The Cyprus tax reform introduces a new Article in the Income Tax Law governing the taxation of certain payments received in connection with employment or the holding of an office.

The amendment clarifies the tax treatment of several types of employment-related benefits, including payments made upon accepting employment and payments made upon termination of employment or office.

Under the new rules, specific categories of income are subject to special tax treatment.

In particular:

• Income up to €200,000 is exempt from income tax.

• Any amount exceeding €200,000 is taxed at a flat rate of 20%.

Importantly, such income is not aggregated with the individual’s other taxable income.

Types of Payments Covered

The provisions apply to various forms of employment-related benefits, including:

• Incentive payments granted to encourage an individual to accept employment or take up an office, even if paid before the commencement of employment.

• Ex-gratia payments made in connection with retirement, early retirement, or termination of employment or office.

• Benefits granted through Early Retirement Schemes.

• Compensation for termination of employment or office when such compensation is not specifically provided in the employment contract or other employment terms.

• Amounts awarded by a court in relation to income falling within the above categories.

Tax Treatment

The tax treatment of such payments is as follows:

These amounts are taxed separately and are not added to the individual’s other income for purposes of determining the applicable tax bands.

Employer Tax Treatment

The law also provides that such payments are not deductible for the employer for corporate tax purposes.

This means that the employer cannot claim the payment as a tax-deductible expense, irrespective of whether the amount is below or above the €200,000 threshold.

Example

Assume an employee receives an ex-gratia termination payment of €300,000.

Tax treatment for the employee

• First €200,000 → tax exempt

• Remaining €100,000 → taxed at 20%

Tax payable:

€100,000 × 20% = €20,000

Tax treatment for the employer

The entire €300,000 payment is not tax deductible for corporate tax purposes.

Commentary – Policy Rationale

The introduction of Article aims to clarify and standardise the taxation of payments connected with the commencement or termination of employment.

While the reform adopts a stricter approach by denying tax deductibility to employers, it maintains a favourable tax treatment for employees, allowing significant termination payments to remain partially tax-exempt and subject to a relatively moderate tax rate.