Cross-border aspects of the German trade tax for shipping companies

Cross-border aspects of the German trade tax

Foreign income subject to trade tax is to be determined via a reference to the so-called “territoriality principle” of trade tax, as is particularly evident in Sect. 2(1) sent. 3, Sect. 8 no. 8, Sect. 9 no. 2, and Sect. 9 no. 3 sent. 1 of the Trade Tax Act. Accordingly, the scope of trade tax should be limited to “domestic-sourced” income of the business entity subject to trade tax (Sect. 2(1) sent. 2; Sect. 2(2) sent. 1 of the Trade Tax Act; see, e.g., Federal Tax Court, Judgement dated February 25, 2021, file number III R 67/18, margin no. 28, regarding the income of a poker player). In the opinion of the Federal Tax Court, trade tax law is, in this respect, “characterized by a strict domestic connection” (Federal Tax Court, Judgement dated June 5, 2024, file number I R 32/20, Federal Tax Gazette II 2024, p. 875, margin no. 35). 

However, the legislature has only been able to implement the “territoriality principle” for trade tax to a limited extent (“not implemented by the legislature without exception,” Federal Tax Court, Judgement dated July 16, 2025, file number I R 20/22, margin no. 20), since permanent establishments located abroad within the meaning of Sect. 12 of the General Fiscal Code (“Abgabenordnung”) are required in order to arrive at a deduction from the trade income pursuant to Sect. 9 no. 3 sent. 1 of the Trade Tax Act. The generation of trade income as the basis for assessing trade tax (Sect. 6 of the Trade Tax Act) by a foreign permanent establishment within the meaning of Sect. 12 of the General Fiscal Code must be positively demonstrated. If this cannot be demonstrated, foreign income (e.g., for income and corporate tax purposes within the meaning of Sect. 34d of the Income Tax Act) is also subject to trade tax (“restricted domestic principle”; e.g., Federal Tax Court, Judgement dated December 20, 2017, file number I R 98/15). Most recently, this fact led the Berlin-Brandenburg Tax Court to consider a credit for foreign taxes against trade tax that is not provided for by law (Berlin-Brandenburg Fiscal Court, Judgement dated January 14, 2026, file number 10 K 10106/23, regarding the DTT Germany-USA 2008; appeal lodged at the Federal Tax Court, pending under file number I R 2/26).

But how should one proceed in the case of commercial enterprises (Sect. 2 of the Trade Tax Act) that, although active abroad, do not (and are unable to) establish a permanent establishment there within the meaning of Sect. 12 of the General Fiscal Code due to their very nature? These include, among others, internationally active shipping companies that are subject to a special income tax rule under Sect. 5a of the Income Tax Act (“tonnage taxation”). For trade tax purposes, this is incorporated into the assessment under Sect. 7 sent. 3 of the Trade Tax Act. Its scope of application has recently been the subject of dispute (Federal Tax Court, Judgement dated October 25, 2018, file number IV R 41/16). In addition, the deduction under Sect. 9 no. 3 sent. 2 et seqq. of the Trade Tax Act results in a flat-rate reduction of trade income, which the fourth chamber of the Federal Tax Court has now examined in detail (file number IV R 30/23).

Deduction for foreign permanent establishments – whether actual or fictitious

For trade tax purposes, the definition of a permanent establishment is derived exclusively from Sect. 12 of the General Tax Code (e.g. Federal Tax Court, Judgement dated April 2, 2025, file number X R 26/21, margin no. 54; draft of a circular of the Federal Finance Ministry covering the definition of a permanent establishment dated February 13, 2026, margin no. 2). For trade tax purposes, the definition is derived solely from Sect. 12 of the General Tax Code because the Trade Tax Act does not provide its own definition (e.g. Federal Tax Court, Judgement dated December 3, 2024, file number IV R 5/22, margin no. 22).

In the “outbound” case, the permanent establishment abroad is therefore “desirable” under Sect. 12 of the General Tax Code, as it results in a deduction from trade income under Sect. 9 no. 3 sent. 1, first halfsent., of the Trade Tax Act. However, the question of the extent to which the deduction should be made must be answered separately and has also recently occupied the Federal Tax Court (Federal Tax Court, Judgement dated June 5, 2024, file number I R 32/20, Federal Tax Gazette II 2024, p. 875). Furthermore, through the second half-sentence of Sect. 9 no. 3 sent. 1 of the Trade Tax Act, the legislature has excluded low-taxed (Sect. 8(5) of the Foreign Transactions Tax Act (“Außensteuergesetz”)) and passive (Sect. 8(1) of the Foreign Transactions Tax Act) income from foreign permanent establishments (Sect. 7 sent. 8 of the Trade Tax Act) as well as the CFC amount (“Hinzurechnungsbetrag”) under the Foreign Transactions Tax Act (Sect. 10 the Foreign Transactions Tax Act) from the reduction.

Shipping companies, on the other hand – such as the plaintiff in the appeal with the file number IV R 30/23 – by definition do not have a fixed place of business or facility within the meaning of the permanent establishment definition in Sect. 12 of the General Tax Code, given that their ships are used in international traffic. Nevertheless, they are to be granted a reduction in trade income, which the Federal Tax Court justifies, among other things, via a reference to the “principle of equivalence” (margin no. 43): According to this principle, municipalities are to be compensated for the special burdens imposed on them by industrial, commercial, and craft enterprises (e.g. Federal Tax Court, Judgement dated November 6, 2019, file number I R 32/18, Federal Tax Gazette II 2021, p. 68, margin no. 46, “principle of equivalence”). However, such a burden exists only to a limited extent in the case of a shipping company that operates its own or chartered merchant ships in international traffic. Therefore, Sect. 9 no. 3 sent. 2 of the Trade Tax Act provides for a flat-rate deduction: “80 percent of the trade income” is deemed “to be attributable to a permanent establishment not located in Germany” and is therefore deducted from the trade income.

How extensive is the business income of the shipping company to be deducted?

The fourth chamber of the Federal Tax Court discusses the exact structure of the deduction in detail: Its guiding principle is the “appropriate and straightforward determination of the portion of the business income not subject to trade tax out of the shipping company’s total business income” (margin no. 17). Contrary to the view of the lower tax court, the fourth chamber of the Federal Tax Court assumes that Sect. 9 no. 3 sent. 2 et seq. of the Trade Tax Act must be interpreted broadly: In addition to “time charters,” “voyage charters” and “slot charters” are also covered. A distinction between different types of charters would “significantly undermine” the simplification purpose of the reduction rule (margin no. 24).

Furthermore, the provision must be measured against European Union law. Most recently, the question of whether a German tax provision had the “character of state aid” (Art. 107 TFEU) was disputed with regard to the “affiliated parties clause” of Sect. 6a of the German Real Estate Transfer Tax Act (“Grunderwerbsteuergesetz”). However, the ECJ rejected its state aid character (ECJ, Judgement dated December 19, 2018, file number C-374/17, “A-Brauerei”). 

For the purposes of Sect. 9 no. 3 sent. 2 et seqq. of the Trade Tax Act, the Federal Tax Court does not see any obligation to stay the proceedings and refer the matter to the Court of Justice of the European Union (ECJ) for a potential preliminary ruling procedure (Art. 267(3) TFEU). However, it views the provision as a coherent part of the trade tax reference system, which is based on the principle of territoriality (margin no. 42), such that, in its opinion, it (clearly) does not constitute state aid within the meaning of Art. 107(1) TFEU.