Contract analysis

I. Purpose and Scope of This Memorandum This memorandum sets forth Calderwood & Harkness LLP's ("C&H") recommended negotiation strategy for the bilateral Advance Pricing Agreement ("APA") to be pursued on behalf of Halcyon Semiconductor Inc. ("HSI," EIN 84-2917630) and its parent, Halcyon Semiconductor AG ("HSAG," Steuernummer 203/118/04527), with the Internal Revenue Service Advance Pricing and Mutual Agreement Prog

II. Background Summary A. Parties and Relationships Halcyon Semiconductor AG ("HSAG") is a German Aktiengesellschaft publicly listed on the Frankfurt Stock Exchange (XETRA: HSA; ISIN DE000HSA0017). HSAG's registered office is located at Halcyon-Allee 12, 01099 Dresden, Saxony, Germany. HSAG is the ultimate parent entity of the Halcyon group and serves as the group's primary research and development center, intellectu

1. Tangible Goods (Wafer/Die Sales): HSAG to HSI Under the Master Intercompany Supply Agreement (originally effective January 1, 2019; amended July 1, 2022, to reflect updated pricing terms and product specifications), HSAG manufactures and sells semiconductor wafers and die to HSI for resale to third-party customers in the North American market. HSI purchases finished wafers and die on an FOB shipping point basis fr

2. Royalties (IP License): HSI to HSAG Under the IP License Agreement (effective January 1, 2019), HSAG licenses to HSI the right to use HSAG's proprietary semiconductor process technology, design libraries, process design kits ("PDKs"), and related intangible property for the purpose of marketing and selling Halcyon products in the North American market. The license is exclusive to HSI within the United States and n

3. Cost-Sharing Contributions (R&D CSA): HSI to HSAG Under the Qualified Cost Sharing Arrangement ("CSA," effective July 15, 2018), HSAG and HSI jointly bear the costs of developing next-generation semiconductor process technology, specifically 2nm and sub-2nm process R&D. HSI's cost-sharing percentage is 22.5%, reflecting the proportion of total anticipated benefits from the jointly developed intangible property tha

4. Aggregate Intercompany Flows (FY 2024) The aggregate annual intercompany flows for FY 2024 across the three covered transaction categories are summarized below: The substantial scale of these intercompany flows — approximately €1.28 billion annually — underscores the importance of obtaining bilateral APA coverage to provide transfer pricing certainty and eliminate double taxation risk. C. Advisors The following ad

III. Negotiation Strategy — Tangible Goods (Wafer/Die Sales) A. Proposed Opening Position The tangible goods transaction — intercompany sales of semiconductor wafers and die from HSAG to HSI — is the largest of the three covered intercompany flows, representing approximately 77% of total aggregate intercompany transactions. The transfer pricing methodology and arm's-length range for this transaction will have the mos

1. Narrowing the range. IRS APMA frequently seeks a narrower arm's-length range than the full IQR, or alternatively, proposes a single-point target with a tolerance band. We should expect the IRS to propose collapsing the arm's-length range to a narrower band centered around the median — for example, 3.5% to 5.5% operating margin, or even tighter. There is also a meaningful possibility that the IRS will insist on a s

2. Comparable selection challenges. IRS APMA will conduct its own review of the 17-comparable set and may challenge the inclusion or exclusion of specific companies. We should anticipate that the IRS will issue Information Document Requests ("IDRs") seeking the detailed financial statements, segment data, and business descriptions for each comparable company, as well as a complete description of Meridian's screening

3. Single-year versus multi-year testing. IRS APMA may prefer annual compliance testing rather than the multi-year rolling weighted average that we propose. Annual testing is administratively simpler from the IRS's perspective and ensures that the arm's-length standard is satisfied in each tax year. However, annual testing creates significant volatility risk in the semiconductor industry, where operating margins can

4. Alternative profit level indicator. While operating margin is our proposed PLI, the IRS may suggest a Berry ratio (gross profit divided by operating expenses) or return on operating assets as a cross-check or alternative PLI. The Berry ratio may be raised particularly if the IRS questions the reliability of operating margin for distributors carrying significant inventory — the argument being that inventory-intensi

5. Comparability adjustments. IRS APMA routinely requests comparability adjustments to the benchmark set to improve the reliability of the comparison. The most commonly requested adjustments include: (a) working capital adjustments to account for differences in accounts receivable, inventory, and accounts payable levels between HSI and the comparable companies; (b) accounting consistency adjustments to normalize for

6. BZSt coordination — tested party selection. While IRS APMA is unlikely to propose HSAG as the tested party (as this would be inconsistent with standard US practice for limited-risk distributor APAs), the BZSt may prefer TNMM analysis with HSAG as the tested party, which is more consistent with German transfer pricing documentation practice under the GAufzV. If the BZSt independently advocates for HSAG as the teste

IV. Negotiation Strategy — Royalties (IP License) A. Proposed Opening Position The royalty transaction — HSI's payment to HSAG for the right to use HSAG's proprietary semiconductor process technology, design libraries, and related intangible property — is the covered transaction most likely to generate significant IRS scrutiny, based on the feedback received during the pre-filing conference. The royalty pricing direc

1. CUT comparability challenges. As expressly flagged at the pre-filing conference, IRS Senior Economist Mark Holloway raised concerns about the comparability of certain CUT agreements in the benchmark set. Two specific dimensions of comparability concern were identified. First, technology vintage: certain of the eight CUT agreements may involve licensing of older or more mature semiconductor process technologies (e.

2. Narrowing the CUT range. IRS APMA may seek to exclude certain CUTs from the benchmark set, particularly those at the extremes of the range (the 3.5% low outlier and the 8.2% high outlier), thereby tightening the IQR. If the IRS successfully challenges the comparability of the extreme observations, the resulting narrowed IQR could shift the median and alter the arm's-length positioning of the 6.0% contractual rate.

3. Preference for profit-based corroboration. IRS APMA may insist on greater reliance on the residual profit split analysis as a primary (rather than merely corroborative) method, particularly if CUT comparability is successfully challenged. The IRS has increasingly favored profit-based methods for intangible property transactions involving unique and valuable IP, following the OECD's 2017 BEPS guidance on hard-to-va

4. IP-attributable revenue base. The royalty is computed on HSI's IP-attributable revenues ($745.7 million in FY 2024, representing 18.1% of HSI's $4.12 billion in net revenues). The IRS may challenge the computation of the IP-attributable revenue base — specifically, the revenue attribution methodology set forth in Schedule B to the IP License Agreement. If the IRS contends that a broader share of HSI's revenues is

5. BZSt position. We anticipate that the BZSt will advocate for a royalty rate at or above 6.0% to ensure adequate compensation to HSAG as the IP owner and developer. HSAG invests approximately €1.42 billion annually in total R&D and is the entity that developed the licensed intangible property through decades of cumulative investment and innovation. From the BZSt's perspective, a royalty rate that under-compensates

6. Interaction with CSA. IRS APMA may question whether the royalty and the CSA together create a double charge for IP rights — that is, whether HSI is paying both a royalty for existing IP (through the IP License Agreement) and cost shares for future IP (through the CSA) that is duplicative of or overlapping with the licensed technology. This concern arises because the CSA covers development of "next-generation" 2nm

V. Negotiation Strategy — Cost Sharing Arrangement (R&D CSA) A. Proposed Opening Position The Cost Sharing Arrangement is the most technically complex of the three covered transactions and, together with the royalty, is the area of greatest potential IRS scrutiny. The CSA involves both ongoing cost-sharing payments (which are relatively straightforward in principle) and a substantial Platform Contribution Transaction