The business tax is the primary source of revenue of municipalities. It is a tax raised only in Germany and doesn’t exist in any other country in a comparable form. The business tax is imposed by municipalities due to cost causation of local companies. Therefore, it is intended as a refunding for infrastructure and other burdens that arise from local companies. All business enterprises that are recorded by the income tax law are obligated to pay the tax. Freelancer and other non-commercial activities are exempt from business tax. The assessment basis is the business income of a company. Based on the business income the finance office determines the so-called base amount of business tax, which results from the multiplication of business income and the uniform tax rate of 3.5 percent. Depending on the company, exemptions, reductions or additions can be charged against the business income. The base amount of business tax is multiplied with the business tax rate, which is determined individually by each municipality. The result shows the business tax a company has to pay.
As part of their location policy municipalities can individually determine the business tax rate. In general, a low business tax rate can be seen as an advantage for a business location while a high rate is disadvantageous. For companies, especially large corporations, it is important to consider the business tax rate during location analysis, as it is one of the most dominant corporate taxes. The importance of business tax rate, for both municipalities in the context of economic development as well as companies during the location decision, can be illustrated by the following case:
In the course of a corporate tax reform in 2008 which brought a change of business tax along, the German company Deutsche Börse AG moved its headquarters and most of its employees from Frankfurt to the nearby Eschborn to save tax. At that time Frankfurt imposed a business tax rate of 460 percent while Eschborn imposed only 280 percent.
Other than land tax, which is subjected to slight variations due to its nature, the business tax is a volatile source of finance for municipalities. Depending on business fluctuations companies generate different incomes, which are ultimately reflected in the municipal revenues from business tax.