If you are separating from your spouse and will be required to pay compensatory maintenance, it is generally more advantageous to do so in the form of periodic payments rather than a single lump sum. Below, we explain the tax implications under Spanish law and why a phased payment approach may prove more beneficial.
Compensatory Maintenance and Income Tax
When a married couple separates and one spouse is left in a significantly worse financial position than during the marriage, it is common for the court to require the other spouse to pay compensatory maintenance. The tax treatment is as follows:
- The paying spouse may reduce their taxable base in their personal income tax declaration by the amount of the maintenance paid, thereby reducing their overall tax burden.
- The receiving spouse must declare the maintenance received as income in their income tax declaration, classified as employment income.
Judicial Decision Required. To qualify for the deduction, the maintenance must be established by court order. It is possible to first agree to a settlement arrangement (known as a convenio regulador), which includes the compensatory maintenance. If this agreement is subsequently ratified by the court without modification, the deduction applies from the moment the agreement is signed.
A Lump Sum Payment Is Not Always the Best Option
Compensatory maintenance can be paid as a recurring amount (annuity-style) or in a lump sum, including through the transfer of an asset either initially or after some instalments have been made. However, if you are considering a one-off payment, caution is advised.
It is important to note that the deductible amount for compensatory maintenance cannot exceed the income tax taxable base for the year in which it is paid.
This means that any portion that exceeds the taxable base cannot be carried forward to future years. Therefore, making a single, substantial payment may not be financially prudent. In most cases, paying the maintenance in annual instalments—or at least spreading it across several tax years—offers better tax efficiency.
This strategy ensures:
- All amounts paid remain deductible in your income tax declaration.
- Since income tax is a progressive tax, each year the reduction will apply to the portion of income taxed at the highest marginal rate, maximising your tax savings.
If You Still Prefer a Lump Sum…
Adjust the Amount. If you are inclined to settle the obligation promptly through a lump sum—or by transferring a property—make sure you adjust the amount to reflect the lower tax savings associated with this method.
Example:
Let us suppose you earn 70,000€ net annually and agree to pay 6,000€ per year in compensatory maintenance over 20 years, adjusted annually for inflation. Thanks to tax savings of approximately 2,700€ per year (assuming a marginal rate of 45%), the effective cost over 20 years would be 66,000€:
(6,000€ – 2,700€) × 20 years = 66,000€
However, if you opt for a lump sum payment of 120,000€, you will only benefit from a single year’s tax reduction, resulting in an approximate saving of 20,447€. This means your effective cost would be 99,553€, or 33,553€ more than with annual payments. In this scenario, a lump sum would only be financially worthwhile if you pay no more than 86,447€:
(120,000€ – 33,553€).
Closing Thought
If you decide to pay compensatory maintenance as a lump sum and the amount is significant, be aware that the deductible portion is limited by your income tax taxable base. This typically results in a smaller tax saving than if the maintenance were paid annually. A structured, recurring payment may offer greater tax efficiency and a more favourable financial outcome.
