Contract analysis

I. INTRODUCTION AND PURPOSE Calderwood & Harkness LLP, on behalf of its clients — a German semiconductor manufacturer (hereinafter "Foreign Parent") and its wholly owned US subsidiary (hereinafter "US Sub" and, together with Foreign Parent, the "Applicants") — respectfully submits this pre-filing memorandum to the Advance Pricing and Mutual Agreement Program ("APMA") of the Internal Revenue Service ("IRS"), Large Bus

II. DESCRIPTION OF THE TAXPAYER AND INDUSTRY A. Foreign Parent Foreign Parent is an Aktiengesellschaft (AG) organized and existing under the laws of the Federal Republic of Germany. Foreign Parent is publicly listed on the Frankfurt Stock Exchange (XETRA segment) and has its registered office (Sitz) and principal fabrication campus in the Free State of Saxony, Germany. Foreign Parent is a leading European semiconduct

III. DESCRIPTION OF COVERED TRANSACTIONS The proposed bilateral APA would cover three categories of intercompany transactions between Foreign Parent and US Sub. Each transaction category is described in detail below. A. Transaction 1: Tangible Goods — Sale of Semiconductor Wafers and Die Transaction Description. Foreign Parent manufactures semiconductor wafers and singulated die at its fabrication facilities in Dresd

IV. PROPOSED TRANSFER PRICING METHODS This Section IV sets forth the Applicants' proposed transfer pricing methods for each of the three covered transaction categories, including the rationale for each method selection under the best method rule, the identification of the tested party, the profit level indicator or rate employed, the results of the benchmarking analyses, and the application of the benchmarking result

1. Proposed Method The Applicants propose the Transactional Net Margin Method ("TNMM"), as described in Chapter II of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (2022 ed.) ("OECD Guidelines"), and its US domestic law equivalent, the Comparable Profits Method ("CPM"), as set forth in Treasury Regulation § 1.482-5, as the transfer pricing method for the intercompany sale

2. Tested Party The Applicants propose US Sub as the tested party. US Sub is the least complex entity in the tangible goods transaction, functioning as a limited-risk distributor with routine functions (distribution, marketing, design support, and customer service), limited ownership of intangible assets (US Sub does not own or develop core process technology intangibles), and bearing primarily inventory risk (holdin

3. Profit Level Indicator The Applicants propose operating margin on net resales (i.e., operating income divided by net third-party revenue) as the profit level indicator ("PLI"). Operating margin is selected because it is the most commonly used and widely accepted PLI for distribution entities under both the TNMM and the CPM. Operating margin appropriately captures the return attributable to US Sub's distribution, m

4. Benchmarking Study The Applicants conducted a benchmarking study to identify independent companies whose functions, risks, and asset profiles are comparable to those of US Sub in its capacity as a limited-risk distributor of semiconductor products in North America. The benchmarking study employed the following screening criteria: • Industry: Companies classified in SIC codes 5065 (Electronic Parts and Equipment, N

5. Benchmarking Results The interquartile range of operating margins for the 17 comparable companies, computed on a five-year weighted average basis, is as follows:

6. Application to US Sub US Sub's FY 2024 operating margin on net resales was 4.80% ($197.8 million operating income ÷ $4,120 million net revenue). This result falls within the interquartile range of 2.8% to 6.1% and is above the median of 4.4%. Accordingly, US Sub's actual operating margin is consistent with the arm's-length range established by the benchmarking study, confirming that the intercompany transfer price

7. Best Method Considerations The TNMM/CPM is selected as the best method under the best method rule set forth in Treasury Regulation § 1.482-1(c) and Paragraph 2.2 of the OECD Guidelines, for the following reasons: • Least complex party: US Sub is the least complex party in the tangible goods transaction, and reliable benchmarking data for entities performing US Sub's limited-risk distribution functions is available

1. Proposed Method The Applicants propose the Comparable Uncontrolled Transaction ("CUT") method, as set forth in Treasury Regulation § 1.482-4(c) and described in Chapter VI of the OECD Guidelines, as the primary transfer pricing method for the royalty payments made by US Sub to Foreign Parent under the IP License Agreement. The CUT analysis is corroborated by a residual profit split analysis, which serves as a conf

