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PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT

CALDERWOOD & HARKNESS LLP Tax Department

MEMORANDUM

TO: Leonard Cross, Responsible Partner Garrett Simmons, Lead Associate

FROM: Leila Nazari, Working Associate

DATE: July 25, 2022

RE: Entity Classification and Structural Role of Penterra Holdings Luxembourg S.à r.l. (PHL) — C&H Matter No. 1018-00009

CLIENT: Penterra Pharmaceuticals Corp. (EIN: 22-3741856)

I. Purpose and Scope

This memorandum analyzes the entity classification of Penterra Holdings Luxembourg S.à r.l. ("PHL") for U.S. federal income tax purposes and its structural role within the Penterra Pharmaceuticals Corp. ("PPC") international group. The analysis is intended to provide a comprehensive treatment of PHL's classification under the applicable Treasury Regulations, as well as to articulate PHL's position and function within the broader PPC corporate architecture, so that the firm's defense team has a clear and authoritative reference point for all matters touching upon PHL's status during the course of the current IRS examination.

This analysis supports Calderwood & Harkness LLP's defense of PPC in the IRS Large Business & International Division examination (Exam Team ID: LB&I-NE-TP-2022-00641) covering tax years 2017 through 2020. The examination has raised significant transfer pricing issues relating to the allocation of income between PPC and its Irish subsidiary, Penterra Biopharma International DAC ("PBI"), and the proper characterization and valuation of several intercompany arrangements. Because PHL is interposed in the corporate chain between PPC and PBI, a definitive analysis of PHL's classification and role is essential to ensuring a consistent and defensible presentation to the IRS.

Specifically, this memorandum addresses the following topics:

(a) PHL's formation and legal status under Luxembourg law, including the nature of the S.à r.l. entity form and PHL's organizational particulars;

(b) PHL's U.S. federal tax classification as a disregarded entity under the check-the-box regulations set forth in Treas. Reg. §§ 301.7701-1 through 301.7701-3, including the per se corporation analysis, default classification rules, and the Form 8832 election;

(c) the implications of disregarded-entity treatment for the transfer pricing positions at issue in the examination, including the treatment of the cost-sharing arrangement, the legacy IP royalty, and the platform contribution transaction valuation between PPC and PBI; and

(d) PHL's functional role as an intermediate holding company between PPC and PBI, including an assessment of PHL's lack of independent economic activity and its consequent irrelevance to the substantive transfer pricing disputes.

This analysis may be relevant to the IRS's examination of PPC's cost-sharing arrangement ("CSA"), the legacy IP royalty agreement between PPC and PBI, and the platform contribution transaction ("PCT") valuation between PPC and PBI. The memorandum is designed to be read in conjunction with the broader defense strategy memorandum and the other specialized analyses described in Section VII below.

II. Executive Summary

PHL is a Société à responsabilité limitée organized under the laws of the Grand Duchy of Luxembourg, with its registered office at 14, rue Aldringen, L-1118 Luxembourg. PHL is registered with the Luxembourg Registre de Commerce et des Sociétés (the "RCS") under number B 168452. As a Luxembourg S.à r.l., PHL is a private limited liability company with a single member.

PHL is 100% owned by PPC, which is a Delaware corporation publicly traded on the Nasdaq Stock Market under the ticker symbol PPCA, with its principal executive offices and headquarters located at 2200 Independence Boulevard, Princeton Junction, New Jersey 08550. PPC is the ultimate U.S. parent of the Penterra multinational group and is the taxpayer under examination.

PHL, in turn, owns 100% of PBI, a Designated Activity Company organized under the laws of Ireland, with its registered office at 4th Floor, Claremont House, Sandyford Business Park, Dublin D18 K7T4, Ireland. PBI functions as the group's IP-holding company and serves as the principal entity for non-Americas commercialization of the Penterra pharmaceutical portfolio. PBI holds Irish Tax Reference number 3218764T.

Under the check-the-box regulations (Treas. Reg. §§ 301.7701-1 through 301.7701-3), PPC filed IRS Form 8832 electing to classify PHL as a disregarded entity for U.S. federal income tax purposes. The election was effective from the date of PHL's formation. As a result of this election, PHL is not treated as a separate entity from its owner, PPC, for U.S. federal income tax purposes. This means that PHL's assets, liabilities, and all items of income, deduction, gain, loss, and credit are treated as belonging directly to PPC.

Consequently, for purposes of Internal Revenue Code ("IRC") § 482 and the transfer pricing analysis applicable to the examination years (TY 2017–2020), PHL's interposition between PPC and PBI is transparent. All intercompany transactions between PPC and PBI — including the CSA, the legacy IP license agreement (providing for a 4.5% royalty), and the PCT (valued at $312 million) — are properly analyzed as transactions directly between PPC and PBI. PHL plays no substantive role in any of these arrangements, and its existence as an intermediate holding entity does not create any additional transfer pricing obligations or controlled transactions requiring separate analysis under IRC § 482.

PHL also owns, indirectly through PBI, the relationship with Penterra Manufacturing Ireland Ltd. ("PMI"), an Irish private limited company (Companies Registration Office Number 512347) operating as a contract manufacturer at Unit 7, Ringaskiddy Industrial Estate, Co. Cork T12 PX29, Ireland. PMI's manufacturing activities are conducted under a contract manufacturing agreement with PBI and are not the subject of a separate transfer pricing dispute in the current examination, though PMI's activities form part of the overall value chain under review.

The IRS's proposed adjustments totaling $380.4 million across TY 2017–2020 — comprising CSA cost-sharing adjustments, legacy IP royalty adjustments, and a correlative offset — all relate to transactions between PPC and PBI. PHL's classification as a disregarded entity confirms that the IRS is correct to focus its inquiry on the PPC-PBI relationship, and PHL's interposition does not alter or complicate the analysis in any material respect.

III. PHL Formation and Luxembourg Legal Status

A. Organizational Details

The following sets forth the material organizational details of PHL, as reflected in its constitutional documents, Luxembourg corporate filings, and the records produced in connection with the current examination:

Full Legal Name: Penterra Holdings Luxembourg S.à r.l.

Entity Type: Société à responsabilité limitée (S.à r.l.) — a private limited liability company under Luxembourg law. The S.à r.l. is governed principally by the Luxembourg law of 10 August 1915 on commercial companies, as amended (the "1915 Law"), and more recently by the Luxembourg law of 23 July 2016 concerning business associations (the "2016 Law"), which replaced and modernized certain provisions of the 1915 Law effective as of August 23, 2016.

Registered Office: 14, rue Aldringen, L-1118 Luxembourg. The registered office is maintained through a Luxembourg corporate services provider, as is customary for holding companies of this nature that do not maintain independent operational facilities.

RCS Number: B 168452. PHL's registration with the Luxembourg Registre de Commerce et des Sociétés is current and in good standing.

Date of Formation: PHL was incorporated in Luxembourg in connection with the establishment of the PBI IP-holding structure. PBI was incorporated on March 15, 2012, and PHL was formed shortly prior to PBI's incorporation — specifically, in February 2012 — to serve as the intermediate holding entity between PPC and PBI. The precise date of PHL's incorporation is reflected on the original articles of association (acte constitutif) notarized in Luxembourg and filed with the RCS. The timing of formation was coordinated with the broader restructuring that included the establishment of the CSA between PPC and PBI, which became effective on July 1, 2012.

Ownership: 100% of PHL's equity interests (parts sociales) are held by PPC. PHL has a single member (associé unique). All corporate parts were subscribed and fully paid up at the time of formation. PHL has not issued any additional equity interests, and no third party holds any ownership interest — direct or indirect — in PHL.

Activities: PHL's sole function is to serve as a holding company for PBI. PHL does not conduct any independent business operations. It has no employees, no independent revenue-generating activities, and no operational presence beyond its Luxembourg registration and the maintenance of its corporate formalities. PHL's income consists solely of dividends received from PBI (when declared) and any interest income on de minimis cash balances held in its Luxembourg bank accounts at Hollowell Commerce Bank (BIL).

Governance: PHL is managed in accordance with Luxembourg corporate law requirements applicable to S.à r.l. entities. Its constitutional documents (articles of association, or statuts) reflect its holding-company purpose and authorize PHL to hold participations in domestic and foreign entities and to perform all activities ancillary thereto. PHL is managed by one or more gérants (managers) appointed by the sole associé. In practice, PHL's management is provided by designees of PPC and/or the Luxembourg corporate services provider, consistent with the limited scope of PHL's activities. Board resolutions and shareholder resolutions are maintained in PHL's corporate records in Luxembourg.

B. Luxembourg Legal Characteristics

Under Luxembourg law, a Société à responsabilité limitée is a separate legal entity with its own legal personality, distinct from that of its members. The S.à r.l. form provides limited liability for its members — that is, the liability of PPC as the sole associé of PHL is limited to the amount of PPC's capital contribution to PHL. This limited liability feature is fundamental to the S.à r.l. form and distinguishes it from certain other Luxembourg entity types, such as the société en nom collectif (general partnership), in which members bear unlimited liability.

The S.à r.l. is one of the most widely used entity types for holding company and group finance structures in Luxembourg. Its flexibility, relatively light governance requirements (compared to a Société Anonyme, or S.A.), and favorable treatment under the Luxembourg participation exemption regime make it an attractive vehicle for multinational holding structures. Key features of the S.à r.l. form include:

• Separate legal personality: PHL exists as a distinct juridical person under Luxembourg law, capable of owning assets, entering into contracts, and being a party to legal proceedings in its own name.

• Limited liability: The sole associé's (PPC's) liability is limited to its capital contribution. Creditors of PHL may not, absent exceptional circumstances (such as piercing of the corporate veil under Luxembourg law, which is rarely applied), seek recourse against PPC's assets.

