Add-backs, deductions and trade losses in detail

A printing firm reports a profit of €380,000 and still does not pay trade tax on €380,000. It leases presses, rents a hall, uses time-limited software licences, donates to a charity and holds a limited partnership stake. Each of these moves the tax base in a different direction — and misfiling just one of them misses the tax base amount even though every single calculation is right.

Where this module starts

The basic computation — trading income, rounding, allowance, base rate, municipal multiplier — is covered in the course “Computing German corporation tax and trade tax”. This module opens the two lines that appear there as lump items: the add-backs and the deductions. It then adds the loss carryforward, which only applies afterwards.

The starting point remains § 7 sentence 1 GewStG. What counts is the profit as income tax or corporation tax law determines it; §§ 8 and 9 then increase and reduce it. Between the tax balance sheet profit and the tax base amount there are therefore several layers of correction, each with its own logic.

• First layer: the add-backs of § 8 GewStG, above all the financing shares of no. 1
• Second layer: the deductions of § 9 GewStG, which remove income that belongs elsewhere
• Third layer: deduction of carried-forward shortfalls under § 10a GewStG
• Only then: rounding, any allowance and the base rate under § 11 GewStG

The order is not a formality. § 10a refers to the relevant trading income resulting from §§ 7 to 10, so the loss deduction sits on top of the amount already added back and reduced. Anyone who deducts losses from the accounting profit measures the one-million-euro limit against the wrong figure.

§ 8 no. 1 GewStG: classify first, then compute

The six items of no. 1 and the shares at which they enter are presented in the neighbouring course. In practice, errors rarely arise in the multiplication but one step earlier: when an expense is filed under the wrong letter or under none. Four test questions sort out the most frequent borderline cases.

First test: did the expense reduce profit at all? The opening sentence of § 8 only captures amounts to the extent they were deducted in computing profit. Interest capitalised as part of a building's production cost did not reduce that year's profit and does not belong in that year's sum.

Second test for rent, lease and leasing: is the asset used part of fixed assets? Letters d and e say so expressly. § 247(2) HGB counts as fixed assets the items intended to serve the business permanently. What matters is that purpose for the business, not merely the length of the individual rental contract.

Third test: is the asset owned by someone else? Both letters require that too. If a leased asset is attributed to the lessee and carried on its balance sheet, the question changes: the interest component contained in the instalments must then be examined, and it may fall under letter a as consideration for debt.

Fourth test for letter f: is a right being granted for a limited time? The law names concessions and licences only as examples. It excludes two groups: licences that exclusively entitle the holder to pass derived rights on to third parties, and expenses that form the assessment base of the artists' social levy under § 25 KSVG.

The second exception is little known and significant for publishers, agencies and media firms. Anyone paying fees to self-employed artists and writers pays the artists' social levy on them. To the extent those fees form its assessment base, sentence 2 of letter f keeps them outside the add-back, even when they pay for a right of use.

Under letter d, sentence 2 halves the add-back for three groups: vehicles powered exclusively by electric motors, plug-in hybrids emitting at most 50 grams of carbon dioxide per kilometre or with at least 80 kilometres of electric range, and bicycles that are not motor vehicles. A firm leasing company bikes for its staff should know that last group.

The share of the individual item and the quarter of the sum multiply. Above the allowance, each euro of an item therefore adds only a fraction to trading income. For planning, this effective fraction says more than the two fractions taken separately; the table below computes it for each letter.

Translated into tax: at a multiplier of 400 percent, one additional euro of hall rent above the allowance raises trading income by 12.5 cents, the tax base amount by 0.4375 cents and trade tax by 1.75 cents. One euro of machine leasing costs 0.7 cents. That is the order of magnitude separating renting from buying.

The €200,000 allowance relates to the already weighted sum, not to the gross amounts. A business can therefore pay one million euros of leasing instalments for movable assets without a single euro being added back: one fifth of that reaches the allowance exactly but does not exceed it.

The provision draws no distinction by legal form. Unlike the § 11 GewStG allowance, which a GmbH does not receive, the no. 1 threshold applies to corporations just as it does to sole traders. Many smaller businesses stay below it; for them, no. 1 is a duty to check with no numerical result.

The other add-backs of § 8 GewStG

After no. 1, the catalogue looks patchy, because numbers 2, 3, 6, 7 and 11 have been repealed. Six items remain, and they arise less often. Most of them mirror a deduction in § 9 — and that mirror relationship is the easiest way to understand them.

No. 4 concerns the partnership limited by shares (KGaA). Profit shares distributed to its general partners on contributions not made to the share capital, or as a bonus for management, are added back at the company. At the recipient, § 9 no. 2b deducts the same amounts again so they are burdened only once.

No. 5 captures dividends from portfolio holdings. Where profit shares are wholly or partly exempt under § 3 no. 40 EStG or § 8b(1) KStG, trade tax claws the exempt part back, unless the conditions of § 9 no. 2a or 7 are met. Related business expenses that were disregarded for income tax purposes are subtracted.

