Maintenance and Compensatory Allowances following Divorce and Income Tax
Newsletter - April 2021
Allowances for maintenance paid between spouses and ex-spouses are now deductible from the debtor’s income, whether or not the payments are determined by the court (Finance Act for 2021).
Compensatory allowances paid as a lump sum, as an award of assets in ownership or as a temporary or lifelong right of use, dwelling or usufruct and lump-sum payments replacing annuities grant the right to tax relief under Article 199 octodecies of the French Tax Code.
MAINTENANCE ALLOWANCES IN THE EVENT OF DIVORCE
Allowances for maintenance paid between spouses and ex-spouses are deductible from the payer’s income provided they meet the following conditions:
- Be legally separated or divorced or in the process of separating or divorcing
- Be taxed individually
- Allowances must be paid for maintenance purposes (food, housing, etc.)
An allowance for maintenance constitutes taxable income for the beneficiary.
COMPENSATORY ALLOWANCES IN THE EVENT OF DIVORCE
Conditions for Tax Relief
To grant entitlement to tax relief, the compensatory allowance must be paid:
- by natural persons who are tax residents in France or outside France provided they derive most of their income from France;
- under certain conditions relating to the form (cash, award of assets in ownership, award of a temporary or lifelong right of use, dwelling or usufruct) and nature of payments made (lump sump or lump sum replacing annuities following a court decision);
- over a period at least equal to twelve months from the date the decree of divorce becomes final.
Amounts of Tax Relief
- For a compensatory allowance paid as a lump sum within 12 months of the decree of divorce: the debtor is entitled to income tax relief equal to 25% of the sums paid within the limit of €30,500.
As the compensatory allowance does not constitute income for the beneficiary, the amount is not subject to income tax.
Compensatory allowances in the form of temporary usufruct over a period of five years are also concerned.
- For a compensatory allowance paid as a lump sum over a period exceeding 12 months after the decree of divorce: the sums paid by the debtor are deductible from their taxable income in the amount paid during the year of taxation but without exceeding the amount stipulated by the court.
For the beneficiary, the sum constitutes taxable income under the system of annuities.
It is important to note that the tax treatment of payments made after the 12-month period stipulated in the decree of divorce differs depending on whether the sums were paid before or after 4 April 2012.
- For a compensatory allowance paid as a life annuity: the amount is deductible from the debtor’s taxable income and taxable for the annuitant according to the system of annuities.
- For a combined compensatory allowance, i.e. paid partly as a lump sum within 12 months of the decree of divorce and partly as an annuity:
- Payment of these combined compensatory allowances now grants entitlement to tax relief (Article 3.3° of the Finance Act for 2021).
- Payment of the annuity is deductible for the debtor and taxable for the beneficiary.
Sums paid as a temporary or lifelong annuity, and lump-sum payments over a period exceeding 12 months are deductible from the debtor’s taxable income and subject to income tax for the beneficiary.
Application of Tax Relief
Tax Relief Basis
The tax relief basis is equal to the lump sum stipulated in the decree of divorce, within the limit of €30,500 for the entire 12-month period of payment.
Given the limit of payments granting the right to tax relief, the maximum tax relief equal to 25% is €7,625.
For allowances paid in a form other than cash, the basis must be beyond question. The value must be explicitly defined in the divorce agreement or decree. Failing this, it must be valued by an officer of the court.
For allowances resulting from the conversion of an annuity into a lump sum, the basis must be determined taking into account the lump sum payable by the debtor under the conversion decision and all the payments already made, re-valued according to the variation in the annual average consumer price index between the year of payment of the annuity and the year of conversion.
The tax relief does not give rise to any refund.
Documents to be submitted by the Taxpayer
The taxpayer must be able to prove the amount of the lump-sum compensatory allowance by any means (copy of the decree of divorce) and its effective payment over the year for which the tax is assessed.
Otherwise, the tax relief will be challenged under the adversarial tax adjustment procedure. Interest on overdue payments shall be due on the additional tax payable. If the taxpayer acts in bad faith, a tax increase may be due.
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