Remuneration is tax-free if it is paid on the basis of a federal or state law authorization or by the federal government or a state government from a federal or state treasury. The prerequisite for this is that they are shown as expense allowances in the budget. The same applies to other emoluments paid as expense allowances from public funds to persons performing public services. The tax exemption does not apply to payments that exceed the recipient's expenses.
Practical example:
The tax office treated € 2,496 (€ 208 per month) as tax-free and recognized the remaining amount of € 2,656 as income from employment. After an unsuccessful appeal, the taxpayer claimed full tax exemption of the expense allowance of € 5,152 in the legal proceedings.
The tax court dismissed the claim. § Section 3 no. 12 sentence 2 EStG must be interpreted in accordance with the constitution to the effect that only the reimbursement of expenses that are deductible as business expenses or income-related expenses are exempt from tax. Accordingly, there is no tax-free expense allowance if the compensation is paid for loss of earnings or loss of time or if the recipient is reimbursed for a higher expense than he has incurred.
The taxpayer had not incurred any deductible expenses in connection with her work as a local councillor in the amount of the compensation granted. The examination of whether the compensation exceeds the recipient's expenses does not extend to the specific expenses incurred by the individual taxpayer, but only to whether persons in the same official or honorary position had expenses in the average amount of the expense allowance over the years.
For the practical implementation of this test the rates set by the highest tax authorities of the federal states or, alternatively, the amounts set out in the wage tax guidelines may be used. Above the amounts specified by the highest tax authorities of the federal states or in the wage tax guidelines, the taxpayer can demonstrate and prove that the expense allowance granted to him or her has not been sufficiently recognized as a tax-free expense allowance.
Against this background, the expense allowance paid in 2020 in the amount of € 208 per month, corresponding to € 2,496 per year, was to be treated as tax-free. The taxpayer had neither proven nor credibly demonstrated that she had incurred higher expenses. The tax court also made it clear that a dual function, such as that held by the taxpayer, as a result of simultaneous voluntary work as a local councillor and as a local councilor does not justify the recognition of a higher tax-free amount in the form of a cumulative application of the tax allowances for local councillors and local councilors. Only if higher expenses can be proven to have been incurred can these be taken into account (BFH ruling of 19.11.2024, VIII R 29/23).
Conclusion: The administrative regulations provide a tool to make it easier to determine the extent to which an expense allowance is tax-free. If the actual expenses incurred, which do not consist of loss of time or loss of work, are not proven, an estimate is permissible - as in this case.