Deductibility of “Cost of Living Allowance”

The law student Max wanted to deduct the so-called “cost of living allowance” from his income of gainful employment in New York, N.Y. U.S.A. during an internship at an American law firm.


Max was a student in his practical training (Rechtsreferendar). As he had an internship in New York City, he received, next to his normal German salary, so-called a “cost of living allowance“ (bonus to equalize the costs of living) from the law firm. Max declared in his tax return i.a. costs for double household keeping for New York City and Germany. His tax office disagreed.

Max argues that following §20 DTA Germany and USA his American intern’s allowance was tax-free. Following this rule, intern’s income will be tax-exempt in the US if the intern receives his income from a source not in the US. So is here the case with his German salary. In accordance with §3c EStG, all expenses related to tax-exempt income are not eligible for deduction. This rule aims at hindering a double benefit in taxation. Understand “related to tax-exempt income” as being so much connected to this source of income that the expense is inseparable from the income. This double benefit would be permitting the deduction of costs even though there is nothing upon which taxes can be levied. Max considered this rule as a tax-exempt limit and so not subjecting these “costs of living” as income to taxation. Therefore, he presumes the “costs of living” as not taxable in Germany.

The Niedersächisches FG decided on March 09, 2005 (re 3 K 10119/02) in favor of the tax office. Max’s “costs of living” is an income and not redemptions for experienced costs. His Finanzamt correctly considered these “costs of living” expenses as payments for expenses related to deductions of keeping a double household. He was therefore not eligible to claim deductions for double household. Furthermore, there is no relationship between his American allowance and his German income. The court also held that because his internship was not taxable following the Double Taxation Agreement and partially related to his German salary, the tax office with good right subtracted his intern’s allowance from his deductions of double household.

This article shows that income, disregarding its nature, cannot be declared as an expense.

Published on the old CMS: 2007/2/6
Read on the old CMS till November 2008: 1,320 reads

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