• Restrictions on transferability of interests: Parts sociales of a S.à r.l. are not freely transferable and are not eligible for listing on a securities exchange. Transfer of parts sociales to third parties requires the consent of the other members (if any) or compliance with the transfer restrictions set forth in the statuts. This restriction on transferability is relevant to the U.S. entity classification analysis, as discussed in Section IV below.

• No public trading of interests: A Luxembourg S.à r.l. may not issue shares to the public or list its equity interests on any regulated market. This distinguishes the S.à r.l. from the S.A., which may issue publicly traded shares.

The key characteristics relevant to U.S. entity classification are as follows: PHL has a single member (PPC); it provides limited liability to its member; and it does not issue publicly traded interests. As discussed further in Section IV, these characteristics determine PHL's eligibility for classification under the check-the-box regulations and its default classification absent an affirmative election.

PHL is subject to Luxembourg corporate income tax (impôt sur le revenu des collectivités, or "IRC") at the standard rate applicable to Luxembourg companies, as well as the municipal business tax (impôt commercial communal) applicable to entities located in Luxembourg City. However, given PHL's holding-company function and the nature of its income — principally dividends from PBI — PHL may benefit from the Luxembourg participation exemption regime (régime des sociétés mères et filiales) on qualifying dividends and capital gains. Under this regime, dividends and capital gains derived from qualifying participations (generally, a holding of at least 10% or with an acquisition cost of at least EUR 1.2 million, held for a continuous period of at least 12 months) are exempt from Luxembourg corporate income tax. PBI's shares qualify as a participating interest for purposes of this exemption, and PHL has claimed the participation exemption on dividends received from PBI in its Luxembourg tax filings.

IV. U.S. Entity Classification Analysis

A. Applicable Regulatory Framework

The classification of business entities for U.S. federal income tax purposes is governed by the Treasury Regulations under IRC § 7701, commonly known as the "check-the-box" regulations. These regulations, which became effective January 1, 1997, replaced the prior four-factor "Kintner" classification approach and provide a simplified, elective regime for entity classification. The relevant regulations are as follows:

Treas. Reg. § 301.7701-1 sets forth the general principles of entity classification. It provides that whether an organization is an "entity" separate from its owners for federal tax purposes is a matter of federal law and does not depend on whether the organization is recognized as an entity under local (including foreign) law. An entity that is recognized for federal tax purposes is classified as either a trust or a business entity. A "business entity" is any entity that is not properly classified as a trust and that has associates and an objective to carry on business and divide the gains therefrom. For purposes of the check-the-box regulations, any entity that is not a trust is a business entity.

Treas. Reg. § 301.7701-2 provides the key definitional framework. It distinguishes between two categories of business entities: (i) entities that are classified as corporations, and (ii) entities that are not classified as corporations and are therefore "eligible entities" that may elect their classification. The regulation defines "corporation" to include, among other things, a business entity organized under a federal or state statute that refers to the entity as "incorporated" or as a "corporation," as well as certain specifically enumerated foreign entities. The list of per se foreign corporations is set forth in Treas. Reg. § 301.7701-2(b)(8), organized by jurisdiction and entity type. This per se list is central to the classification of foreign entities, because an entity on the per se list is automatically classified as a corporation and is not eligible to elect a different classification.

Treas. Reg. § 301.7701-3 governs the election of entity classification for eligible entities. An eligible entity with a single owner may elect to be classified as either (i) an association taxable as a corporation or (ii) a disregarded entity (i.e., an entity that is not treated as an entity separate from its owner). An eligible entity with two or more owners may elect to be classified as either (i) an association taxable as a corporation or (ii) a partnership. The regulation also establishes default classification rules that apply in the absence of an affirmative election, as well as procedures for making and revoking elections on IRS Form 8832.

Each of these regulatory provisions is analyzed in turn below as applied to PHL.

B. Per Se Corporation Analysis

The threshold question in classifying PHL for U.S. federal tax purposes is whether PHL falls within the per se corporation list set forth in Treas. Reg. § 301.7701-2(b)(8)(i). If PHL is a per se corporation, it is automatically classified as a corporation for U.S. tax purposes and is not eligible to elect a different classification.

Treas. Reg. § 301.7701-2(b)(8)(i) lists specific foreign entity types by jurisdiction that are treated as per se corporations. The list is organized alphabetically by country. For Luxembourg, the per se corporation list includes the following entity type:

Luxembourg — Société Anonyme (S.A.)

The Société Anonyme is the Luxembourg public limited liability company form, analogous in many respects to a U.S. corporation. It is characterized by its ability to issue shares to the public, to list its shares on a regulated market, and by its governance structure (including a board of directors or management board and supervisory board).

A Luxembourg Société à responsabilité limitée (S.à r.l.) is not included on the per se corporation list. The S.à r.l. is a distinct entity type under Luxembourg law, with different legal characteristics — most notably, its inability to issue publicly traded interests and the restrictions on transferability of its parts sociales. The regulations specifically enumerate only the S.A. as a per se corporation for Luxembourg; the omission of the S.à r.l. is intentional and consistent with the Treasury Department's approach of including only those foreign entity types that most closely resemble a U.S. domestic corporation.

Therefore, PHL, as a Luxembourg S.à r.l., is an "eligible entity" under the check-the-box regulations and is not automatically classified as a corporation. PHL may elect its classification under Treas. Reg. § 301.7701-3.

C. Default Classification

Because PHL is an eligible entity, the next step in the analysis is to determine PHL's default classification — that is, the classification that would apply if PHL did not make an affirmative election on Form 8832.

Under Treas. Reg. § 301.7701-3(b)(2), the default classification for a foreign eligible entity depends on the number of members and whether the members have limited liability. The regulation provides as follows:

(i) A foreign eligible entity with two or more members is classified by default as:

(A) a partnership if at least one member does not have limited liability; or

(B) an association (taxable as a corporation) if all members have limited liability.

(ii) A foreign eligible entity with a single member is classified by default as:

(A) a disregarded entity if the single member does not have limited liability; or

(B) an association (taxable as a corporation) if the single member has limited liability. See Treas. Reg. § 301.7701-3(b)(2)(i)(B).

Applying these rules to PHL:

• PHL has a single member — PPC.

• As discussed in Section III.B above, a Luxembourg S.à r.l. provides limited liability to its members. PPC's liability as the sole associé of PHL is limited to its capital contribution. PPC does not bear personal, unlimited liability for the obligations of PHL.

• Because PHL is a single-member foreign eligible entity and its sole member (PPC) has limited liability, the default classification for PHL under Treas. Reg. § 301.7701-3(b)(2)(i)(B) is as an association taxable as a corporation for U.S. federal tax purposes.

Therefore, absent an affirmative election to the contrary, PHL would be classified as an association taxable as a corporation — that is, PHL would be treated as a separate taxable entity (a corporation) for U.S. federal income tax purposes. Under such a default classification, PHL would be a "controlled foreign corporation" within the meaning of IRC § 957(a), and its interposition between PPC and PBI would have substantive U.S. tax consequences, including potential implications for subpart F income, GILTI, and the treatment of dividends received from PBI.

However, as discussed in the following section, PPC made a timely election to override this default classification.

D. Check-the-box Election — Form 8832

PPC filed IRS Form 8832 (Entity Classification Election) with the Internal Revenue Service, electing to classify PHL as a disregarded entity for U.S. federal income tax purposes. The election was effective from the date of PHL's formation in February 2012, so that PHL has been treated as a disregarded entity from inception and has never been classified as an association or corporation for U.S. federal income tax purposes.

The election was timely filed within 75 days of PHL's formation, in accordance with Treas. Reg. § 301.7701-3(c)(1)(i), which provides that an election will be effective on the date specified on the Form 8832, provided that the form is filed within 75 days before or 75 days after the requested effective date. The election was made by PPC as the sole owner of PHL, and the Form 8832 was signed by an authorized officer of PPC on behalf of PHL.

The Form 8832 was filed with the IRS Service Center at the address designated for entity classification elections, and a copy was attached to PPC's consolidated Form 1120 (U.S. Corporation Income Tax Return) for the taxable year that included PHL's date of formation, as required by Treas. Reg. § 301.7701-3(c)(1)(ii). The election has been in continuous effect since PHL's formation and has not been revoked or superseded. Under Treas. Reg. § 301.7701-3(c)(1)(iv), an entity that makes an election under Form 8832 generally may not change its classification again by election within 60 months of the effective date of the election, absent IRS consent. No such change in classification has been made or requested.

It is essential to confirm with Crestfield & Associates LLP (engagement partner Martin Ogilvy; transfer pricing partner Susan Lam) that copies of the filed Form 8832 election for PHL are in PPC's corporate tax files and were produced in response to IDR No. 1 (corporate structure documentation) issued by the IRS examination team. If the Form 8832 was not included in the IDR No. 1 response, a copy should be located and held ready for production in the event of a follow-up request, as the IRS may wish to verify the validity and timeliness of the election.

E. Effect of Disregarded Entity Classification

As a result of the Form 8832 election, PHL is classified as a disregarded entity for U.S. federal income tax purposes. The implications of this classification are significant and pervasive. Under Treas. Reg. § 301.7701-2(a), a "disregarded entity" is a business entity that has a single owner and is not classified as a corporation. Such an entity is not treated as an entity separate from its owner. In other words, PHL is treated as if it does not exist as a separate entity for purposes of U.S. federal income tax law.

The principal consequences of PHL's disregarded-entity status are as follows:

Treatment of assets, liabilities, and income. All of PHL's assets, liabilities, and items of income, deduction, gain, loss, and credit are treated as those of PPC for U.S. federal income tax purposes. PHL's ownership of PBI shares is treated as if PPC directly owns the shares of PBI. Any dividends received by PHL from PBI are treated, for U.S. tax purposes, as dividends received directly by PPC from PBI.

Direct ownership of PBI. PHL's ownership of 100% of the equity interests in PBI is treated, for U.S. federal tax purposes, as if PPC directly owns PBI. This treatment is critical because it determines PBI's status as a controlled foreign corporation ("CFC") of PPC under IRC § 957(a) and affects the application of subpart F, GILTI, and other international tax provisions.

