Tax aspects in international divorce

It is important for one to be familiar with the tax aspects of an international divorce when filing for divorce. Thus, it is advisable to seek tax advice during (international) divorce proceedings.

Tax aspects in a national scenario

In (plain) national situations, for the payer, spousal maintenance is tax-deductible, meaning that it is deducted from his or her taxes. On the other hand, the recipient is taxed on the basis of a progressive tax rate (meaning the tax rate dependent on his or her income level). For child maintenance other rules apply. Child alimony is not tax-deductible for the payer, but also not taxed for the recipient.

The spouses could agree on a lump-sum payment of the spousal maintenance, meaning a single payment as opposed to a series of payments. The recipient is taxed on the lump-sum at once, based on the progressive tax rate. For the payer, the lump sum is only tax-deductable when the amount of the lump sum is paid to the ex-spouse. This means that the lump sum must be paid at the moment the divorce is registered. The disadvantage of the progressive taxation can be cushioned by filing a petition for the so-called “middeling” (averaging).

It is also possible to come to a buy-out agreement of the spousal maintenance by allocating possessions in the year of the divorce. The transfer of possessions and the petition for divorce must take place in the same calendar year. If there is a tax advantage on these possessions, it is possible for the payer to use the tax deduction.

Tax aspects in an international scenario

In many foreign countries, spousal maintenance is not or barely deductable. Suppose a maintenance debtor gets employed in a foreign country, for example an expat. In general, he will be qualified as a non-resident taxpayer. This means that he is only taxable in the Netherlands as far as he has Dutch income. Dutch income is formed by income from working and living in the Netherlands, and income from savings and investments in the Netherlands.

If the non-resident taxpayer keeps his house in the Netherlands (leased or not), this house will be taxed. If he is obliged to pay spousal maintenance, this maintenance is not deductible from his Dutch income. This tax-deductible item is explicitly excluded in Dutch tax law. If his former wife lives in the Netherlands, the spousal maintenance she receives is taxable for her. In this situation spousal maintenance is taxable, but not deductible!

In this specific case there is a possibility too, if things are well structured, to realise a net lump sum. During the year of the divorce, the non-resident taxpayer opts for resident taxpayer status. This choice automatically applies to his former wife. In the tax return for the year of the divorce, the tax deductible item will be allocated to the recipient, with the result that recipient receives the lump sum net.