No. 8 adds back shares in the loss of a general partnership, a limited partnership or another co-entrepreneurship. The partnership is itself liable to trade tax; its loss is captured and carried forward there. The investor should not deduct it a second time from its own trading income.

No. 9 concerns corporations only. Donations and membership fees that a GmbH deducted under § 9(1) no. 2 KStG are added back. This is not a ban on deduction but a detour: § 9 no. 5 GewStG allows the deduction under its own rules, which are the same for every legal form.

No. 10 prevents a double benefit on shareholdings. If a write-down to the lower going-concern value or a loss on sale of a share in a corporation reduces profit, and the reduction stems from distributions or profit transfers already deducted under § 9 no. 2a, 7 or 8, it is added back. Distributed substance does not relieve twice.

No. 12 concerns foreign taxes deducted in computing income under § 34c EStG. They are added back to the extent they relate to profits left out of trading income or deducted under § 9. Whoever does not tax an item of income for trade tax should not deduct the tax borne by it either.

Deductions beyond real estate

The land tax deduction and the extended deduction for real estate companies under § 9 no. 1 are covered by the neighbouring course. The other numbers share one idea: they remove income that already has its place with another trading business, abroad or with a tax-privileged recipient.

No. 2 deducts profit shares in a domestic or foreign co-entrepreneurship, provided they were included in profit. It is the counterpart of the no. 8 add-back: profits and losses of the partnership belong to its own trading income, and the investor leaves both out of its own.

No. 2a deducts profits from shares in a non-exempt domestic corporation if, at the start of the assessment period, the holding amounts to at least 15 percent of the share capital. This reference date is decisive, not an average: raising the stake during the year only takes effect in the next period.

Anyone below the threshold ends up in the no. 5 add-back. The two provisions thus split dividends: a qualifying holding leads to a deduction, a portfolio holding to an add-back of the exempt part. Expenses directly connected with deducted profit shares reduce the deduction; § 8 no. 1 does not apply to them to that extent.

Sentence 4 of no. 2a contains a subtlety for corporations. Business expenses that are non-deductible under § 8b(5) KStG do not count as profits from shares. The flat portion that corporation tax law attributes to a GmbH despite the exemption therefore stays in trading income even for a qualifying holding.

For holdings in corporations with registered office and management abroad, no. 7 requires the same threshold of 15 percent of nominal capital at the start of the period. No. 8 adds profits that a double tax treaty exempts subject to a minimum holding; where the treaty agrees a lower threshold, that one applies.

No. 3 deducts the part of trading income attributable to a permanent establishment outside Germany. Trade tax funds municipalities, and what a foreign branch earns belongs to none of them. For operating merchant ships in international traffic, the law assumes a flat foreign share of 80 percent.

No. 5 deducts donations made from business funds to tax-privileged recipients. The ceiling is alternative: either 20 percent of the trading profit increased by the § 8 no. 9 add-back, or four per mille of the sum of total turnover and the wages and salaries spent in the financial year.

The reference to the no. 9 add-back has a purpose. For a GmbH, profit has already been reduced by the donation; without adding it back, the base of the 20 percent limit would be too small. Under sentence 8, excess donations are not lost but can be deducted in later periods within the ceilings.

Sole traders and partnerships have an additional option. On application, they can deduct donations to the endowment capital of a foundation in the year of the gift and the following nine periods, up to one million euros in total, alongside the general limit. Donations to a foundation's consumable assets are excluded.

The trade loss under § 10a GewStG

If the computation under §§ 7 to 9 produces a negative amount, a shortfall arises. § 10a knows only one direction for it: it reduces the relevant trading income of later periods. The wording speaks exclusively of shortfalls from preceding periods; there is no carryback to an earlier year as in § 10d(1) EStG.

Up to relevant trading income of one million euros, carried-forward shortfalls are deducted without limit. Above that, the carryforward may reduce the excess by at most 60 percent. A business with a large loss carryforward therefore pays trade tax in a very good year even though losses remain open.

An example shows the effect. With relevant trading income of two million euros and a sufficient carryforward, the first million is fully deductible and 60 percent of the second, together 1.6 million euros. That leaves 400,000 euros to which rounding and the base rate apply; the rest of the carryforward waits for next year.

Income tax is more generous above the same threshold. § 10d(2) EStG allows a deduction of up to 70 percent there. Anyone using one percentage for both taxes in a planning model overstates the trade tax relief in precisely the years where it matters most.

Under sentence 6, the amount of shortfalls available for carryforward is determined separately. That determination is a notice of its own, and its content binds the following years. In a co-entrepreneurship, the shortfall is allocated to the partners by the general profit-sharing ratio; advance profit shares are disregarded.

Corporations face a second loss trap. Under sentence 10, § 8c KStG applies accordingly: if shares change hands to the extent described there, trade tax shortfalls can lapse just like corporation tax loss carryforwards. Buying shares in a company is therefore always a trade tax question as well.