On 4 March 2010, the German Federal Constitutional Court announced a decision from 27 January 2010 regarding the German trade tax (Gewerbesteuer).

The plaintiffs, two German municipalities located in the German state of Brandenburg, challenged a 2004 amendment to the German trade tax law which obligates municipalities to assess a minimum trade tax. The Federal Constitutional Court rejected the municipalities’ claim and held the regulation to be in conformance with the German constitution.

Trade tax in Germany is collected by the municipalities which have the authority to assess the amount of trade tax by fixing the trade tax collection rate (Hebesatz). Until 1 January 2004, German municipalities were free to fix the trade tax collection rate at any level including 0% (i.e. no trade-tax assessment). Since that time, however, municipalities have been obligated to assess a minimum trade tax collection rate of 200% which then results in a minimum trade tax of approximately 7% of trading profit, determined as follows:

• 3.5 % of trading profit is used as the base value for trade tax purposes (Steuermessbetrag);
• Municipalities assess the trade tax collection rate (e.g. 200%);
• The base value multiplied by the trade tax collection rate equals the trade tax assessment (e.g. 200% of 3.5% = 7% trade tax).

In its challenge to the German Federal Constitutional Court, the plaintiff municipalities claimed that the minimum trade tax collection rate limited their municipal financial autonomy in such a manner that the core freedom granted to municipalities by the German constitution was injured.

Municipalities often fix the trade tax at levels which make them more attractive for companies looking for a place of establishment. The Federal Constitutional Court stated that such competition must be compatible with the common welfare and that competition at any cost must be restricted. It further noted that the amendment was intended to avoid the creation of German tax havens and to enhance the distribution of business settlements throughout Germany.

The Court also noted that a part of the total trade tax revenue is delivered to the federal state in exchange for which municipalities receive a share of income tax revenues and that fixing a minimum trade tax collection rate therefore prevents municipalities from obtaining a portion of income tax revenue without contributing any trade tax.

Finally, the Federal Constitutional Court noted that the German constitution does not grant municipalities an unlimited freedom to assess the trade tax collection rate and held that the limitation of municipal financial autonomy imposed by the minimum rate is reasonable since the municipalities are given a sufficient scope for assessing trade tax collection rates. The Court noted specifically that the minimum rate is below the average assessment rate throughout Germany which therefore provides a reasonable margin for competitive rate setting.