Contract analysis

I. PURPOSE AND SCOPE OF THIS STATEMENT This Penalty Protection Statement (the "Statement") is prepared by Calderwood & Harkness LLP ("Calderwood & Harkness" or "Counsel") on behalf of Halcyon Semiconductor Inc. ("HSI"), a Delaware corporation and wholly owned subsidiary of Halcyon Semiconductor AG ("HSAG"), a German Aktiengesellschaft organized under the laws of the Federal Republic of Germany with its registered off

II.A. IRC § 6662(e) — Substantial Valuation Misstatement

Section 6662(a) of the Code imposes an accuracy-related penalty equal to twenty percent (20%) of the portion of an underpayment of tax attributable to, among other things, a "substantial valuation misstatement" as defined in Section 6662(e). In the context of transfer pricing, Section 6662(e)(1)(B) provides that a substantial valuation misstatement exists with respect to any transaction between persons described in S

II.B. IRC § 6662(h) — Gross Valuation Misstatement

Section 6662(h) of the Code imposes a heightened penalty of forty percent (40%) of the portion of an underpayment of tax attributable to a "gross valuation misstatement." In the transfer pricing context, a gross valuation misstatement exists if the price for any property or services (or for the use of property) claimed on any return is 400% or more (or 25% or less) of the amount determined under Section 482 to be the

II.C. Reasonable Cause Exception — Treas. Reg. § 1.6662-6

Section 6664(c)(1) of the Code provides that no penalty shall be imposed under Section 6662 with respect to any portion of an underpayment if it is shown that there was "reasonable cause" for such portion and that the taxpayer acted in "good faith" with respect to such portion. In the specific context of transfer pricing penalties under Sections 6662(e) and 6662(h), the reasonable cause and good faith defense is furt

II.D. Interaction with OECD Transfer Pricing Guidelines The transfer pricing documentation and analysis prepared by HSI and its advisors are also consistent with the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (2022 edition) (the "OECD Guidelines"). While the OECD Guidelines do not have the force of law in the United States, they are widely recognized as an authoritative int

III. DESCRIPTION OF THE TAXPAYER AND CONTROLLED TRANSACTIONS

III.A. Overview of HSI Halcyon Semiconductor Inc. is a Delaware C-corporation (Delaware Secretary of State File Number 7341825) with EIN 84-2917630. HSI was incorporated in the State of Delaware on March 14, 2016, and commenced operations on July 1, 2016. HSI is a wholly owned subsidiary of HSAG. Throughout the Covered Tax Years, 100% of HSI's outstanding common stock was held by HSAG, and there were no minority equi

III.B. Overview of HSAG Halcyon Semiconductor AG is a German Aktiengesellschaft publicly listed on the Frankfurt Stock Exchange (XETRA) under the ticker symbol "HAL" (ISIN: DE000HSA0017). HSAG's Steuernummer (German tax identification number) is 203/118/04527. HSAG's registered office is located at Halcyon-Allee 12, 01099 Dresden, Saxony, Germany. HSAG is the ultimate parent entity of the Halcyon Semiconductor group,

III.C. Covered Controlled Transactions The controlled transactions between HSI and HSAG that are the subject of this Statement fall into three categories, as described below. Each category of controlled transaction is governed by a written intercompany agreement that sets forth the terms and conditions of the transaction, including pricing mechanisms, payment terms, and other commercial terms.

III.C.1. Tangible Goods — Semiconductor Wafer and Die Sales (HSAG to HSI). HSAG manufactures semiconductor wafers and singulated die at its Dresden and Chemnitz fabrication facilities and sells them to HSI under the Master Intercompany Supply Agreement, which became effective on January 1, 2019, and was amended on July 1, 2022 (the "Supply Agreement"). Pursuant to the Supply Agreement, HSAG ships finished wafers and

III.C.2. Royalties — IP License Payments (HSI to HSAG). HSI pays HSAG a royalty under an intellectual Property License Agreement that became effective on January 1, 2019 (the "IP License Agreement"). Pursuant to the IP License Agreement, HSAG grants HSI a non-exclusive, non-transferable license to use HSAG's proprietary semiconductor process technology, design libraries, electronic design automation ("EDA") tools and

III.C.3. Cost-Sharing Contributions — R&D CSA (HSI to HSAG). HSAG and HSI are parties to a Qualified Cost Sharing Arrangement (the "CSA") that became effective on July 15, 2018. The CSA governs the sharing of costs and risks associated with the development of next-generation 2-nanometer ("2nm") and sub-2nm semiconductor process technologies (the "CSA Activity"). The CSA was structured to comply with the requirements

III.C.4. Aggregate Intercompany Flows. The total aggregate intercompany flows between HSI and HSAG for FY 2024 are summarized in the following table: The magnitude of these intercompany flows — approximately €1.28 billion in FY 2024 — underscores the materiality of the transfer pricing positions at issue and the importance of the contemporaneous documentation and best method analyses that form the basis of this Penal

IV. SATISFACTION OF THE FIRST PRONG: REASONABLE CONCLUSION AS TO BEST METHOD

IV.A. Best Method Rule — General Principles Treasury Regulation Section 1.482-1(c) sets forth the "best method rule," which provides that the arm's-length result of a controlled transaction must be determined under the method that, given the facts and circumstances, provides the most reliable measure of an arm's-length result. The best method rule does not prescribe a hierarchy of methods; rather, it requires an eval

