EStG) provides for a flat-rate offset of trade tax against income tax. This significantly mitigates the double tax burden. For corporations (GmbH), no such offset is possible-in these cases, trade tax is a genuine cost factor.

What is the trade tax exemption, and does it apply to real estate companies?

Sole proprietors and partnerships benefit from an annual exemption of 24,500 euros on trade income (Section 11(1) of the Trade Tax Act). Corporations-including the typical real estate GmbH or GmbH & Co. KG-do not receive this exemption. For property management companies, the exemption is of only theoretical significance anyway, provided they claim the extended trade tax reduction under Section 9 No. 1 of the Trade Tax Act (GewStG)-because in that case, the trade income from real estate is completely excluded. For real estate developers and commercial property dealers in the Nuremberg metropolitan region who cannot achieve a full reduction, however, the exemption is relevant when planning small projects: With a business income of 50,000 euros from a property sale by a sole proprietor, only 25,500 euros would effectively be subject to trade tax, which, at a Nuremberg assessment rate of 467%, corresponds to a tax savings of around 4,200 euros.

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