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It is a reality that every separation or divorce leads to increased expenses for both parties. Not only do you now have two separate households, but all costs that were previously shared are effectively doubled.
The impact of divorce or separation can differ significantly for each spouse, and in some cases one of them will face greater difficulties managing life independently.
THE Compensatory Allowance FOR ECONOMIC IMBALANCE:
Given the economic imbalance that one spouse may experience, the law provides for the possibility of financially equalising or rebalancing the position of the spouse whose situation is most adversely affected as a result of the separation or divorce.
The law therefore grants the right to claim a compensatory allowance for economic imbalance following separation or divorce, in an amount not exceeding the standard of living enjoyed during the marriage, nor exceeding what the paying spouse is able to sustain, bearing in mind that any child maintenance obligation always takes priority over any other type of allowance.
It is worth noting that the compensatory allowance is understood to extend family solidarity beyond the breakdown of the relationship, with the aim of rebalancing, as equitably as possible, the economic position of the more disadvantaged spouse, as the High Court of Justice of Catalonia has affirmed on numerous occasions.
AM I ENTITLED TO A COMPENSATORY ALLOWANCE FOLLOWING DIVORCE?
The relevant point in time for assessing whether an economic imbalance exists is the breakdown of the relationship. It is necessary to consider whether there are significant changes following that breakdown.
- If one spouse experiences significant changes following the breakdown, that spouse may claim the compensatory allowance from the other.
- If both spouses experience similar changes such that the degree of hardship is comparable, neither of them may claim any allowance from the other.
The standard of living maintained during the marriage must therefore be taken into account, as it serves as the upper limit for the amount of the allowance. That said, it cannot be argued that the compensatory allowance should equalise both spouses' assets, contrary to what is often assumed.
It is important to note that the right to a compensatory allowance is granted by the courts in cases of separation or divorce, not in cases of dissolution of a non-married partnership, which is governed by different legal provisions that offer other forms of compensation.
WHAT AMOUNT CAN I CLAIM AS A COMPENSATORY ALLOWANCE?
The financial situation of both spouses following the breakdown of the marriage must be carefully assessed, taking into account any other benefits awarded. For example, the financial imbalance will be less significant if the more disadvantaged spouse is granted use of the family home. Other factors must also be considered, such as age, health, and the care arrangements for any children, as these directly affect the future prospects of the more disadvantaged spouse.
In general, courts take a wide range of factors into account, including educational background, professional qualifications, and the individual's career history. As a result, courts rarely grant compensatory allowances in favour of individuals who are young and in good health, or who hold university degrees and have strong employment prospects, particularly where the period of cohabitation was relatively short.
Another key factor is the duration of the cohabitation. The longer one spouse sacrificed their professional development in order to dedicate themselves to the family, the greater the likelihood that a genuine financial imbalance exists and warrants compensation. This also protects the legitimate expectations of the spouse who chose not to advance their career in favour of family life and has consequently become financially dependent on the other, making it considerably more difficult to regain financial independence after the separation.
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- ALLOWANCE BY AGREEMENT: The parties may agree on the amount and duration of the allowance where it takes the form of a periodic payment.
- ALLOWANCE WITHOUT AGREEMENT: Where no agreement has been reached or the agreement has not been approved by the court, the court will determine the amount and duration, having regard to the criteria set out in Article 233-15 of the Catalan Civil Code, namely:
- The financial position of each party, taking into account whether financial compensation is applicable on grounds of work performed during the marriage, or any anticipated allocations arising from the settlement of the matrimonial property regime;
- The carrying out of family duties or other decisions taken in the interest of the family during the period of cohabitation, where this has reduced one spouse's earning capacity;
- The foreseeable economic prospects of each spouse, having regard to their age, state of health, and the way in which custody is allocated;
- The duration of the cohabitation;
- Any new family expenses incurred by the paying party, where applicable.
These criteria are not exhaustive, and the court may take into account any other circumstances that may be relevant in each particular case.
The court will assess the situation as a whole. If it finds that one spouse is in a position of financial imbalance at the time of the breakdown, and also considers that the potential paying party is able to meet the obligation, taking into account any child maintenance payments and other commitments, the judge will award the compensatory benefit. However, this is conditional on the disadvantaged spouse having expressly requested it, as the court cannot make such an award of its own motion.
