Cyprus – Changes in Income tax exemption – 1st January 2026

Tax-free threshold for retirement and severance lump sums –

Effective 1 January 2026, a tax reform in Cyprus significantly increases the income tax exemption for lump-sum payments received as voluntary retirement bonuses or termination-of-employment payouts.

Key changes

• Increased Exemption: The tax-free amount rises substantially from the previous €20,000 to €200,000.
• Taxable Amount: Any portion of the payout exceeding €200,000 will be taxed at a flat rate of 20%.

Legislated in late 2025, this change greatly expands the tax-free status for “golden handshake” severance payments, aiming to promote greater flexibility in retirement planning and arrangements.

Preferential tax rate on employee stock option gains –

Effective 1 January 2026, the 2026 tax reform in Cyprus introduces a preferential 8% personal tax rate for benefits derived from employee stock options, provided they are granted under qualified employer plans.

This special 8% rate, intended to incentivize equity-based compensation, is subject to the following caps:

• Annual Limit: The 8% rate applies up to an amount equal to two times (2×) the employee’s annual remuneration per year.
• Lifetime Cap: There is an overall lifetime limit of €1,000,000 of stock option income that is eligible for this 8% rate. This cap is measured over a ten-year period.

Proceeds exceeding these caps will be taxed at the normal salary tax rates.

Please contact your Mercans’ services delivery team for any additional information regarding the implications of the above change.

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Cyprus – Changes in Income tax exemption – 1st January 2026

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