Federal Fiscal Court ruling: when does trade tax liability for notional business activities arise?

The trade tax liability under section 2(1) of the Trade Tax Act 

Trade tax is linked by the “general rule” of section 7 sentence 1 of the Trade Tax Act to the “profit from the business activity to be determined in accordance with the provisions of the Income Tax Act or the Corporate Income Tax Act”. But this merely establishes a substantive legal link to the provisions on profit determination, while from a procedural law perspective there is no connection between the trade tax assessment notice and income tax profit determination (e.g., Federal Fiscal Court judgement of 28 May 2020, file ref. IV R 17/17, Federal Tax Gazette [Bundessteuerblatt–BStBl.] II 2023, p. 607, para. 21). The initial amount determined under section 7 sentence 1 is then “turned into trade income” by applying “elements typical of a tax on assets”, particularly the add-backs and deductions of sections 8 and 9 of the Trade Tax Act (“second calculation step,” Federal Fiscal Court judgement of 23 Nov 2021, file ref. I R 5/18, para. 17).

However, even in Federal Fiscal Court case law, section 7 is subordinate to section 2 (“objective trade tax liability”), which must already be determined in the assessment notice (section 184(1) second sentence of the Fiscal Code [Abgabenordnung–AO]). “The provision merely governs … the method of determining trade income in the event that business … exists” (e.g., Federal Fiscal Court judgement of 20 Mar 2019, file ref. VIII B 81/18, para. 12). This makes the differences in the timing between income tax liability and trade tax liability important. It follows from the nature of trade tax as a tax on assets that the trade tax liability only arises once all the conditions for constituting business activity have been met and business has been started (Federal Fiscal Court judgement of 1 Sep 2022, file ref. IV R 13/20, para. 33 with further references). 

Consequently, the enterprise as relevant for income tax purposes – including the generating of business income – starts earlier and ends later than business activity within the meaning of section 2(1) of the Trade Tax Act (see most recently Federal Fiscal Court judgement of 20 Feb 2025, file ref. IV R 23/22, para. 55 with further references). In particular, in the case of sole proprietorships and partnerships, “lawyer’s fees for preparations to found the business , expenses incurred in broker’s commissions prior to opening the business, consulting fees, advertisements, office supplies, expenses for renting business premises, and hiring a senior employee prior to opening the business, as well as general…start-up costs” (Federal Fiscal Court judgement of 30 Aug 2022, file ref. X R 17/21, Federal Tax Gazette II 2023, p. 396, para. 20) are thus often irrelevant for trade tax purposes. Conversely, trade tax liability ends when commercial activity is permanently ended (e.g., Federal Fiscal Court judgement of 22 Feb 2024, file ref. IV R 14/21, Federal Tax Gazette II 2024, p. 408, para. 21).

Trade tax liability for notional business activities (section 15(3) of the Income Tax Act)

Even notionally commercial partnerships (section 15(3) of the Income Tax Act; “commercial tainting” [gewerbliche Abfärbung] and “commercial nature” [gewerbliche Prägung]) constitute fixed business activity despite the (at least partial) absence of original commercial income (section 2(1) second sentence of the Trade Tax Act; Explanatory Notes to the Trade Tax Act [Gewerbesteuer-Hinweise–GewStH] 2.1(2), “Comprehensive business activity of a partnership”; Federal Fiscal Court judgement of 19 Dec 2023, file ref. IV R 5/21, Federal Tax Gazette II 2024, p. 845, para. 20). Participating in “general economic transactions” within the meaning of section 15(2) sentence 1 of the Income Tax Act, which is otherwise required to qualify as business activity, is not required for them to incur trade tax liability (Federal Fiscal Court judgement of 20 Nov 2003, file ref. IV R 5/02, Federal Tax Gazette II 2004, p. 464). Case law makes exceptions only in the case of “upward tainting” (section 15(3) no. 1 first sentence second alternative of the Income Tax Act), where it assumes that business activity exists for income tax purposes (in accordance with the Circular of the Highest Tax Authorities of the Federal States of 5 Nov 2025, Federal Tax Gazette I 2025, p. 1838) but, for the purposes of section 2 of the Trade Tax Act, specifically does not assume business activity (for details see Federal Fiscal Court judgement of 5 Sep 2023, file ref. IV R 24/20, Federal Tax Gazette II 2025, p. 778).