Transparency for transfer pricing purposes. All transactions between PPC and PBI are analyzed as direct intercompany transactions, notwithstanding PHL's legal interposition in the ownership chain. PHL's existence does not create a separate "tested party" or an additional link in the controlled transaction chain for purposes of IRC § 482. This is critical for the transfer pricing analysis because it means that the CSA cost-sharing payments, the legacy IP royalty, and the PCT are all properly characterized and tested as transactions between PPC and PBI — the two entities that actually perform functions, employ assets, and assume risks with respect to the pharmaceutical IP at issue.

No separate tax return. PHL does not file a separate U.S. federal income tax return. Its activities (to the extent any exist) are reported on PPC's consolidated Form 1120. PHL's income and expenses are included in PPC's consolidated return as if they were PPC's own.

Certain informational reporting obligations may persist. Notwithstanding PHL's disregarded-entity status, certain informational reporting requirements may apply. Specifically, Form 8858 (Information Return of U.S. Persons With Respect to Foreign Disregarded Entities and Foreign Branches) may be required for PHL, and Form 5471 reporting obligations may apply to PBI by reason of PPC's deemed direct ownership. These reporting obligations are discussed further in Section VI.C below.

V. PHL's Role in the PPC Corporate Structure

A. Ownership Chain

The corporate ownership chain from PPC to the Irish operating entities, reflecting PHL's intermediate holding position, is as follows:

Penterra Pharmaceuticals Corp. (PPC) Delaware corporation; publicly traded on Nasdaq (ticker: PPCA) HQ: 2200 Independence Boulevard, Princeton Junction, NJ 08550 EIN: 22-3741856

↓ 100% owner of

Penterra Holdings Luxembourg S.à r.l. (PHL) Luxembourg S.à r.l.; RCS Number B 168452 Registered Office: 14, rue Aldringen, L-1118 Luxembourg Disregarded entity for U.S. federal income tax purposes

↓ 100% owner of

Penterra Biopharma International DAC (PBI) Irish Designated Activity Company Registered Office: 4th Floor, Claremont House, Sandyford Business Park, Dublin D18 K7T4, Ireland Irish Tax Reference: 3218764T IP-holding company and principal for non-Americas commercialization

↓ 100% owner of

Penterra Manufacturing Ireland Ltd. (PMI) Irish private limited company; CRO Number 512347 Registered Office: Unit 7, Ringaskiddy Industrial Estate, Co. Cork T12 PX29, Ireland Contract manufacturer

This ownership chain has been in place since the formation of PHL and PBI in 2012. There have been no material changes to the corporate structure during the examination years (TY 2017–2020). The organizational charts reflecting this structure were included in the IDR No. 1 response dated July 8, 2022, and have been made available to the IRS examination team.

B. Purpose of Intermediate Holding Company

PHL was established as an intermediate holding entity between PPC and PBI for several reasons that are common and well-recognized in multinational pharmaceutical and life sciences structures. While PHL's interposition is tax-transparent for U.S. purposes (due to its disregarded-entity status), PHL exists as a separate legal entity under Luxembourg law and serves the following purposes:

European holding platform. Luxembourg provides a well-established and widely used holding-company regime. The Luxembourg participation exemption on qualifying dividends and capital gains from subsidiaries allows PHL to receive dividends from PBI on a tax-efficient basis under Luxembourg law. Luxembourg's stable legal and regulatory environment, its well-developed corporate law, and the availability of experienced corporate service providers and legal professionals make it an attractive jurisdiction for holding companies serving European operations.

Treaty network. Luxembourg's extensive tax treaty network — one of the broadest in Europe — may facilitate efficient dividend repatriation from PBI to PHL and onward to PPC. In particular, the Luxembourg-Ireland tax treaty and the EU Parent-Subsidiary Directive may provide for reduced or eliminated withholding taxes on dividends paid by PBI to PHL. Similarly, the U.S.-Luxembourg tax treaty may affect the withholding tax treatment of distributions from PHL (or, given PHL's disregarded-entity status, may be relevant in analyzing the treaty entitlements of the entities in the chain). The interplay between these treaty provisions and PHL's disregarded-entity status requires careful analysis, which is being coordinated with Thornbury & Keogh as described in Section VI.E below.

Structural flexibility. The interposition of PHL provides operational and structural flexibility for the European operations. Should PPC wish to undertake future acquisitions, dispositions, or reorganizations of European entities, PHL provides a natural platform from which to structure such transactions. For example, PHL could acquire additional European subsidiaries or dispose of its interest in PBI without directly involving PPC at the legal entity level. This structural flexibility was contemplated at the time of PHL's formation and remains a valid commercial purpose, even though no such transactions have been undertaken during the examination years.

Limited liability segregation. PHL creates a legal barrier between PPC and the Irish operating entities (PBI and PMI). While PPC, as a Delaware corporation, already benefits from limited liability, the interposition of PHL provides an additional layer of legal separation between PPC's U.S. assets and the operations and potential liabilities of the Irish entities. This structural protection is consistent with standard corporate governance practices in multinational groups.

It bears emphasis that none of these purposes — individually or collectively — is inconsistent with PHL's classification as a disregarded entity for U.S. tax purposes. The check-the-box regulations permit an eligible entity to elect disregarded-entity status regardless of the entity's commercial purposes under local law. The election relates solely to the entity's classification for U.S. federal income tax purposes and does not affect the entity's status or activities under foreign law.

C. PHL's Lack of Independent Functions

A central fact relevant to both the entity classification analysis and the transfer pricing examination is PHL's complete lack of independent economic activity. The following points are material:

PHL has no employees. It has never employed any individuals, whether in Luxembourg or elsewhere. All corporate management and administrative functions are performed by PPC designees or by the Luxembourg corporate services provider acting on PPC's behalf.

PHL does not conduct any independent business activities. Its sole function is to hold the shares of PBI. PHL does not manufacture, market, distribute, or sell any pharmaceutical products. It does not conduct any research and development activities. It does not provide any services — managerial, financial, technical, or otherwise — to any member of the PPC group.

PHL does not perform any DEMPE (Development, Enhancement, Maintenance, Protection, Exploitation) functions with respect to the pharmaceutical intellectual property that is the subject of the IRS examination. The DEMPE framework, as articulated in the OECD Transfer Pricing Guidelines (particularly as revised in the 2017 BEPS Actions 8-10 Final Reports), focuses on the functions performed, assets used, and risks assumed in connection with intangible property. PHL performs no development functions, does not enhance or maintain any intangibles, does not protect or enforce IP rights, and does not exploit any intangibles in any market. All DEMPE functions are performed by PPC (in the United States) and PBI (in Ireland).

PHL does not participate in the CSA between PPC and PBI. The CSA was executed directly between PPC and PBI, effective July 1, 2012, and governs the sharing of costs and risks associated with the development of intangible property. PHL is not a party to the CSA, does not make or receive any cost-sharing payments, and does not bear any share of the costs or risks of intangible development.

PHL does not receive or pay royalties under the legacy IP license agreement. The legacy IP license, which provides for a 4.5% royalty on PBI's net sales of products embodying pre-CSA intangible property, is a bilateral agreement between PPC (as licensor) and PBI (as licensee). PHL is not a party to this agreement and does not receive any royalty income.

PHL did not make or receive the PCT payment of $312 million. The PCT, which was determined at the inception of the CSA to compensate PPC for making available its pre-existing intangible property and other platform contributions to the CSA, was a transaction between PPC and PBI. PHL had no role in the PCT calculation, negotiation, or payment.

PHL's disregarded-entity status is fully consistent with its complete lack of independent economic activity. Indeed, the absence of any substantive functions, assets (other than its shareholding in PBI), or risks at the PHL level underscores the appropriateness of treating PHL as transparent for U.S. tax purposes and confirms that PHL does not introduce any additional complexity into the transfer pricing analysis.

VI. Implications for the IRS Examination

A. Transfer Pricing Analysis Framework

Because PHL is a disregarded entity for U.S. federal income tax purposes, the IRS examination properly focuses on the intercompany transactions between PPC and PBI as if they were direct transactions between those two entities. PHL's interposition in the corporate chain does not alter this framework, and all transfer pricing issues raised by the IRS examination team are correctly framed as issues between PPC and PBI.

The IRS's proposed adjustments totaling $380.4 million across TY 2017–2020 consist of the following components:

All of these proposed adjustments relate to transactions between PPC and PBI. The CSA cost-sharing adjustments concern the allocation of intangible development costs between PPC and PBI under the CSA. The legacy IP royalty adjustments concern the arm's-length nature of the 4.5% royalty rate under the pre-existing IP license agreement. The correlative offset reflects the IRS's acknowledgment that certain adjustments may have offsetting effects across the related transactions. None of these adjustments involve PHL in any substantive role, and none require any separate analysis of PHL as a controlled party or tested party under IRC § 482.

PHL's existence does not create any additional transfer pricing issues or controlled transactions that require separate analysis under IRC § 482 or the regulations thereunder. Specifically:

• PHL does not receive any management fees, service fees, cost-sharing payments, royalties, or other intercompany payments from PPC or PBI.

• PHL does not charge any fees or payments to PPC or PBI.

• PHL does not perform any services for, or on behalf of, PPC or PBI that would give rise to a controlled services transaction under Treas. Reg. § 1.482-9.

• PHL does not own, license, or exploit any intangible property that would give rise to a controlled transfer of intangibles under Treas. Reg. §§ 1.482-4 or 1.482-7.

• The only "transaction" involving PHL is its receipt of dividends from PBI (when declared) and the holding of PBI's shares. Because PHL is a disregarded entity, these are treated as PPC's receipt of dividends from PBI and PPC's direct ownership of PBI shares.

Accordingly, PHL's entity classification as a disregarded entity simplifies and clarifies the transfer pricing analysis by confirming that the only relevant controlled transactions are those between PPC and PBI.