2. Tested Party The CUT method evaluates the royalty terms of the controlled transaction by reference to the royalty terms of comparable uncontrolled transactions. In this context, the analysis focuses on Foreign Parent as the licensor, comparing the royalty rate charged by Foreign Parent to US Sub with royalty rates observed in comparable arm's-length license agreements involving similar types of semiconductor intan

3. Benchmarking Study The Applicants conducted a benchmarking study to identify comparable uncontrolled license agreements for semiconductor intellectual property. The study drew upon two primary data sources: (i) a subscription royalty rate database (specifically, the Sundial Health IT royalty rate database), which aggregates licensing data from public filings, court proceedings, and voluntary submissions; and (ii)

4. Benchmarking Results The interquartile range of royalty rates observed in the eight comparable uncontrolled license agreements is as follows:

5. Application to the IP License Foreign Parent's royalty rate of 6.0% on IP-attributable revenues falls within the interquartile range of 3.5% to 8.2% and is above the median of 5.6%. The effective royalty rate on US Sub's total net revenues (i.e., 6.0% × 18.1% IP-attributable share = approximately 1.09% of total net revenues) is consistent with the rates observed in the comparable uncontrolled license agreements wh

6. Corroboration by Residual Profit Split The Applicants have performed a residual profit split analysis as a confirmatory method. Under the residual profit split, each party is first allocated a routine return for its functions (US Sub's routine return is computed at the TNMM/CPM-determined operating margin, and Foreign Parent's routine manufacturing return is computed by reference to comparable contract manufacture

7. Best Method Considerations The CUT method is selected as the best method for the following reasons: • Availability of comparable uncontrolled transactions: Eight comparable arm's-length license agreements were identified, providing a sufficient basis for reliable comparisons; • Comparability: The comparable agreements involve similar industries (semiconductor), similar types of intangibles (process technology and

1. Proposed Method The Applicants propose the income method, as prescribed by Treasury Regulation § 1.482-7(g)(4), as the transfer pricing method for evaluating the arm's-length character of the CSA, including both (i) the determination of US Sub's cost-sharing percentage (anticipated benefit share) and (ii) the valuation of the PCT buy-in payment.

2. Anticipated Benefit Share Analysis US Sub's cost-sharing percentage of 22.5% was determined based on an analysis of the reasonably anticipated benefits to each participant from the exploitation of the intangible property developed under the CSA in each participant's assigned geographic territory. The anticipated benefit share analysis was conducted using the following methodology: • Revenue Projections: Projected

3. PCT Valuation At the inception of the CSA on July 15, 2018, US Sub made a lump-sum PCT buy-in payment of $312.5 million to Foreign Parent. This payment compensated Foreign Parent for the value of the pre-existing platform intangible property (process development data, experimental results, feasibility studies, and early-stage engineering work product related to 2nm process technology) that Foreign Parent contribut

4. Periodic Adjustment Evaluation The anticipated benefit share underlying US Sub's 22.5% cost-sharing percentage is subject to triennial review and adjustment, in accordance with the CSA Agreement and the principles of Treasury Regulation § 1.482-7(i). The triennial review evaluates whether the actual exploitation outcomes and market developments are materially consistent with the projections used to determine the o

5. Best Method Considerations The income method is the specified method under the cost-sharing regulations (Treasury Regulation § 1.482-7) for valuing platform contributions and evaluating the arm's-length character of cost-sharing arrangements. The income method is the most reliable method for the following reasons: • Regulatory specification: The income method is the method specifically prescribed by the Treasury R

V. PROPOSED APA TERM AND ROLLBACK REQUEST A. Prospective APA Term The Applicants propose a prospective APA term of five tax years, commencing January 1, 2025 and ending December 31, 2029. Both Foreign Parent and US Sub have a December 31 fiscal year-end for both US federal income tax and German corporate income tax purposes. Accordingly, the five prospective APA years would correspond to the following tax years: • Ta

1. Consistency of Pricing Policies. The intercompany pricing policies and transfer pricing methods described in this memorandum have been consistently applied by Foreign Parent and US Sub throughout the rollback period (2022–2024). The Supply Agreement, the IP License Agreement, and the CSA Agreement have been in effect throughout this period, and the intercompany pricing terms have been determined using the same met

2. Stability of Functional Profiles and Risk Allocations. The functional profiles of Foreign Parent and US Sub, the allocation of risks between the parties, and the economic circumstances of the covered transactions have remained substantially unchanged since at least January 1, 2022. Foreign Parent has continued to serve as the group's principal manufacturer, R&D center, and IP owner, while US Sub has continued to f

3. Elimination of Double Taxation. Granting the rollback would provide certainty for the entire eight-year period (2022–2029) and would eliminate the risk of double taxation with respect to the covered transactions for all years within the combined rollback and prospective APA term. This is consistent with the objectives of the bilateral APA program and the Treaty's Mutual Agreement Procedure.

