Local governments are entitled to impose a trade tax (= Gewerbesteuer) on the profit of any business enterprise established on their territory. The basis for taxation is the same profit as established by the financial accounts of the enterprise, after application of the necessary modifications for the income tax purposes.

However, some expenses deductible for income tax purposes are added, whereas some items of income are deducted. It is particularly inconvenient that half of the amount of interest paid on long-term debts must be added: Thus, the tax payer has not only to pay interest, but even trade tax on top.

On the other side, some income may be deducted, notably income from dividends or other profits from national and foreign subsidiaries and from foreign business establishments.

5 % of the resulting trade profit is used as the basis onto which the trade tax rate is applied. Local governments are free to determine the applicable trade tax rate for the respective year, the tax rates vary from 340 % (the small town of Ruesselsheim / Rhine) to 490 % (city of Frankfurt), in 2001. The tiny little village of Norderheverkoog, in the far north of Germany, does not impose any trade tax at all: unfortunately, because of some restrictions, only specialised enterprises, e.g. financial holding companies, have a chance to settle, there.

On the average, the major cities apply a tax rate of between 450 and 480 %.

As the trade tax is imposed on the net trade profit after deduction of the trade tax, the amount must be divided by a factor equal to 1 plus 1/100th of 5 % of the applicable tax rate; e.g.: if the tax rate is 500%, the divisor would be 1,25.

(See as well Calculation of Corporation Tax)