B. Section 367(d) Considerations

The initial contribution of intangible property rights to PBI through the CSA (effective July 1, 2012) must be evaluated under IRC § 367(d), which governs the U.S. tax treatment of outbound transfers of intangible property by U.S. persons to foreign corporations. Section 367(d) generally provides that a U.S. person who transfers intangible property to a foreign corporation in a transaction described in IRC § 351 or § 361 is treated as having sold such property in exchange for payments contingent on the productivity, use, or disposition of the property, with annual inclusions of deemed royalty income commensurate with the income attributable to the transferred intangible.

Because PHL is a disregarded entity, any contribution of intangible property by PPC to PBI is treated as flowing through PHL — that is, PHL's interposition is disregarded, and the transfer is treated as a direct transfer from PPC to PBI for purposes of IRC § 367(d). PHL's existence as a Luxembourg entity in the ownership chain does not change the § 367(d) analysis in any respect. The relevant questions under § 367(d) — including whether there was an outbound transfer of intangible property, the characterization and valuation of the transferred intangibles, and the computation of deemed royalty inclusions — are all analyzed as if PPC transferred intangible property directly to PBI.

This conclusion is consistent with the general principle that a disregarded entity is not treated as a separate entity for U.S. federal income tax purposes. The interposition of PHL between PPC and PBI does not create an additional "transfer" step (i.e., from PPC to PHL and then from PHL to PBI); rather, the single transfer from PPC to PBI is the only event recognized for U.S. tax purposes.

A separate memorandum analyzing IRC § 367(d) implications in detail has been prepared and is dated September 28, 2022. That memorandum should be consulted for a comprehensive discussion of the § 367(d) issues, including the valuation of the transferred intangibles, the appropriate useful life assumptions, and the interaction between § 367(d) and the CSA regulations under Treas. Reg. § 1.482-7.

C. Form 5471 Reporting

PPC is required to file Form 5471 (Information Return of U.S. Persons With Respect to Certain Foreign Corporations) for each foreign corporation in which it holds a qualifying interest. Because PHL is a disregarded entity, PPC is treated as directly owning PBI, and PPC is accordingly required to file Form 5471 for PBI as a Category 5 filer (as a U.S. shareholder that owns stock in a CFC).

With respect to PHL itself, the reporting requirements are somewhat more nuanced. Although PHL is a disregarded entity for substantive U.S. federal income tax purposes, certain informational filing requirements may still apply. Specifically, PPC may be required to file Form 8858 (Information Return of U.S. Persons With Respect to Foreign Disregarded Entities and Foreign Branches) for PHL. Form 8858 is used to report the activities of foreign disregarded entities owned by U.S. persons and provides the IRS with information about the entity's financial statements, intercompany transactions, and ownership structure. Additionally, depending on the specific facts and the reporting categories applicable to PHL, a Form 5471 may also be required or advisable for PHL — particularly to the extent that PHL is treated as a foreign entity for informational reporting purposes notwithstanding its disregarded status.

Forms 5471 for PBI and PHL for TY 2017–2020 were produced in response to IDR No. 40. The filing requirements and reporting categories for PHL should be confirmed with Crestfield & Associates LLP to ensure that all required informational returns have been timely and accurately filed for each of the examination years. Any deficiencies in informational reporting could give rise to penalties under IRC § 6038 or § 6038B and could potentially be used by the IRS to challenge the credibility of PPC's compliance posture.

D. GILTI and BEAT Considerations

PHL's disregarded-entity status has important implications for the application of the post-TCJA international tax provisions, particularly the GILTI (Global Intangible Low-Taxed Income) regime under IRC § 951A and the BEAT (Base Erosion and Anti-Abuse Tax) under IRC § 59A.

GILTI. The GILTI provisions, effective for taxable years of foreign corporations beginning after December 31, 2017 (and therefore applicable to TY 2018–2020 of the examination period), require U.S. shareholders of CFCs to include in gross income their pro rata share of the CFC's "tested income" (reduced by a deemed tangible income return). Because PHL is a disregarded entity, PBI — not PHL — is the relevant CFC for GILTI purposes. PPC is treated as directly owning PBI, and PBI's tested income is included in PPC's GILTI calculation. PHL itself, as a disregarded entity, is not a CFC and does not generate tested income or tested loss.

The interaction between any IRC § 482 adjustments proposed by the IRS and PPC's GILTI position is significant. To the extent the IRS's proposed adjustments would reallocate income from PBI to PPC, such adjustments could reduce PBI's tested income and thereby reduce PPC's GILTI inclusion. Conversely, if adjustments increase PPC's U.S. taxable income, PPC may be entitled to additional foreign tax credits under IRC § 960 to offset the GILTI inclusion. These interactions are complex and are addressed in a separate memorandum (GILTI/BEAT impact analysis, dated October 2022).

BEAT. The BEAT provisions apply to applicable taxpayers (generally, large corporations with average annual gross receipts of at least $500 million over a three-year period) and impose a minimum tax based on "modified taxable income," which adds back certain "base erosion payments" made to foreign related parties. Because PHL is a disregarded entity, payments from PPC to PHL are not recognized for U.S. tax purposes, and PHL cannot be a recipient of base erosion payments. Payments from PPC to PBI, however, may be base erosion payments if they constitute deductible amounts paid to a foreign related party. The legacy IP royalty payments from PBI to PPC, by contrast, flow in the opposite direction (from a foreign entity to a U.S. entity) and are not base erosion payments. The BEAT analysis is also addressed in the separate GILTI/BEAT impact analysis memorandum.

The U.S. corporate tax rate change — from 35% in TY 2017 (pre-TCJA) to 21% in TY 2018–2020 (post-TCJA), effective January 1, 2018 pursuant to the Tax Cuts and Jobs Act, Pub. L. No. 115-97 — and the broader suite of TCJA international provisions are relevant context for the examination. However, these rate changes and new provisions do not alter PHL's entity classification, which is governed solely by the check-the-box regulations and PPC's Form 8832 election.

E. Irish Tax Considerations

While this memorandum focuses on U.S. federal income tax classification and transfer pricing, certain Irish and cross-border tax considerations relating to PHL's structural role are worth noting for completeness and to ensure coordination with PBI's Irish tax advisors.

From an Irish tax perspective, PBI is taxed as an Irish-resident company. PBI's trading income — which includes income from the commercialization of pharmaceutical products in non-Americas markets — is subject to the standard Irish corporate tax rate of 12.5% on trading income. In addition, PBI has claimed the benefits of Ireland's Knowledge Development box ("KDB") regime, which provides an effective tax rate of 6.25% on qualifying profits derived from qualifying intellectual property assets. PBI has claimed KDB benefits from FY 2016 forward, and the KDB claims are reflected in PBI's Irish tax returns for the relevant periods.

PHL's Luxembourg status is relevant to the cross-border dividend flows from PBI to PHL and from PHL (or, given PHL's disregarded-entity status for U.S. purposes, effectively PPC) onward. The following treaty instruments may be relevant:

• Luxembourg-Ireland tax treaty (and EU Parent-Subsidiary Directive): May provide for reduced or eliminated withholding tax on dividends paid by PBI (an Irish company) to PHL (a Luxembourg company). The EU Parent-Subsidiary Directive generally eliminates withholding tax on qualifying dividends between parent and subsidiary companies in EU Member States, subject to anti-avoidance provisions.

• U.S.-Ireland tax treaty: May be relevant to the extent that PBI's disregarded-entity treatment of PHL causes dividends from PBI to be treated as paid directly to PPC (a U.S. entity) for U.S. tax purposes, potentially raising questions about which treaty governs the withholding tax treatment from Ireland's perspective.

• U.S.-Luxembourg tax treaty: May be relevant to the treatment of any distributions or deemed distributions from PHL to PPC, although PHL's disregarded-entity status may limit the practical significance of this treaty for U.S. tax purposes.

Coordination with Thornbury & Keogh (lead partner Ciarán Thornbury, 22 Fitzwilliam Square, Dublin 2, D02 YH68, Ireland), PBI's Irish tax advisors, is ongoing regarding these cross-border aspects. Thornbury & Keogh has been engaged to advise PBI on Irish tax compliance, the KDB claims, and the Irish tax implications of any IRS transfer pricing adjustments that may affect PBI's reported income. It is important that the U.S. and Irish tax positions be coordinated to avoid inconsistencies and to ensure that PPC is in a position to claim appropriate foreign tax credits and to pursue any available relief under the U.S.-Ireland tax treaty's mutual agreement procedure, if necessary.

VII. Coordination with Other Work Streams

The analysis in this memorandum supports and is consistent with the broader defense strategy outlined in the Defense Strategy Memorandum dated July 12, 2022, prepared by Leonard Cross and Garrett Simmons. PHL's classification as a disregarded entity is a foundational fact that underlies several of the key legal and factual positions taken in the defense strategy.

This memorandum should be read in conjunction with the following key related deliverables, each of which addresses a discrete aspect of the IRS examination and defense:

Functional Analysis of PBI (October 2022) — This analysis documents PBI's substantive functions, assets, and risks in detail, demonstrating that PBI has genuine economic substance in Ireland. Key metrics include: 185 employees based in Ireland by the end of 2020; 42 board meetings held in Dublin during the 2017–2020 examination period; €47.2 million in cumulative regulatory spend during the examination period; independent pricing and commercialization decisions across 68 country markets; and approximately 18,000 square feet of office space at the Sandyford Business Park location. This functional analysis is critical to refuting any IRS contention that PBI lacks substance or that its functions should be attributed to PPC.

CSA Regulatory Analysis (August 5, 2022) — This memorandum analyzes PPC's and PBI's compliance with the CSA regulations under Treas. Reg. § 1.482-7, including the requirements for documentation, the arm's-length standard for cost-sharing payments, and the proper treatment of stock-based compensation costs.