4. Administrative Efficiency. Addressing the rollback period in connection with the prospective APA avoids the need for separate audit proceedings, competent authority referrals, or other dispute resolution processes with respect to the transfer pricing of the covered transactions for the 2022–2024 tax years. C. Total Covered Period If the rollback request is granted, the total covered period would encompass eight ta

VI. TREATY BASIS AND COMPETENT AUTHORITY PROCEDURES The proposed bilateral APA is sought under the authority of Article 25 (Mutual Agreement Procedure) of the Convention between the United States of America and the Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital and to Certain Other Taxes, signed on June 29, 2006 (the "T

Article 9 (Associated Enterprises) of the Treaty sets forth the arm's-length standard applicable to transactions between associated enterprises. Specifically, Article 9(1) provides that where conditions are made or imposed between two associated enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for thos

VII. LEGAL FRAMEWORK The following legal authorities are relevant to the proposed bilateral APA and the transfer pricing analyses described in this memorandum: United States Domestic Law: • Internal Revenue Code § 482. Section 482 authorizes the Secretary of the Treasury to distribute, apportion, or allocate gross income, deductions, credits, or allowances between or among organizations, trades, or businesses owned o

VIII. USER FEE The Applicants acknowledge the requirement, pursuant to Rev. Proc. 2015-41, § 4.12, to submit the applicable IRS APA user fee upon the filing of a formal APA application. Based on the aggregate annual intercompany transaction values described in this memorandum, the Applicants understand that the applicable user fee category is the "large case" fee of $113,500 (as published by the IRS and effective for

IX. REQUESTED PRE-FILING CONFERENCE The Applicants respectfully request a pre-filing conference with the APMA program at the earliest available date, to be held in person at the IRS offices in Washington, D.C., or by secure videoconference, as may be convenient for the APMA program. The Applicants propose to discuss the following topics at the pre-filing conference:

1. Feasibility of the Bilateral APA. The Applicants wish to discuss whether the APMA program views the proposed bilateral APA with the German competent authority (BZSt) as feasible, and the expected timeline for competent authority negotiations. The Applicants understand that the APMA program's willingness to accept and process bilateral APA cases may depend on a number of factors, including the current caseload and

2. Acceptability of Proposed Transfer Pricing Methods and Tested Party Selections. The Applicants wish to obtain the APMA program's preliminary feedback on the proposed transfer pricing methods (TNMM/CPM for tangible goods, CUT for royalties, and income method for cost sharing), the selection of US Sub as the tested party for the tangible goods transaction, and the overall analytical framework described in Section IV

3. Scope and Coverage of the Rollback Request. The Applicants wish to discuss the APMA program's willingness to consider the rollback of the APA terms to the three prior tax years (2022–2024) and any conditions or additional information that may be required to support the rollback request.

4. Documentation Requirements for the Formal Application. The Applicants wish to discuss the documentation requirements for the formal APA application (IRS Form 14661 and supporting materials), including the level of detail expected in the economic analysis, the benchmarking studies, the functional analysis, and the financial projections. The Applicants wish to ensure that the formal application is as complete and re

5. Coordination with the German Competent Authority (BZSt). The Applicants wish to discuss the process for coordinating the bilateral APA negotiation with the German competent authority, including the timing of the parallel German application, the exchange of position papers, and the scheduling of competent authority meetings.

6. Additional Information or Analyses. The Applicants welcome any indication from the APMA program of additional information, data, or analyses that should be included in the formal APA application beyond the materials described in this pre-filing memorandum. The following individuals from counsel will attend the pre-filing conference: • Leonard Cross, Partner, Tax Department, Calderwood & Harkness LLP • Leila Nazari

X. CONCLUSION AND CONTACT INFORMATION Based on the foregoing, the Applicants believe that the proposed bilateral APA and the transfer pricing methods described herein are consistent with the arm's-length standard under Internal Revenue Code § 482, the United States-Germany Income Tax Treaty, and the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (2022 ed.). The proposed APA wou