Meaning of § 3 EStG

tax-exempt income

In Germany, all people who earn money in any way are subject to the Income Tax Act. That means they have to pay income tax. However, § 3 EStG also regulates that there are exceptions to this that are not subject to income tax liability. You can find out everything about these exceptions, certain exemption limits and deduction options in the following article.

Definition § 3 EStG

In § 3 ITA personal but factual exemptions contained in piecemeal orders. These tax exemptions, which are described in § 3 EStG, apply to all taxpayers in a limited or unlimited form . In § 2 EStG all facts are listed which lead to a possible tax exemption or to a reduced taxation.

What is the difference between tax-exempt income and income?

Everyone, regardless of whether they are employed or self-employed, receives an income through their commercial activity . On the other hand, tax-free income is defined in Section 3 of the Income Tax Act (EStG), which comes from government subsidies, benefits in kind or insurance benefits. In contrast to income, no taxes are levied on this income. Cash flows from the social sector are also counted under tax-free income . These include, for example, child benefit or unemployment benefit.

What types of income are there in German tax law?

According to ESHAOXING, German tax law knows a total of seven types of income , which are taken into account when determining and calculating income tax. Even if you may not believe it, there is also income on which you, as a taxpayer, do not have to pay any taxes and on which there is a tax exemption . It is quite possible that the sums involved can also be very large. Probably the best and most famous example of this is winning the lottery. Even if you have a six in the lottery, the tax office doesn’t care. But now to the seven types of income that are subject to income tax liability:

  1. Income from employed or self-employed work
  2. Income that comes from a commercial enterprise
  3. Income from capital. These include, for example, interest, dividends, price gains when selling shares, etc.)
  4. All income from leasing or rental
  5. Income from statutory or company pensions
  6. Income from agriculture and forestry
  7. Other income within the meaning of the catch-all paragraph 22 of the Income Tax Act

The difference between tax-free and non-taxable income is explained below.

What is tax-free income according to § 3 EStG?

The Income Tax Act defines tax-free income as inflows in the form of money or monetary value. These are not taxable under the Income Tax Act. However, a distinction must be made between two types .

  • completely tax-free income
  • Tax-free income, which is subject to the progression proviso

Progression proviso means that this income is tax-free, but has an effect on the tax rate of other possible taxable income. This includes, for example, sickness or care allowance, unemployment and short-time work allowance, parental allowance, etc. In addition, there is a restriction on maximum limits in the Income Tax Act with regard to tax exemption of income. In this context, there is also talk of tax allowances. This means that the income concerned is tax-free up to a specified limit, the tax-free amount. Anything that goes beyond this limit is normally subject to taxation.

Section 3 of the Income Tax Act lists exactly which income is not subject to income tax liability . Among the most important of these tax-free revenues are.

  • Education, parental and maternity allowances
  • Child benefit
  • Benefits from statutory accident, health or long-term care insurance
  • Social assistance, unemployment benefits and wage replacement benefits according to the Employment Promotion Act
  • Housing benefit
  • Income from the Training Assistance Act (e.g. BAföG)
  • Fixed subsidies for private and company pension schemes
  • Surcharges for night work as well as work on Sundays and public holidays
  • Expense allowance for voluntary work

What is non-taxable income?

Among the non-taxable income includes all revenues that can not be taxed. The reason for this is that they are not assigned to the seven types of income according to the Income Tax Act. The non-taxable income includes, among other things.

  • Gambling winnings (unless the player is a professional
  • Lottery winnings
  • Donations and inheritances
  • Acquisition by finding
  • Income that is generated in the context of a hobby that is irrelevant for tax purposes
  • Sale of private assets.
    In paragraphs 17, 20, paragraph 2, 23 EStG and 21 UmwStG, possible exceptions are described in detail.

Which types of tax-free income are differentiated according to § 3 EStG?

In § 3 EStG a distinction is made between non-taxable income and tax-free income. However, the taxpayer must note that tax-free income, which is described in the context of the progression proviso , can lead to an additional tax burden . These include wage replacement benefits such as

  • Winter or winter loss allowance
  • Bankruptcy money
  • Transition allowance
  • Sickness and maternity benefits

What should be considered in connection with § 3 EStG for operating expenses and advertising expenses?

In addition, in the case of expenses in direct economic connection with tax-free income, it should be noted that the taxpayer cannot claim these as business expenses or business expenses . However, this regulation only applies to expenses or expenses which, according to their purpose or origin, are inextricably linked to the tax-free income . You have to observe the purpose of the regulation in § 3c EStG . On the one hand, a double benefit for you as a taxpayer is avoided through the tax exemption and, on the other hand, a deduction of income-related expenses. In Section 3c (1) of the Income Tax Act however, it is assumed that all expenses or expenses must be precisely allocated to one another.

tax-exempt income