Legacy IP License Analysis (July 2022) — This memorandum analyzes the 4.5% royalty arrangement between PPC (as licensor) and PBI (as licensee) for arm's-length compliance under IRC § 482 and the applicable regulations, including the comparable uncontrolled transaction (CUT) method and other transfer pricing methodologies.

IRC § 367(d) Analysis (September 28, 2022) — This memorandum addresses the outbound transfer of intangible property considerations arising from the establishment of the CSA and the contribution of pre-existing IP to the arrangement, including the interaction between § 367(d) and the cost-sharing regulations.

GILTI/BEAT Impact Analysis (October 2022) — This memorandum addresses the implications of the post-TCJA international tax provisions (GILTI under IRC § 951A and BEAT under IRC § 59A) for PPC's tax positions, including the interaction between any IRC § 482 adjustments and PPC's GILTI inclusions and foreign tax credit positions.

Economic Substance Analysis (August 18, 2022) — This memorandum analyzes the economic substance doctrine and the DEMPE framework as applied to PBI, demonstrating that PBI's functions, assets, and risks support the allocation of income to PBI under the transfer pricing framework. This analysis reinforces the conclusion that PHL — which has no economic substance — is appropriately treated as transparent and irrelevant to the substantive transfer pricing dispute.

Each of these work products has been prepared on the understanding that PHL is a disregarded entity and that the relevant controlled transactions are between PPC and PBI. Consistency on this foundational point across all work streams is essential.

VIII. Recommendations and Action Items

Based on the foregoing analysis, the following action items are recommended to ensure that PHL's entity classification is properly documented and that the defense team's presentation to the IRS is consistent and complete:

1. Confirm Form 8832 Election. Obtain from Crestfield & Associates LLP (Susan Lam, transfer pricing partner) a copy of the filed Form 8832 for PHL and confirm that the election remains in effect and has not been revoked or superseded. The original filed Form 8832, including the IRS acknowledgment or date-stamped copy, should be located and added to the defense file. If the Form 8832 was not included in the IDR No. 1 response, confirm whether the IRS has separately requested or obtained a copy of the election, and be prepared to produce it promptly upon request.

2. IDR Preparedness. Ensure that PHL's disregarded-entity status is clearly documented and explained in any IDR responses that reference the corporate structure. The IDR No. 1 response (dated July 8, 2022) included organizational charts reflecting the PPC-PHL-PBI-PMI ownership chain, with annotations indicating PHL's disregarded-entity status. Any future IDR responses or submissions should be consistent with this characterization. If the IRS examination team raises questions about PHL's status or role, the defense team should be prepared to provide a clear and concise explanation, supported by the Form 8832 and PHL's constitutional documents.

3. Consistent Characterization. Ensure that all Calderwood & Harkness LLP work product — including memoranda, draft IDR responses, presentations, and any submissions to the IRS or IRS Appeals — consistently treats PPC-PBI transactions as direct intercompany transactions, without suggesting any separate role for PHL in the transfer pricing chain. Any reference to PHL should clearly note its disregarded-entity status and its lack of independent economic activity. Inconsistent characterization across work product could undermine the defense team's credibility and create unnecessary confusion.

4. Informational Filing Review. Confirm with Crestfield & Associates LLP that all required informational returns have been timely filed for PHL and PBI for TY 2017–2020, including: (a) Form 8858 (Information Return of U.S. Persons With Respect to Foreign Disregarded Entities and Foreign Branches) for PHL; (b) Form 5471 (Information Return of U.S. Persons With Respect to Certain Foreign Corporations) for PBI; and (c) any other applicable informational returns, such as Form 8865 (if applicable) and FinCEN Form 114 (FBAR) reporting for any PHL Luxembourg bank accounts. Any late-filed or unfiled informational returns should be identified and addressed promptly, as penalties under IRC §§ 6038, 6038B, and 6679 could be asserted and could undermine PPC's compliance posture.

5. Luxembourg Tax Filings. While PHL's Luxembourg tax filings are not directly relevant to the U.S. examination, ensure that PHL's Luxembourg tax filings are consistent with its holding-company function and do not reflect any activities or income inconsistent with PHL's role as described in this memorandum. If PHL's Luxembourg tax returns claim the participation exemption on dividends from PBI, the basis for the exemption should be documented. Coordinate with Thornbury & Keogh or any Luxembourg tax advisors engaged by PPC to verify that PHL's Luxembourg filings are in order and consistent with the U.S. defense position.

IX. Conclusion

Based on the analysis set forth in this memorandum, the following conclusions are reached:

PHL is properly classified as a disregarded entity for U.S. federal income tax purposes based on PPC's timely filing of IRS Form 8832. As a Luxembourg Société à responsabilité limitée with a single member (PPC), PHL is an eligible entity under the check-the-box regulations set forth in Treas. Reg. §§ 301.7701-1 through 301.7701-3 and is not a per se corporation under Treas. Reg. § 301.7701-2(b)(8). While PHL's default classification (absent an election) would have been as an association taxable as a corporation — because PHL is a single-member foreign eligible entity whose sole member has limited liability — PPC's Form 8832 election overrides this default and classifies PHL as a disregarded entity effective from formation.

PHL's disregarded-entity status means that PHL is transparent for U.S. federal income tax purposes. PPC is treated as directly owning PBI, and all intercompany transactions — including the CSA cost-sharing arrangement, the legacy IP royalty (4.5% rate), and the PCT ($312 million) — are properly analyzed as direct transactions between PPC and PBI under IRC § 482. PHL's legal interposition in the ownership chain does not create any additional controlled transactions, tested parties, or transfer pricing issues.

PHL performs no DEMPE functions with respect to the pharmaceutical IP at issue in the examination. PHL has no employees, no independent revenue-generating activities, and no operational presence beyond its Luxembourg corporate registration. PHL does not participate in the CSA, the legacy IP license, or the PCT. PHL's sole function is to serve as a legal holding company for PBI — a function that, while commercially reasonable and consistent with standard multinational pharmaceutical structures, does not create any substantive U.S. tax consequences given PHL's disregarded-entity classification.

PHL's existence as an intermediate holding company does not create additional transfer pricing exposure and does not alter the substantive analysis of the IRS's proposed adjustments totaling $380.4 million across TY 2017–2020. The defense team should continue to treat PHL as transparent in all communications with the IRS and in all work product, and should ensure that all informational reporting and documentation requirements relating to PHL are satisfied.

Classification: PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT

This memorandum has been prepared by counsel in connection with the provision of legal advice and in anticipation of litigation. It is protected by the attorney-client privilege and the work product doctrine. It should not be disclosed to any third party without the prior written consent of Calderwood & Harkness LLP and PPC.

Matter Number: 1018-00009

Prepared by: Leila Nazari, Working Associate Tax Department Calderwood & Harkness LLP 1735 Market Street, Suite 3100 Philadelphia, PA 19103

Adjustment Category	Amount
CSA cost-sharing adjustments	$235.01 million
Legacy IP royalty adjustments	$188.04 million
Correlative offset	($42.65 million)
Total proposed adjustments	$380.4 million

PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP Tax Department
MEMORANDUM
TO: Leonard Cross, Responsible Partner Garrett Simmons, Lead Associate
FROM: Leila Nazari, Working Associate
DATE: July 25, 2022
RE: Entity Classification and Structural Role of Penterra Holdings Luxembourg S.à r.l. (PHL) — C&H Matter No. 1018-00009
CLIENT: Penterra Pharmaceuticals Corp. (EIN: 22-3741856)
I. Purpose and Scope
This memorandum analyzes the entity classification of Penterra Holdings Luxembourg S.à r.l. ("PHL") for U.S. federal income tax purposes and its structural role within the Penterra Pharmaceuticals Corp. ("PPC") international group. The analysis is intended to provide a comprehensive treatment of PHL's classification under the applicable Treasury Regulations, as well as to articulate PHL's position and function within the broader PPC corporate architecture, so that the firm's defense team has a clear and authoritative reference point for all matters touching upon PHL's status during the course of the current IRS examination.
This analysis supports Calderwood & Harkness LLP's defense of PPC in the IRS Large Business & International Division examination (Exam Team ID: LB&I-NE-TP-2022-00641) covering tax years 2017 through 2020. The examination has raised significant transfer pricing issues relating to the allocation of income between PPC and its Irish subsidiary, Penterra Biopharma International DAC ("PBI"), and the proper characterization and valuation of several intercompany arrangements. Because PHL is interposed in the corporate chain between PPC and PBI, a definitive analysis of PHL's classification and role is essential to ensuring a consistent and defensible presentation to the IRS.
Specifically, this memorandum addresses the following topics:
(a) PHL's formation and legal status under Luxembourg law, including the nature of the S.à r.l. entity form and PHL's organizational particulars;
(b) PHL's U.S. federal tax classification as a disregarded entity under the check-the-box regulations set forth in Treas. Reg. §§ 301.7701-1 through 301.7701-3, including the per se corporation analysis, default classification rules, and the Form 8832 election;
(c) the implications of disregarded-entity treatment for the transfer pricing positions at issue in the examination, including the treatment of the cost-sharing arrangement, the legacy IP royalty, and the platform contribution transaction valuation between PPC and PBI; and
(d) PHL's functional role as an intermediate holding company between PPC and PBI, including an assessment of PHL's lack of independent economic activity and its consequent irrelevance to the substantive transfer pricing disputes.
This analysis may be relevant to the IRS's examination of PPC's cost-sharing arrangement ("CSA"), the legacy IP royalty agreement between PPC and PBI, and the platform contribution transaction ("PCT") valuation between PPC and PBI. The memorandum is designed to be read in conjunction with the broader defense strategy memorandum and the other specialized analyses described in Section VII below.
II. Executive Summary
PHL is a Société à responsabilité limitée organized under the laws of the Grand Duchy of Luxembourg, with its registered office at 14, rue Aldringen, L-1118 Luxembourg. PHL is registered with the Luxembourg Registre de Commerce et des Sociétés (the "RCS") under number B 168452. As a Luxembourg S.à r.l., PHL is a private limited liability company with a single member.
PHL is 100% owned by PPC, which is a Delaware corporation publicly traded on the Nasdaq Stock Market under the ticker symbol PPCA, with its principal executive offices and headquarters located at 2200 Independence Boulevard, Princeton Junction, New Jersey 08550. PPC is the ultimate U.S. parent of the Penterra multinational group and is the taxpayer under examination.
PHL, in turn, owns 100% of PBI, a Designated Activity Company organized under the laws of Ireland, with its registered office at 4th Floor, Claremont House, Sandyford Business Park, Dublin D18 K7T4, Ireland. PBI functions as the group's IP-holding company and serves as the principal entity for non-Americas commercialization of the Penterra pharmaceutical portfolio. PBI holds Irish Tax Reference number 3218764T.
Under the check-the-box regulations (Treas. Reg. §§ 301.7701-1 through 301.7701-3), PPC filed IRS Form 8832 electing to classify PHL as a disregarded entity for U.S. federal income tax purposes. The election was effective from the date of PHL's formation. As a result of this election, PHL is not treated as a separate entity from its owner, PPC, for U.S. federal income tax purposes. This means that PHL's assets, liabilities, and all items of income, deduction, gain, loss, and credit are treated as belonging directly to PPC.
Consequently, for purposes of Internal Revenue Code ("IRC") § 482 and the transfer pricing analysis applicable to the examination years (TY 2017–2020), PHL's interposition between PPC and PBI is transparent. All intercompany transactions between PPC and PBI — including the CSA, the legacy IP license agreement (providing for a 4.5% royalty), and the PCT (valued at $312 million) — are properly analyzed as transactions directly between PPC and PBI. PHL plays no substantive role in any of these arrangements, and its existence as an intermediate holding entity does not create any additional transfer pricing obligations or controlled transactions requiring separate analysis under IRC § 482.
PHL also owns, indirectly through PBI, the relationship with Penterra Manufacturing Ireland Ltd. ("PMI"), an Irish private limited company (Companies Registration Office Number 512347) operating as a contract manufacturer at Unit 7, Ringaskiddy Industrial Estate, Co. Cork T12 PX29, Ireland. PMI's manufacturing activities are conducted under a contract manufacturing agreement with PBI and are not the subject of a separate transfer pricing dispute in the current examination, though PMI's activities form part of the overall value chain under review.
The IRS's proposed adjustments totaling $380.4 million across TY 2017–2020 — comprising CSA cost-sharing adjustments, legacy IP royalty adjustments, and a correlative offset — all relate to transactions between PPC and PBI. PHL's classification as a disregarded entity confirms that the IRS is correct to focus its inquiry on the PPC-PBI relationship, and PHL's interposition does not alter or complicate the analysis in any material respect.
III. PHL Formation and Luxembourg Legal Status
A. Organizational Details
The following sets forth the material organizational details of PHL, as reflected in its constitutional documents, Luxembourg corporate filings, and the records produced in connection with the current examination:
Full Legal Name: Penterra Holdings Luxembourg S.à r.l.
Entity Type: Société à responsabilité limitée (S.à r.l.) — a private limited liability company under Luxembourg law. The S.à r.l. is governed principally by the Luxembourg law of 10 August 1915 on commercial companies, as amended (the "1915 Law"), and more recently by the Luxembourg law of 23 July 2016 concerning business associations (the "2016 Law"), which replaced and modernized certain provisions of the 1915 Law effective as of August 23, 2016.
Registered Office: 14, rue Aldringen, L-1118 Luxembourg. The registered office is maintained through a Luxembourg corporate services provider, as is customary for holding companies of this nature that do not maintain independent operational facilities.
RCS Number: B 168452. PHL's registration with the Luxembourg Registre de Commerce et des Sociétés is current and in good standing.
Date of Formation: PHL was incorporated in Luxembourg in connection with the establishment of the PBI IP-holding structure. PBI was incorporated on March 15, 2012, and PHL was formed shortly prior to PBI's incorporation — specifically, in February 2012 — to serve as the intermediate holding entity between PPC and PBI. The precise date of PHL's incorporation is reflected on the original articles of association (acte constitutif) notarized in Luxembourg and filed with the RCS. The timing of formation was coordinated with the broader restructuring that included the establishment of the CSA between PPC and PBI, which became effective on July 1, 2012.
Ownership: 100% of PHL's equity interests (parts sociales) are held by PPC. PHL has a single member (associé unique). All corporate parts were subscribed and fully paid up at the time of formation. PHL has not issued any additional equity interests, and no third party holds any ownership interest — direct or indirect — in PHL.
Activities: PHL's sole function is to serve as a holding company for PBI. PHL does not conduct any independent business operations. It has no employees, no independent revenue-generating activities, and no operational presence beyond its Luxembourg registration and the maintenance of its corporate formalities. PHL's income consists solely of dividends received from PBI (when declared) and any interest income on de minimis cash balances held in its Luxembourg bank accounts at Hollowell Commerce Bank (BIL).
Governance: PHL is managed in accordance with Luxembourg corporate law requirements applicable to S.à r.l. entities. Its constitutional documents (articles of association, or statuts) reflect its holding-company purpose and authorize PHL to hold participations in domestic and foreign entities and to perform all activities ancillary thereto. PHL is managed by one or more gérants (managers) appointed by the sole associé. In practice, PHL's management is provided by designees of PPC and/or the Luxembourg corporate services provider, consistent with the limited scope of PHL's activities. Board resolutions and shareholder resolutions are maintained in PHL's corporate records in Luxembourg.
B. Luxembourg Legal Characteristics
Under Luxembourg law, a Société à responsabilité limitée is a separate legal entity with its own legal personality, distinct from that of its members. The S.à r.l. form provides limited liability for its members — that is, the liability of PPC as the sole associé of PHL is limited to the amount of PPC's capital contribution to PHL. This limited liability feature is fundamental to the S.à r.l. form and distinguishes it from certain other Luxembourg entity types, such as the société en nom collectif (general partnership), in which members bear unlimited liability.
The S.à r.l. is one of the most widely used entity types for holding company and group finance structures in Luxembourg. Its flexibility, relatively light governance requirements (compared to a Société Anonyme, or S.A.), and favorable treatment under the Luxembourg participation exemption regime make it an attractive vehicle for multinational holding structures. Key features of the S.à r.l. form include:
• Separate legal personality: PHL exists as a distinct juridical person under Luxembourg law, capable of owning assets, entering into contracts, and being a party to legal proceedings in its own name.
• Limited liability: The sole associé's (PPC's) liability is limited to its capital contribution. Creditors of PHL may not, absent exceptional circumstances (such as piercing of the corporate veil under Luxembourg law, which is rarely applied), seek recourse against PPC's assets.
• Restrictions on transferability of interests: Parts sociales of a S.à r.l. are not freely transferable and are not eligible for listing on a securities exchange. Transfer of parts sociales to third parties requires the consent of the other members (if any) or compliance with the transfer restrictions set forth in the statuts. This restriction on transferability is relevant to the U.S. entity classification analysis, as discussed in Section IV below.
• No public trading of interests: A Luxembourg S.à r.l. may not issue shares to the public or list its equity interests on any regulated market. This distinguishes the S.à r.l. from the S.A., which may issue publicly traded shares.
The key characteristics relevant to U.S. entity classification are as follows: PHL has a single member (PPC); it provides limited liability to its member; and it does not issue publicly traded interests. As discussed further in Section IV, these characteristics determine PHL's eligibility for classification under the check-the-box regulations and its default classification absent an affirmative election.
PHL is subject to Luxembourg corporate income tax (impôt sur le revenu des collectivités, or "IRC") at the standard rate applicable to Luxembourg companies, as well as the municipal business tax (impôt commercial communal) applicable to entities located in Luxembourg City. However, given PHL's holding-company function and the nature of its income — principally dividends from PBI — PHL may benefit from the Luxembourg participation exemption regime (régime des sociétés mères et filiales) on qualifying dividends and capital gains. Under this regime, dividends and capital gains derived from qualifying participations (generally, a holding of at least 10% or with an acquisition cost of at least EUR 1.2 million, held for a continuous period of at least 12 months) are exempt from Luxembourg corporate income tax. PBI's shares qualify as a participating interest for purposes of this exemption, and PHL has claimed the participation exemption on dividends received from PBI in its Luxembourg tax filings.
