E1 Hallmark-Safe Harbour Rates


The 6th modification of Directive on Administrative Coopartion (DAC6) came into force on 25 June 2018. The Directive requires intermediaries, such as, EU-based tax consultants, banks, asset managers, corporate administrative service providers, insurance companies and lawyers, as well as taxpayers, to report certain cross-border arrangements (reportable arrangements) to the relevant EU Member State tax authority.

This article focuses on the use of safe harbor rates which are considered reportable arrangements under hallmark E1-Use of safe harbor rates.

Hallmark E1 in Practice – Impact on Cyprus Companies using safe harbor rates

With the introduction of the Transfer Pricing legislation in Cyprus and the requirement to maintain local documentation for related party transactions above certain thresholds, the Tax Authorities issued Circular 6/2023. This circular requires companies with related party transactions below these thresholds to maintain minimum documentation. In some cases, the minimum documentation allows taxpayers to use safe harbor rates.

The safe harbor rates apply to the following types of transactions:

  1. Provision of financing from other financial means: If the financing is funded through financial means like bonds, loans from related parties, interest-free loans from shareholders, cash advances, or bank loans, the applicable safe harbor rate is 2.5% after deducting allowable expenses.
  2. Provision of financing from own capital: If the financing is funded from sources such as issued share capital, share premium, non-refundable capital contributions, or retained earnings, the applicable safe harbor rate is the 10-year government bond yield of the borrower's country plus 3.5%.
  3. Receiving financing from related parties: Receiving of financing in the form of loans or bonds or cash advances from related parties, that carry an interest rate, to the extent that the funds borrowed are used in the business. In this case, the applicable safe harbor shall not exceed the 10-year government bond of Cyprus plus a 1.5%.
  4. Conducting low value-adding services: The applicable safe harbor rate should be a minimum 5% mark-up on the relevant costs.


Reporting Obligations Under DAC6

Hallmark E1 of the Directive targets arrangements using unilateral safe harbor rates, even if these rates are backed by appropriate minimum transfer pricing documentation. A reportable cross-border arrangement is considered effective from the date that it is available for implementation, it is ready for implementation, or when the first step is taken, whichever comes first. The DAC6 report must be submitted within 30 days from the decision to use the safe harbour rate.


Practical Considerations

Due to practical difficulties in using safe harbor rates, the final submission date is defined as the deadline for submitting the tax return for the relevant year, which may be extended by the Tax Department. There is no need to report the arrangement every year. However, if there is a significant change that triggers another hallmark, the arrangement must be reported under the new hallmark.



The use of the safe harbor rates may be used by some consultants/taxpayers for tax compliance purposes without preparation of minimum documentation or relevant declaration on the tax return. However, this cannot circumvent the DAC6 Directive, therefore, the obligation to report still applies.



Marios Palesis


Tax Department



Christina Papaioannou

Senior Supervisor

Tax Department





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