Top level means not inside other functions or objects or classes or closures. Where this refers to the window object.

console.log(this === window)    // true
var x = 5

function foo() {
  console.log(this === window)    // true
  var y = 3
}

foo.call(this);

console.log(y)    // not defined

What does "function declarations at the top level" mean? Does it mean functions that are not inner functions?

Yes, it means just that. It refers to the syntax of the declarations: anything that is not nested inside some other syntactical structure.

However, the statement is not quite accurate. It should be restricted to the "top level of scripts", since var and function declarations at the top level of module code don't create global variables - they declare variables in the global scope. Also, var declarations in blocks ({ … }) still declare global variables (that become properties of the global object) as long as they're not nested in a function.