IV. U.S. Entity Classification Analysis
A. Applicable Regulatory Framework
The classification of business entities for U.S. federal income tax purposes is governed by the Treasury Regulations under IRC § 7701, commonly known as the "check-the-box" regulations. These regulations, which became effective January 1, 1997, replaced the prior four-factor "Kintner" classification approach and provide a simplified, elective regime for entity classification. The relevant regulations are as follows:
Treas. Reg. § 301.7701-1 sets forth the general principles of entity classification. It provides that whether an organization is an "entity" separate from its owners for federal tax purposes is a matter of federal law and does not depend on whether the organization is recognized as an entity under local (including foreign) law. An entity that is recognized for federal tax purposes is classified as either a trust or a business entity. A "business entity" is any entity that is not properly classified as a trust and that has associates and an objective to carry on business and divide the gains therefrom. For purposes of the check-the-box regulations, any entity that is not a trust is a business entity.
Treas. Reg. § 301.7701-2 provides the key definitional framework. It distinguishes between two categories of business entities: (i) entities that are classified as corporations, and (ii) entities that are not classified as corporations and are therefore "eligible entities" that may elect their classification. The regulation defines "corporation" to include, among other things, a business entity organized under a federal or state statute that refers to the entity as "incorporated" or as a "corporation," as well as certain specifically enumerated foreign entities. The list of per se foreign corporations is set forth in Treas. Reg. § 301.7701-2(b)(8), organized by jurisdiction and entity type. This per se list is central to the classification of foreign entities, because an entity on the per se list is automatically classified as a corporation and is not eligible to elect a different classification.
Treas. Reg. § 301.7701-3 governs the election of entity classification for eligible entities. An eligible entity with a single owner may elect to be classified as either (i) an association taxable as a corporation or (ii) a disregarded entity (i.e., an entity that is not treated as an entity separate from its owner). An eligible entity with two or more owners may elect to be classified as either (i) an association taxable as a corporation or (ii) a partnership. The regulation also establishes default classification rules that apply in the absence of an affirmative election, as well as procedures for making and revoking elections on IRS Form 8832.
Each of these regulatory provisions is analyzed in turn below as applied to PHL.
B. Per Se Corporation Analysis
The threshold question in classifying PHL for U.S. federal tax purposes is whether PHL falls within the per se corporation list set forth in Treas. Reg. § 301.7701-2(b)(8)(i). If PHL is a per se corporation, it is automatically classified as a corporation for U.S. tax purposes and is not eligible to elect a different classification.
Treas. Reg. § 301.7701-2(b)(8)(i) lists specific foreign entity types by jurisdiction that are treated as per se corporations. The list is organized alphabetically by country. For Luxembourg, the per se corporation list includes the following entity type:
Luxembourg — Société Anonyme (S.A.)
The Société Anonyme is the Luxembourg public limited liability company form, analogous in many respects to a U.S. corporation. It is characterized by its ability to issue shares to the public, to list its shares on a regulated market, and by its governance structure (including a board of directors or management board and supervisory board).
A Luxembourg Société à responsabilité limitée (S.à r.l.) is not included on the per se corporation list. The S.à r.l. is a distinct entity type under Luxembourg law, with different legal characteristics — most notably, its inability to issue publicly traded interests and the restrictions on transferability of its parts sociales. The regulations specifically enumerate only the S.A. as a per se corporation for Luxembourg; the omission of the S.à r.l. is intentional and consistent with the Treasury Department's approach of including only those foreign entity types that most closely resemble a U.S. domestic corporation.
Therefore, PHL, as a Luxembourg S.à r.l., is an "eligible entity" under the check-the-box regulations and is not automatically classified as a corporation. PHL may elect its classification under Treas. Reg. § 301.7701-3.
C. Default Classification
Because PHL is an eligible entity, the next step in the analysis is to determine PHL's default classification — that is, the classification that would apply if PHL did not make an affirmative election on Form 8832.
Under Treas. Reg. § 301.7701-3(b)(2), the default classification for a foreign eligible entity depends on the number of members and whether the members have limited liability. The regulation provides as follows:
(i) A foreign eligible entity with two or more members is classified by default as:
(A) a partnership if at least one member does not have limited liability; or
(B) an association (taxable as a corporation) if all members have limited liability.
(ii) A foreign eligible entity with a single member is classified by default as:
(A) a disregarded entity if the single member does not have limited liability; or
(B) an association (taxable as a corporation) if the single member has limited liability. See Treas. Reg. § 301.7701-3(b)(2)(i)(B).
Applying these rules to PHL:
• PHL has a single member — PPC.
• As discussed in Section III.B above, a Luxembourg S.à r.l. provides limited liability to its members. PPC's liability as the sole associé of PHL is limited to its capital contribution. PPC does not bear personal, unlimited liability for the obligations of PHL.
• Because PHL is a single-member foreign eligible entity and its sole member (PPC) has limited liability, the default classification for PHL under Treas. Reg. § 301.7701-3(b)(2)(i)(B) is as an association taxable as a corporation for U.S. federal tax purposes.
Therefore, absent an affirmative election to the contrary, PHL would be classified as an association taxable as a corporation — that is, PHL would be treated as a separate taxable entity (a corporation) for U.S. federal income tax purposes. Under such a default classification, PHL would be a "controlled foreign corporation" within the meaning of IRC § 957(a), and its interposition between PPC and PBI would have substantive U.S. tax consequences, including potential implications for subpart F income, GILTI, and the treatment of dividends received from PBI.
However, as discussed in the following section, PPC made a timely election to override this default classification.
D. Check-the-box Election — Form 8832
PPC filed IRS Form 8832 (Entity Classification Election) with the Internal Revenue Service, electing to classify PHL as a disregarded entity for U.S. federal income tax purposes. The election was effective from the date of PHL's formation in February 2012, so that PHL has been treated as a disregarded entity from inception and has never been classified as an association or corporation for U.S. federal income tax purposes.
The election was timely filed within 75 days of PHL's formation, in accordance with Treas. Reg. § 301.7701-3(c)(1)(i), which provides that an election will be effective on the date specified on the Form 8832, provided that the form is filed within 75 days before or 75 days after the requested effective date. The election was made by PPC as the sole owner of PHL, and the Form 8832 was signed by an authorized officer of PPC on behalf of PHL.
The Form 8832 was filed with the IRS Service Center at the address designated for entity classification elections, and a copy was attached to PPC's consolidated Form 1120 (U.S. Corporation Income Tax Return) for the taxable year that included PHL's date of formation, as required by Treas. Reg. § 301.7701-3(c)(1)(ii). The election has been in continuous effect since PHL's formation and has not been revoked or superseded. Under Treas. Reg. § 301.7701-3(c)(1)(iv), an entity that makes an election under Form 8832 generally may not change its classification again by election within 60 months of the effective date of the election, absent IRS consent. No such change in classification has been made or requested.
It is essential to confirm with Crestfield & Associates LLP (engagement partner Martin Ogilvy; transfer pricing partner Susan Lam) that copies of the filed Form 8832 election for PHL are in PPC's corporate tax files and were produced in response to IDR No. 1 (corporate structure documentation) issued by the IRS examination team. If the Form 8832 was not included in the IDR No. 1 response, a copy should be located and held ready for production in the event of a follow-up request, as the IRS may wish to verify the validity and timeliness of the election.
E. Effect of Disregarded Entity Classification
As a result of the Form 8832 election, PHL is classified as a disregarded entity for U.S. federal income tax purposes. The implications of this classification are significant and pervasive. Under Treas. Reg. § 301.7701-2(a), a "disregarded entity" is a business entity that has a single owner and is not classified as a corporation. Such an entity is not treated as an entity separate from its owner. In other words, PHL is treated as if it does not exist as a separate entity for purposes of U.S. federal income tax law.
The principal consequences of PHL's disregarded-entity status are as follows:
Treatment of assets, liabilities, and income. All of PHL's assets, liabilities, and items of income, deduction, gain, loss, and credit are treated as those of PPC for U.S. federal income tax purposes. PHL's ownership of PBI shares is treated as if PPC directly owns the shares of PBI. Any dividends received by PHL from PBI are treated, for U.S. tax purposes, as dividends received directly by PPC from PBI.
Direct ownership of PBI. PHL's ownership of 100% of the equity interests in PBI is treated, for U.S. federal tax purposes, as if PPC directly owns PBI. This treatment is critical because it determines PBI's status as a controlled foreign corporation ("CFC") of PPC under IRC § 957(a) and affects the application of subpart F, GILTI, and other international tax provisions.
Transparency for transfer pricing purposes. All transactions between PPC and PBI are analyzed as direct intercompany transactions, notwithstanding PHL's legal interposition in the ownership chain. PHL's existence does not create a separate "tested party" or an additional link in the controlled transaction chain for purposes of IRC § 482. This is critical for the transfer pricing analysis because it means that the CSA cost-sharing payments, the legacy IP royalty, and the PCT are all properly characterized and tested as transactions between PPC and PBI — the two entities that actually perform functions, employ assets, and assume risks with respect to the pharmaceutical IP at issue.
No separate tax return. PHL does not file a separate U.S. federal income tax return. Its activities (to the extent any exist) are reported on PPC's consolidated Form 1120. PHL's income and expenses are included in PPC's consolidated return as if they were PPC's own.
Certain informational reporting obligations may persist. Notwithstanding PHL's disregarded-entity status, certain informational reporting requirements may apply. Specifically, Form 8858 (Information Return of U.S. Persons With Respect to Foreign Disregarded Entities and Foreign Branches) may be required for PHL, and Form 5471 reporting obligations may apply to PBI by reason of PPC's deemed direct ownership. These reporting obligations are discussed further in Section VI.C below.
V. PHL's Role in the PPC Corporate Structure
A. Ownership Chain
The corporate ownership chain from PPC to the Irish operating entities, reflecting PHL's intermediate holding position, is as follows:
Penterra Pharmaceuticals Corp. (PPC) Delaware corporation; publicly traded on Nasdaq (ticker: PPCA) HQ: 2200 Independence Boulevard, Princeton Junction, NJ 08550 EIN: 22-3741856
↓ 100% owner of
Penterra Holdings Luxembourg S.à r.l. (PHL) Luxembourg S.à r.l.; RCS Number B 168452 Registered Office: 14, rue Aldringen, L-1118 Luxembourg Disregarded entity for U.S. federal income tax purposes
↓ 100% owner of
Penterra Biopharma International DAC (PBI) Irish Designated Activity Company Registered Office: 4th Floor, Claremont House, Sandyford Business Park, Dublin D18 K7T4, Ireland Irish Tax Reference: 3218764T IP-holding company and principal for non-Americas commercialization
