The government is moving to overturn the existing framework for taxing retirement compensations and other financial benefits received by high-ranking employees and executives. Under the new bill submitted to Parliament as part of a broader tax reform, compensations, bonuses, and any other benefits linked to employment or office positions will now be subject to full taxation — even in cases of gratuities or privileges that were previously taxed under special rates or remained untaxed.

According to Brief, this legislative change aims to eliminate existing “grey areas” and ensure the universal taxation of high-value compensations, including specific cases of banking employees who reportedly received up to €200,000 tax-free.

If approved by Parliament, the bill will bring significant changes to how retirement compensations, benefits, and monetary advantages received by employees, public servants, and bank staff are taxed. According to the amendment added to Article 5 of the main Income Tax Law, “all income, gains, or other benefits connected to an office or employment shall be considered taxable.”

In practice, this means that retirement compensations, gratuities granted upon early or regular retirement, benefits from voluntary exit schemes, and any other financial advantage not stipulated in a contract or collective agreement will now be included as taxable income. The bill further clarifies that “if compensation is granted by court decision, it shall be taxed according to the nature of the benefit.”

In simple terms, employees who until now received substantial retirement or severance packages with little or no taxation will see those benefits fully taxed. This includes not only typical compensations but also bonuses offered as incentives for accepting employment or appointments.

The bill also specifies that “the new taxation applies to family members of the individual holding the position,” while explicitly excluding certain loans or financial facilities to shareholders when an extraordinary levy has already been paid as part of a disguised dividend distribution.

Additionally, it introduces the concept of “any other income,” covering any economic benefit of a non-capital nature, except for gains falling under Article 20E. This definition ensures clearer and more comprehensive taxation of employment-related benefits, closing long-standing loopholes.

Currently, retirement or severance packages for banking staff and senior corporate executives are often taxed under special rates or entirely exempt, particularly when provided through collective agreements or provident funds. This loophole has allowed some payouts of up to €200,000 to be made tax-free.

Under the new framework, such compensations will now be included in the standard income tax calculation, regardless of contractual or regulatory provisions, unless explicitly exempted in the new law. The Ministry of Finance states that this measure seeks to ensure universal taxation of high-value compensations and prevent system abuse through circumvention mechanisms.

In essence, employees should now expect their retirement packages to be taxed in full, rather than partially — a shift that will significantly affect the net amounts received upon retirement or voluntary exit.

At present, employees receiving retirement or voluntary exit packages enjoy considerable tax relief. According to PwC Cyprus, “A lump-sum payment granted upon retirement, a retiring gratuity, or a pension commutation is exempt from income tax.”

For example, an employee taking an early retirement package of €100,000 or more might currently face little to no income tax liability, as such benefits are often treated as non-employment income. In many cases, collective agreements and company policies have defined these payouts as “facilitations” for departure.

Meanwhile, pensions and related benefits are governed by special taxation rules — for instance, income from overseas pensions can be taxed either under a special regime or the standard income tax scale, depending on the taxpayer’s choice.

If an employee currently receives a voluntary exit package worth €150,000, under the existing system they would likely face no tax or ambiguous treatment. However, once the new law takes effect:

• The first €30,000–€40,000 may remain tax-free (as per existing thresholds or up to 20%).

• The remaining €110,000–€120,000 would fall under the standard income tax rates.

• If the compensation was not provided under a contractual or collective agreement — or was a “gift” — it would be fully taxable.