Greek companies paying severance above mandatory legal limits can deduct the extra expense if they provide clear business justification, tax experts from advisory firm Artion SA said.
Giorgos Dalianis, chief executive of Artion SA, explained that paying severance higher than statutory minimums is a frequent and legitimate business practice in Greece. He noted that excess severance is commonly used to settle executive departures, manage internal restructurings, support voluntary exit schemes, execute consensual resignations, and prevent labor disputes.
Greek labor legislation sets the minimum floor of financial protection for departing workers rather than a maximum ceiling on compensation. As a result, businesses are legally permitted to offer additional financial settlements if the payout links to a real employment termination and satisfies a documented corporate need.
The primary criterion across labor, tax, social security, and accounting evaluations is the genuine compensatory character of the payment. The central question for authorities is whether the payout has a real economic cause tied to job termination, rather than concealing a performance bonus, additional salary, or indirect profit distribution.
Categories of Exit Payouts
Tax and social security evaluations in Greece divide employee departure payments into three separate categories. The first category is mandatory legal severance pay required by Greek labor law upon dismissal.
The second category covers additional or contractual severance pay exceeding legal minimums, which an employer agrees to pay during termination. The third category includes other departure benefits such as exit bonuses, special financial incentives, or extra compensation arrangements.
This classification is crucial because official terms used in private contracts do not bind Greek tax authorities. Auditors examine the actual economic substance of the transaction. Payments serving as rewards for work or performance are reclassified as regular employment income.
High exit payouts given to senior executives, commonly referred to as golden handshakes, require extra documentation. While high amounts do not disqualify a payout from being severance, companies must provide stronger evidence regarding the executive position, length of service, departure circumstances, and company finances.
Tax Rules for Employees
Employee severance payments are governed by special autonomous taxation rules under Article 15 Paragraph 3 of Law 4172/2013, the Greek Income Tax Code. This autonomous tax regime applies to both statutory minimum severance and voluntary extra compensation, provided the payment maintains a true compensatory purpose.
Autonomous taxation is justified because severance is not regular salary for ongoing work. Instead, it compensates an employee for the loss of their job position. For this reason, tax treatment differs from standard income tax rates on salaries.
Greek tax auditors evaluate the true nature of the payment rather than relying on written contract titles. Documenting a payment as severance is insufficient without clear proof connecting the payout to employment termination and the absence of ongoing work.
If tax authorities determine that a payout connects to past performance, sales targets, variable bonuses, or ongoing duties, the amount is taxed as regular salary income regardless of when or how it is paid.
Corporate Tax Deduction Requirements
A company can deduct excess severance expenses under the general tax deduction principles outlined in Article 22 of Law 4172/2013. Business expenses are deductible when conducted in the interest of the enterprise or during normal commercial operations, provided they reflect real transactions recorded in financial books with supporting documentation.
Exceeding statutory severance limits does not automatically make the expense non-deductible. Greek tax law does not restrict tax deductions exclusively to mandatory severance payouts, focusing instead on whether the payment serves a legitimate business purpose.
Ministerial circular POL. 1113/2015, which interprets Article 22 of the Income Tax Code, specifies that necessary business expenses include choices made by corporate management, whether required by law or decided contractually.
Tax authorities generally refrain from overriding corporate management decisions regarding business expediency. Audits intervene only when there is an obvious lack of business cause, a fictitious transaction, an artificial arrangement, or an unjustified transfer of company asset value.
Administrative jurisprudence confirms that expense productivity depends on its connection to corporate operations. Additional severance is tax-deductible when documented for business reasons such as avoiding labor litigation, executing corporate reorganizations, facilitating executive exits, or preserving business reputation.
Companies must prove that a real employment relationship existed, that the departure actually occurred, and that the payout amount is reasonable. Required evidence includes board decisions, termination contracts, detailed explanations of business reasons, bank payment receipts, and proper accounting records.
Social Security and Accounting Standards
Genuine severance compensation is not classified as payment for work performed and is generally exempt from social security contributions in Greece. This exemption relies entirely on the compensatory nature of the payout and its direct connection to job termination.
However, social security authorities also enforce substance over form. If a severance payment conceals extra wages or bonuses, social security contribution liabilities can be assessed against the employer.
Audit risks increase when an employee formally resigns but continues working for the business under a different arrangement or is immediately rehired. Such arrangements trigger close inspection by social security auditors.
From an accounting perspective, severance liabilities must be recognized when the obligation arises, supported by proper documentation. Inadequate accounting records can weaken a company's legal defense during tax inspections, particularly when large sums are involved.
High Risk Audit Scenarios
While additional severance is legally permitted, specific situations carry a higher burden of proof during tax audits. Higher scrutiny occurs when payouts take place shortly before a company ceases operations, enters liquidation, or suspends business activities.
In pre-closure scenarios, tax inspectors check whether severance payments serve real corporate needs or act as a mechanism to transfer company assets to individuals before shutting down.
Significant tax risks also emerge when severance payments are granted to company shareholders, managers, board members, family relatives, or connected entities. While corporate relationships do not trigger automatic tax rejections, they require extensive documentation proving genuine employment and actual departure.
The Dispute Resolution Directorate of the Independent Authority for Public Revenue, known in administrative practice as DED, focuses on the economic reality of transactions involving related parties or closing businesses. Unsubstantiated or disproportionate payouts are reclassified as non-deductible expenses or disguised profit distributions.
In extreme cases involving connected parties without economic justification, tax authorities can invoke general principles against artificial arrangements. Indicators of high tax risk include missing termination agreements, unjustified compensation amounts, immediate rehiring, pre-shutdown payouts, and family connections without proof of work.
Practical Application Examples
The application of these tax rules is illustrated in two contrasting corporate scenarios. In the first case, a long-serving senior executive leaves consensually during an internal reorganization and receives extra severance pay. The expense is tax-deductible because the business need is fully documented with board resolutions, termination agreements, reorganization plans, and bank records.
In the second case, a family-owned business approaching dissolution pays a large severance sum to a shareholder or relative shortly before closing, without clear justification or employment records. Tax auditors and DED rulings are likely to reject the deduction as a disguised profit distribution due to the lack of genuine compensatory purpose.
Offering additional severance pay remains an effective tool for managing organizational change and protecting companies from legal disputes. It also serves as an executive recruitment incentive by demonstrating fair treatment of personnel.
The legal analysis was prepared by Giorgos Dalianis, chief executive of Artion SA and founder of Artion Group, alongside Artion SA partner Konstantinos Theocharis and Thanos Dalianis, partner at Artion Group member company Grand Value. Advisory firm Artion SA, located at 1-3 Oedipodos Street in Chalandri, Greece, provided the advisory commentary for informational purposes.
