The Progressionsvorbehalt (progression proviso) is a German tax mechanism: certain tax-free income (replacement income) is added to taxable income solely to determine the applicable tax rate, which is then applied to the taxable income only.
Affected benefits
- Short-time work benefit (Kurzarbeitergeld)
- Parental benefit (Elterngeld)
- Unemployment benefit I (Arbeitslosengeld I)
- Sickness benefit (Krankengeld)
- Maternity benefit (Mutterschaftsgeld)
Practical impact
Example: Taxable income 40,000 € + 5,000 € Kurzarbeitergeld = 45,000 € for rate determination. The higher rate (for 45k) is then applied to the 40,000 € actual taxable income → higher tax bill than without the benefit.
Important: Anyone subject to the progression proviso must file a tax return.
Sources: § 32b EStG, BMF.