Trade tax can only be charged insofar as a legal entity fulfills the requirements of Sect. 2 of the Trade Tax Act

No “automatic” liability to trade tax for foundations

The liability to trade tax (Sect, 184(1) sent. 2 of the General Tax Act (“Abgabenordnung”)) pursuant to Sect. 2(2) sent. 1 of the Trade Tax Act is fictitiously and mandatorily imposed by law – but only on corporations. The law itself lists German stock corporations and limited liability companies, among others, as “standard examples”. However, a foundation does not belong to this group, as the German Federal Fiscal Court has once again clarified in its ruling of September 25, 2025 (file number III R 16/25; published on January 22, 2026; margin number 15). 

Since foundations are not corporations, a trade tax liability for them can only arise from the remaining paragraphs of Sect. 2 of the Trade Tax Act. The German Federal Fiscal Court in its ruling first addresses paragraph 3 of Sect. 2 of the Trade Tax Act. According to its provisions, “the activities of other legal entities under private law and associations without legal personality are also considered commercial operations if they engage in economic business activities (excluding agriculture and forestry)”. This assumption of a trading activity is not dissimilar to that under Sect. 2(2) sent. 1 of the Trade Tax Act – but additionally requires an examination of the “economic business activity” (“wirtschaftlicher Geschäftsbetrieb”; Sect. 14 of the General Tax Act) and only applies “insofar as” it exists.

In this respect, the German Federal Fiscal Court was unable to decide the case on its own –under German procedural law, only the lower tax court is legally permitted to gather evidence and determine the facts surrounding the economic business activity. However, the German Federal Fiscal Court provides instructions for the application of Sect. 14 of the General Tax Act (margin number 19 et seqq.). The activities of the corporation must be “independent” (Sect. 14 sent. 1 of the General Tax Act; margin number 19) – this distinction must be made first. In the next step (margin number 20 et seqq.), the other characteristics relating to these independent activities are examined. 

In the case of a participation in “another company” – which will frequently be the case for a foundation – a distinction must be made (margin no. 25 et seqq.): In the case of participations in corporations, there is generally no economic business activity. However, the situation is different in the case of participations in commercial (“trading”) partnerships, which are to be treated as a uniform economic business activity (Sect. 64(2) of the General Tax Act). Merely being deemed trading by law (Sect. 15(3) No. 2 of the Income Tax Act) is not sufficient – because the underlying activity consists purely in asset management.

Trade tax liability under section 2(1) sent. 2 of the Trade Tax Act

In addition, findings regarding the foundation's possible commercial activity are also required (Section 2(1) sent. 2 of the Trade Tax Act; margin number 42 et seqq.). In this regard, the Trade Tax Act mirrors the requirements of Sect. 15(2) of the Income Tax Act – with its legally prescribed characteristics:

• Independent activity,
• Sustainable activity,
• Intention to make a profit,
• Participation in general economic transactions,
• No engagement in agriculture, forestry, a liberal profession, or other independent work.

In addition, the German Federal Fiscal Court has added the negative, “unwritten” characteristic of “exceeding the scope of private asset management” (e.g. ruling of the German Federal Fiscal Court dated July 14, 2016, file number IV R 34/13, Federal Tax Gazette II 2017, p. 175, margin number 32). In this respect, too, the lower tax court must therefore assess the case anew in the future.

Overall, the lower tax court must observe the logical order of legal examination: Sect. 2 of the Trade Tax Act must be examined first – without a trade tax liability under this provision, there is no need to examine exemptions from trade tax (Sect. 3 of the Trade Tax Act). Due to the conjunction “insofar as” in Sect. 2(3) of the Trade Tax Act, the result may also be a partial liability to trade tax of the foundation.

Trade tax liability in special cases

Sect. 2 of the Trade Tax Act is only the “first stage of assessment” for trade tax – it alone “determines the scope of a commercial enterprise”. Only then can the scope of the resulting trade tax liability be determined at all, based on trade income (Sect. 6 of the Trade Tax Act) (e.g. ruling of the German Federal Fiscal Court dated June 27, 2019, file number IV R 44/16, Federal Tax Gazette II 2020, p. 24, margin number 28).

In addition to Sect. 2 of the Trade Tax Act, however, a trade tax liability also arises from other provisions in special cases. Sect. 18(3) of the Reorg Tax Act (“Umwandlungssteuergesetz”) establishes a special trade tax liability for five years after the reorganization of a corporation into a partnership or natural person. In the event of the cessation or sale of the business, part of the business, or participation in a partnership within this lock-up period, a trade tax liability is established in any case for the resulting profit (Sect. 18(3) sent. 1 of the Reorg Tax Act). This is even maintained in multi-level structures (Sect. 18(3) sent. 3 of the Reorg Tax Act) – and also applies if the receiving legal entity is otherwise not subject to trade tax, for example in the case of a freelance partnership. 

In contrast to “normal” trade tax, the credit for trade tax pursuant to Sect. 35 of the Income Tax Act is also denied in the case of natural persons (Sect. 18(3) sent. 4 of the Reorg Tax Act). Since the trade tax is not deemed to be a business expense, either (Sect. 4 para. 5b of the Income Tax Act), it is therefore added in full as an additional tax burden in this case.