IV.B. Tangible Goods Transactions — Transactional Net Margin Method / Comparable Profits Method Method Selected. For the tangible goods transactions (semiconductor wafer and die sales from HSAG to HSI), the selected method is the Transactional Net Margin Method ("TNMM") under OECD terminology, which corresponds to the Comparable Profits Method ("CPM") under Treasury Regulation Section 1.482-5. The TNMM/CPM evaluates

IV.C. Royalty Transactions — Comparable Uncontrolled Transaction (CUT) Method Method Selected. For the royalty transactions (IP license payments from HSI to HSAG), the selected method is the Comparable Uncontrolled Transaction ("CUT") method under Treasury Regulation Section 1.482-4(c). The CUT method evaluates the arm's-length character of a controlled royalty by reference to the royalty rates charged in comparable

IV.D. Cost-Sharing Arrangement — Income Method under Treas. Reg. § 1.482-7 Method Selected. For the cost-sharing contributions under the CSA, the selected method for determining the anticipated benefit shares of each CSA participant is the income method prescribed by Treasury Regulation Section 1.482-7(g)(4). The income method determines each participant's anticipated benefit share based on the present value of the i

IV.E. Summary of Best Method Determination For each of the three categories of controlled transactions — tangible goods, royalties, and cost-sharing contributions — HSI and its advisors performed a thorough best method analysis. In each case, alternative methods were identified, considered, and their relative reliability was evaluated against the selected method in light of the specific facts and circumstances. The r

V. SATISFACTION OF THE SECOND PRONG: CONTEMPORANEOUS DOCUMENTATION

V.A. Scope and Timing of Documentation Contemporaneous transfer pricing documentation was prepared for each of the Covered Tax Years — FY 2024, FY 2023, and FY 2022 — in accordance with the requirements of Treasury Regulation Section 1.6662-6(d)(2)(iii). The FY 2024 US Local File for HSI was completed on or before September 30, 2025, which is the transfer pricing documentation deadline and precedes the filing of HSI'

V.B. Description of Principal Documents Maintained HSI's contemporaneous transfer pricing documentation includes all eight categories of principal documents required under Treasury Regulation Section 1.6662-6(d)(2)(iii)(B):

1. Overview of the Taxpayer's Business. The US Local File for each Covered Tax Year contains a comprehensive overview of HSI's business, including a description of HSI's role within the Halcyon group as the exclusive US distribution, marketing, and design-support entity for the North American market. The overview describes HSI's principal activities, the products and services it provides, the end markets it serves (a

2. Description of Organizational Structure. The Local File includes a detailed description of the organizational structure of the Halcyon Semiconductor group, including organization charts depicting the ownership relationships among the principal entities: HSAG (Germany, ultimate parent), HSI (United States), Halcyon Semiconductor Japan K.K. ("HSJ") (Japan), and Halcyon Semiconductor (Shanghai) Co., Ltd. ("HSC") (Chi

3. Documentation of Method Selection (Best Method Analysis). For each controlled transaction, the Local File contains a complete description of the transfer pricing method selected, including a detailed analysis of why that method was selected as the best method. The best method analysis, as summarized in Section IV of this Statement, describes the method, the economic rationale for its selection, and the specific fa

4. Description of Alternative Methods Considered and Reasons for Rejection. The Local File includes a description of each alternative transfer pricing method that was considered for each controlled transaction, together with a detailed explanation of why each alternative was rejected. For the tangible goods transaction, the CUP, RPM, Cost Plus, and Profit Split methods are described, and the reasons for their rejecti

5. Description of Controlled Transactions. The Local File contains a detailed description of each controlled transaction, including identification of all parties, the terms of sale or license, the pricing mechanism, the payment terms, the volume of transactions, the currencies in which transactions are denominated, and the exchange rates used. The description covers the tangible goods transaction (including the Suppl

6. Comparability Analysis. The Local File includes comprehensive comparability analyses for each controlled transaction. For the tangible goods transaction, the comparability analysis incorporates functional analysis memoranda for both HSI and HSAG, identifying the functions performed, risks assumed, and assets employed by each entity. The analysis identifies the 17 comparable semiconductor distributors used in the C

7. Economic Analysis and Benchmarking. The Local File incorporates the benchmarking studies prepared by Meridian Economics GmbH, including the CPM/TNMM benchmarking study (17 comparable companies, interquartile range of operating margins from 2.8% to 6.1%, median of 4.4%) and the CUT benchmarking study (8 comparable license agreements, interquartile range of royalty rates from 3.5% to 8.2%, median of 5.6%). The econo

8. General Index of Principal and Background Documents. The Local File includes a general index of all principal and background documents comprising the contemporaneous transfer pricing documentation set. This index is reproduced as Exhibit A to this Statement.

V.C. Description of Background Documents Maintained In addition to the principal documents described above, HSI maintains the following background documents that support the transfer pricing analyses and provide the factual foundation for the contemporaneous documentation: (a) Audited Financial Statements. Audited financial statements of HSI (standalone) and the HSAG consolidated group for fiscal years 2020 through 2