This raises the question of when trade tax liability arises in these cases, just as it does for original commercial activities. Regarding the commercial nature of section 15(3) no. 2 of the Income Tax Act, the case law on this matter is already well-established: the start of business activity for such a company is generally determined by the start of asset management activities (Federal Fiscal Court judgement of 12 May 2016, file ref. IV R 1/13, Federal Tax Gazette II 2017, p. 489, para. 30). Conversely, even for a company with a commercial nature, the trade tax liability ends when commercial activities end (Federal Fiscal Court judgement of 22 Feb 2024, file ref. IV R 14/21, Federal Tax Gazette II 2024, p. 408, para. 24).

In the case of the lateral tainting of commercial activities (section 15(3) no. 1 first sentence first alternative of the Income Tax Act), however, when trade tax liability arises has not yet been conclusively determined. The Federal Fiscal Court recently had the opportunity to comment on this in a case (file ref. IV R 5/24), where the conditions for tainting had occurred “during the year” (by putting a photovoltaic system into operation in the year in dispute of 2010). However, it was necessary to note that from a procedural standpoint, the profit assessment notice contained several independently contestable findings that could become binding individually. In the case at hand, this meant that the generating of commercial income could no longer be reviewed substantively, as this finding had not been challenged.

Impact of the differences in tax liability for income tax and trade tax

The Federal Fiscal Court was still able to comment on trade tax liability arising later, however. The claimant, a civil law partnership [Gesellschaft bürgerlichen Rechts–GbR], had put into operation a photovoltaic system in March of the year in dispute of 2010– before section 3 no. 72 of the Income Tax Act and section 3 no. 32 of the Trade Tax Act had been introduced. The start-up losses incurred in this process could be separately determined under section 10a of the Trade Tax Act only from the time when trade tax liability had arisen (Federal Fiscal Court judgement of 1 Sep 2022, file ref. IV R 13/20, Federal Tax Gazette II 2024, p. 121, para. 18). The determination of trade tax liability must be made separately in the loss assessment notice – independently of the assessment notice. In 2010, however, the business remained at the preparatory stage, which does not give rise to trade tax liability. Consequently, there was no way to separately determine the losses under section 10a sentence 6 of the Trade Tax Act.

This restriction leads to trade tax issues in other areas involving start-up losses too: when claiming investment deductions (section 7g of the Income Tax Act) before starting business, the expenses are irrelevant for trade tax purposes (Circular of the Higher Tax Authorities of the Federal States of 26 Jan 2011). To avoid hardship, the profit-increasing add-back of an investment deduction is, upon application, excluded from trade income for reasons of equity under section 163 of the Fiscal Code, provided that claiming the investment deduction did not reduce business income (State Tax Office of Lower Saxony Circular of 17 Oct 2023, under IV.3, specifically regarding photovoltaic systems). 

However, the problem can be structurally resolved by using a corporation (section 2(2) sentence 1 of the Trade Tax Act). Its trade tax liability arises as soon as it is registered in the Commercial Register (Federal Fiscal Court judgement of 24 Jan 2017, file ref. I R 81/15, Federal Tax Gazette II 2017, p. 1071), so that start-up losses may be included. In its ruling of 1 Feb 2024 (file ref. IV R 26/21, para. 47), the Federal Fiscal Court pointed out that the losses of a corporation for trade tax purposes can be transferred to a partnership in the context of a hive-down (section 24 of the Reorganisation Tax Act [Umwandlungssteuergesetz–UmwStG]; only the interest in the partnership and the interest held in the general partner remain behind).