The Cypriot government is planning to add a tax on early or voluntary retirement payments as part of a major tax reform. The bill is one of six laws that, together, aim to update the tax system and broaden the country's tax base. If the changes are approved, the following will be taxed: severance pay when an employee is fired, bonuses, allowances, and any other payments related to employment, even if they are given to the employee's family.
What does this mean for employees and employers?
Until now, early retirement, especially in banks and some public organizations like Cyta and the Cyprus Electricity Authority (EAC), has meant getting tax-free payments. This has allowed companies to reduce their workforce without layoffs, and many people have chosen to retire early.
The new draft says that all payments related to employment will be taxed, whether in cash or other assets. However, the government is planning to make a change. For the first 20% of severance pay, taxes will not be taken out.
Who will be protected?
Even though the law is generally focused on one thing, some categories will still be protected. For example, civil servants and employees of the public sector will still not have to pay taxes on severance pay. Payments from pension and savings funds won't be taxed if this is included in the agreement.
Previously unsuccessful: trade unions against
The idea of taxing early severance payments has been suggested before, but trade unions strongly opposed it. The latter said that this was unfair to employees who had worked there for a long time.
Still, some big companies, like Bank of Cyprus, Hellenic Bank, Laiki, Alpha Bank, the old Cooperative Bank, Cyta, the Cyprus Port Authority, and EAC, have suggested this in recent years.