HOW IS COMPENSATORY BENEFIT PAID?
Under the current provisions of the Catalan Civil Code, the benefit may be paid either as a periodic allowance or as a lump sum, whether in assets or in cash. As lump-sum payment has become the general option, the term compensatory benefit is now used, whereas under the previous legislation it was referred to as a compensatory pension.
Where payment is made as a lump sum, it can neither be modified nor extinguished. Where payment is made as a periodic allowance, however, it may be subject to modification, specifically, it may be reduced, but never increased. A reduction may arise from an improvement in the financial circumstances of the recipient or a deterioration in those of the paying party.
In this regard, on the modification of compensatory benefit, we highlight the important ruling of the Supreme Court (Civil Chamber, 1st Section), no. 856/2011 of 24 November, RJ 2012/573, which established that: "Through modification proceedings, a compensatory benefit awarded for an indefinite period may be converted into a time-limited benefit, as this constitutes a modification arising from a substantial change in circumstances."
Furthermore, where the benefit is paid in the form of a pension, the law proceeds on the basis that it is essentially temporary in nature, without prejudice to the possibility that it may, exceptionally, be of indefinite duration.
Another notable change is that the right to claim the benefit does not lapse upon the death of the debtor spouse. If one spouse dies before a year has passed since the de facto separation, the other spouse may, within the three months following the death, bring a claim against the estate for the compensatory benefit. The same rule applies where the matrimonial proceedings come to an end due to the death of the spouse who would have been liable to pay it.
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AM I ENTITLED TO ANY BENEFIT IF MY PARTNER DIES?
One of the key changes introduced by the current rules set out in Book Two is that compensatory benefit may now be awarded not only where the matrimonial property regime comes to an end through separation or divorce, but also in cases where it is dissolved by the death of one of the spouses.
Accordingly, provision is made for the possibility of compensating a spouse in the event of death, provided that the spouse entitled to such compensation does not receive it from the deceased's estate through inheritance.
WHEN DOES THE COMPENSATORY PENSION OR BENEFIT COME TO AN END?
Finally, the compensatory benefit may be extinguished in the following circumstances, pursuant to Article 233-19 of the Catalan Civil Code:
- an improvement in the financial situation of the creditor spouse or a deterioration in that of the debtor spouse;
- the marriage or cohabitation of the creditor spouse;
- the death of the creditor spouse (not the debtor);
- expiry of the agreed term.
These grounds for termination apply both where the compensatory benefit has been determined by a court and where it has been agreed by the parties in a separation agreement, who may make it contingent, for example, on the creditor spouse obtaining employment, the financial independence of the children, or the winding up of a family business.
This freedom to agree terms may also be used in the opposite direction, to exclude the application of certain statutory grounds. In general, waiving the compensatory payment is permitted, including in prenuptial agreements, but only provided that such a waiver does not compromise the basic needs of the spouse entitled to the payment.
TAX TREATMENT OF THE COMPENSATORY PAYMENT:
The tax implications of the compensatory payment under Personal Income Tax (Personal Income Tax (IRPF)) are as follows:
- For the paying spouse, it constitutes a reduction in their taxable base. However, if the payment is made in kind, typically in the form of real estate, it may give rise to a capital gain or loss from an onerous transfer for Personal Income Tax (IRPF) purposes.
- For the recipient spouse, it constitutes an increase in their taxable base and is taxed as employment income at the applicable marginal rate. If the payment is received as a lump sum, a 30% reduction for irregular income may apply, subject to the limits set out in the personal income tax legislation.
Where the compensatory payment is made by transferring an asset, that transfer in lieu of payment will be subject to Property Transfer Tax (ITP, Impuesto de Transmisión Patrimonial), with the exception of the transfer of the primary residence.
Having a clear understanding of the tax treatment is essential during negotiations, as the tax consequences of the arrangement are often overlooked. The fiscal impact on the paying spouse can be significant, which is why we have included this brief note.
WIDOWHOOD PENSION in the case of a former spouse:
As regards the widowhood pension, only a separated or divorced spouse who, at the time of their former spouse's death, was receiving a compensatory payment from them will be entitled to this benefit.
It is therefore worth bearing this in mind in cases of separation or divorce between older spouses, as it may be advisable to agree on a compensatory payment in order to secure, where applicable, a potential future widowhood pension.
