Government to tax early retirement payouts in major reform push

Payoffs for employees taking early or voluntary retirement will be subject to income tax under a sweeping reform plan, the government announced on Tuesday.

The draft legislation, part of a broader package of six tax reform bills, aims to modernise the tax system and broaden the country’s tax base. It proposes bringing previously exempt employment-related payments into the scope of taxation, including gratuities, bonuses, allowances and other benefits linked to an individual’s job, even if paid out to a family member.

Until now, early retirement schemes, primarily used by banks and semi-governmental organisations such as Cyta and the electricity authority of Cyprus (EAC), provided generous exit packages to cut staff numbers entirely free from tax.

These schemes have long been a preferred method of reorganising operations without resorting to redundancies. The proposed amendment to the income tax law would change that status quo.

According to the draft law, all payments connected to employment, whether in cash or kind, will become taxable. That includes gratuities offered upon retirement or the ending of a contract, as well as recurring or one-off allowances.

However, according to Philenews, the government intends to offer limited relief, by making the first 20 per cent of any early retirement compensation tax-free.

Despite the wide reach of the proposed changes, certain groups will remain protected.

Lump sums granted to civil servants and employees within the broader public sector will continue to be exempt from taxation. In addition, payouts from pension and provident funds will remain untaxed, provided they are covered by a collective agreement.

In recent years, voluntary exit schemes have been offered by major employers including the Bank of Cyprus, Hellenic Bank, Laiki Bank, Alpha Bank, the former Cooperative Bank, Cyta, the Cyprus ports authority and the EAC.

A previous effort to introduce a flat tax rate on early retirement benefits was shelved following strong resistance from trade unions, which argued the measure would undermine the rights of long-serving workers.