What role does the legal form of my company play in the calculation of trade tax?
February 15, 2022 | 50,00 EUR | answered by Isabel Möller
Dear tax advisor,
My name is Renate Kaiser and I run a small sole proprietorship in the service sector. Over the past few years, my revenue has been steadily increasing and now I need to address the issue of trade tax. I am wondering what role the legal form of my company plays in the calculation of trade tax and whether changing my legal form could result in tax advantages.
Currently, I am operating as a sole proprietor and I am considering whether it would be beneficial to convert my business into a GmbH or another legal form in order to potentially save on taxes. I am concerned that my current legal form could lead to a higher tax rate in the calculation of trade tax and that I could suffer financial losses as a result.
Therefore, I would like to know from you what impact the legal form of my company has on the calculation of trade tax and whether converting to another legal form could bring tax advantages. Are there specific requirements or criteria that I should consider when choosing my legal form in order to minimize the trade tax burden?
I look forward to your expert advice and thank you in advance for your support.
Sincerely,
Renate Kaiser
Dear Mrs. Kaiser,
Thank you for your inquiry regarding trade tax and the role of the legal form of your company in the calculation of this tax. It is understandable that you are considering whether a change in your legal form could bring tax advantages. In this context, I would like to assist you and provide you with some important information.
Firstly, it is important to understand that trade tax is a local tax levied on businesses engaged in commercial activities. The amount of trade tax is based on the trade income, trade tax base, and trade tax rate of the respective municipality. Trade tax is a business expense and therefore reduces the company's profit.
The legal form of your company does indeed play a role in the calculation of trade tax. As a sole proprietor, you are personally liable for trade tax, and the trade income of your company is included in your personal income tax return. This means that you are taxed as a natural person on your total income, including the trade income from your company.
If you were to convert your company into a GmbH (limited liability company), the GmbH would be a separate legal entity subject to taxation. This means that the trade income of the GmbH would be taxed separately from your personal income. However, a GmbH is subject to corporate tax, which is usually lower than the personal tax rate of a sole proprietor.
Converting to a GmbH may therefore bring tax advantages under certain circumstances, especially if your company generates high profits. However, the establishment and ongoing costs as well as legal aspects of a GmbH must also be considered.
There are various criteria to consider when choosing your legal form in order to minimize the trade tax burden. These include factors such as the amount of your company's profit, planned business development, liability issues, as well as individual tax and legal circumstances. It is therefore advisable to seek comprehensive tax and legal advice in order to find the optimal legal form for you.
I hope that this information has been helpful to you. If you have any further questions or require personal consultation, I am at your disposal.
Yours sincerely,
Isabel Möller, Tax Advisor