↓ 100% owner of
Penterra Manufacturing Ireland Ltd. (PMI) Irish private limited company; CRO Number 512347 Registered Office: Unit 7, Ringaskiddy Industrial Estate, Co. Cork T12 PX29, Ireland Contract manufacturer
This ownership chain has been in place since the formation of PHL and PBI in 2012. There have been no material changes to the corporate structure during the examination years (TY 2017–2020). The organizational charts reflecting this structure were included in the IDR No. 1 response dated July 8, 2022, and have been made available to the IRS examination team.
B. Purpose of Intermediate Holding Company
PHL was established as an intermediate holding entity between PPC and PBI for several reasons that are common and well-recognized in multinational pharmaceutical and life sciences structures. While PHL's interposition is tax-transparent for U.S. purposes (due to its disregarded-entity status), PHL exists as a separate legal entity under Luxembourg law and serves the following purposes:
European holding platform. Luxembourg provides a well-established and widely used holding-company regime. The Luxembourg participation exemption on qualifying dividends and capital gains from subsidiaries allows PHL to receive dividends from PBI on a tax-efficient basis under Luxembourg law. Luxembourg's stable legal and regulatory environment, its well-developed corporate law, and the availability of experienced corporate service providers and legal professionals make it an attractive jurisdiction for holding companies serving European operations.
Treaty network. Luxembourg's extensive tax treaty network — one of the broadest in Europe — may facilitate efficient dividend repatriation from PBI to PHL and onward to PPC. In particular, the Luxembourg-Ireland tax treaty and the EU Parent-Subsidiary Directive may provide for reduced or eliminated withholding taxes on dividends paid by PBI to PHL. Similarly, the U.S.-Luxembourg tax treaty may affect the withholding tax treatment of distributions from PHL (or, given PHL's disregarded-entity status, may be relevant in analyzing the treaty entitlements of the entities in the chain). The interplay between these treaty provisions and PHL's disregarded-entity status requires careful analysis, which is being coordinated with Thornbury & Keogh as described in Section VI.E below.
Structural flexibility. The interposition of PHL provides operational and structural flexibility for the European operations. Should PPC wish to undertake future acquisitions, dispositions, or reorganizations of European entities, PHL provides a natural platform from which to structure such transactions. For example, PHL could acquire additional European subsidiaries or dispose of its interest in PBI without directly involving PPC at the legal entity level. This structural flexibility was contemplated at the time of PHL's formation and remains a valid commercial purpose, even though no such transactions have been undertaken during the examination years.
Limited liability segregation. PHL creates a legal barrier between PPC and the Irish operating entities (PBI and PMI). While PPC, as a Delaware corporation, already benefits from limited liability, the interposition of PHL provides an additional layer of legal separation between PPC's U.S. assets and the operations and potential liabilities of the Irish entities. This structural protection is consistent with standard corporate governance practices in multinational groups.
It bears emphasis that none of these purposes — individually or collectively — is inconsistent with PHL's classification as a disregarded entity for U.S. tax purposes. The check-the-box regulations permit an eligible entity to elect disregarded-entity status regardless of the entity's commercial purposes under local law. The election relates solely to the entity's classification for U.S. federal income tax purposes and does not affect the entity's status or activities under foreign law.
C. PHL's Lack of Independent Functions
A central fact relevant to both the entity classification analysis and the transfer pricing examination is PHL's complete lack of independent economic activity. The following points are material:
PHL has no employees. It has never employed any individuals, whether in Luxembourg or elsewhere. All corporate management and administrative functions are performed by PPC designees or by the Luxembourg corporate services provider acting on PPC's behalf.
PHL does not conduct any independent business activities. Its sole function is to hold the shares of PBI. PHL does not manufacture, market, distribute, or sell any pharmaceutical products. It does not conduct any research and development activities. It does not provide any services — managerial, financial, technical, or otherwise — to any member of the PPC group.
PHL does not perform any DEMPE (Development, Enhancement, Maintenance, Protection, Exploitation) functions with respect to the pharmaceutical intellectual property that is the subject of the IRS examination. The DEMPE framework, as articulated in the OECD Transfer Pricing Guidelines (particularly as revised in the 2017 BEPS Actions 8-10 Final Reports), focuses on the functions performed, assets used, and risks assumed in connection with intangible property. PHL performs no development functions, does not enhance or maintain any intangibles, does not protect or enforce IP rights, and does not exploit any intangibles in any market. All DEMPE functions are performed by PPC (in the United States) and PBI (in Ireland).
PHL does not participate in the CSA between PPC and PBI. The CSA was executed directly between PPC and PBI, effective July 1, 2012, and governs the sharing of costs and risks associated with the development of intangible property. PHL is not a party to the CSA, does not make or receive any cost-sharing payments, and does not bear any share of the costs or risks of intangible development.
PHL does not receive or pay royalties under the legacy IP license agreement. The legacy IP license, which provides for a 4.5% royalty on PBI's net sales of products embodying pre-CSA intangible property, is a bilateral agreement between PPC (as licensor) and PBI (as licensee). PHL is not a party to this agreement and does not receive any royalty income.
PHL did not make or receive the PCT payment of $312 million. The PCT, which was determined at the inception of the CSA to compensate PPC for making available its pre-existing intangible property and other platform contributions to the CSA, was a transaction between PPC and PBI. PHL had no role in the PCT calculation, negotiation, or payment.
PHL's disregarded-entity status is fully consistent with its complete lack of independent economic activity. Indeed, the absence of any substantive functions, assets (other than its shareholding in PBI), or risks at the PHL level underscores the appropriateness of treating PHL as transparent for U.S. tax purposes and confirms that PHL does not introduce any additional complexity into the transfer pricing analysis.
VI. Implications for the IRS Examination
A. Transfer Pricing Analysis Framework
Because PHL is a disregarded entity for U.S. federal income tax purposes, the IRS examination properly focuses on the intercompany transactions between PPC and PBI as if they were direct transactions between those two entities. PHL's interposition in the corporate chain does not alter this framework, and all transfer pricing issues raised by the IRS examination team are correctly framed as issues between PPC and PBI.
The IRS's proposed adjustments totaling $380.4 million across TY 2017–2020 consist of the following components:
All of these proposed adjustments relate to transactions between PPC and PBI. The CSA cost-sharing adjustments concern the allocation of intangible development costs between PPC and PBI under the CSA. The legacy IP royalty adjustments concern the arm's-length nature of the 4.5% royalty rate under the pre-existing IP license agreement. The correlative offset reflects the IRS's acknowledgment that certain adjustments may have offsetting effects across the related transactions. None of these adjustments involve PHL in any substantive role, and none require any separate analysis of PHL as a controlled party or tested party under IRC § 482.
PHL's existence does not create any additional transfer pricing issues or controlled transactions that require separate analysis under IRC § 482 or the regulations thereunder. Specifically:
• PHL does not receive any management fees, service fees, cost-sharing payments, royalties, or other intercompany payments from PPC or PBI.
• PHL does not charge any fees or payments to PPC or PBI.
• PHL does not perform any services for, or on behalf of, PPC or PBI that would give rise to a controlled services transaction under Treas. Reg. § 1.482-9.
• PHL does not own, license, or exploit any intangible property that would give rise to a controlled transfer of intangibles under Treas. Reg. §§ 1.482-4 or 1.482-7.
• The only "transaction" involving PHL is its receipt of dividends from PBI (when declared) and the holding of PBI's shares. Because PHL is a disregarded entity, these are treated as PPC's receipt of dividends from PBI and PPC's direct ownership of PBI shares.
Accordingly, PHL's entity classification as a disregarded entity simplifies and clarifies the transfer pricing analysis by confirming that the only relevant controlled transactions are those between PPC and PBI.
B. Section 367(d) Considerations
The initial contribution of intangible property rights to PBI through the CSA (effective July 1, 2012) must be evaluated under IRC § 367(d), which governs the U.S. tax treatment of outbound transfers of intangible property by U.S. persons to foreign corporations. Section 367(d) generally provides that a U.S. person who transfers intangible property to a foreign corporation in a transaction described in IRC § 351 or § 361 is treated as having sold such property in exchange for payments contingent on the productivity, use, or disposition of the property, with annual inclusions of deemed royalty income commensurate with the income attributable to the transferred intangible.
Because PHL is a disregarded entity, any contribution of intangible property by PPC to PBI is treated as flowing through PHL — that is, PHL's interposition is disregarded, and the transfer is treated as a direct transfer from PPC to PBI for purposes of IRC § 367(d). PHL's existence as a Luxembourg entity in the ownership chain does not change the § 367(d) analysis in any respect. The relevant questions under § 367(d) — including whether there was an outbound transfer of intangible property, the characterization and valuation of the transferred intangibles, and the computation of deemed royalty inclusions — are all analyzed as if PPC transferred intangible property directly to PBI.
This conclusion is consistent with the general principle that a disregarded entity is not treated as a separate entity for U.S. federal income tax purposes. The interposition of PHL between PPC and PBI does not create an additional "transfer" step (i.e., from PPC to PHL and then from PHL to PBI); rather, the single transfer from PPC to PBI is the only event recognized for U.S. tax purposes.
A separate memorandum analyzing IRC § 367(d) implications in detail has been prepared and is dated September 28, 2022. That memorandum should be consulted for a comprehensive discussion of the § 367(d) issues, including the valuation of the transferred intangibles, the appropriate useful life assumptions, and the interaction between § 367(d) and the CSA regulations under Treas. Reg. § 1.482-7.
C. Form 5471 Reporting
PPC is required to file Form 5471 (Information Return of U.S. Persons With Respect to Certain Foreign Corporations) for each foreign corporation in which it holds a qualifying interest. Because PHL is a disregarded entity, PPC is treated as directly owning PBI, and PPC is accordingly required to file Form 5471 for PBI as a Category 5 filer (as a U.S. shareholder that owns stock in a CFC).
With respect to PHL itself, the reporting requirements are somewhat more nuanced. Although PHL is a disregarded entity for substantive U.S. federal income tax purposes, certain informational filing requirements may still apply. Specifically, PPC may be required to file Form 8858 (Information Return of U.S. Persons With Respect to Foreign Disregarded Entities and Foreign Branches) for PHL. Form 8858 is used to report the activities of foreign disregarded entities owned by U.S. persons and provides the IRS with information about the entity's financial statements, intercompany transactions, and ownership structure. Additionally, depending on the specific facts and the reporting categories applicable to PHL, a Form 5471 may also be required or advisable for PHL — particularly to the extent that PHL is treated as a foreign entity for informational reporting purposes notwithstanding its disregarded status.
Forms 5471 for PBI and PHL for TY 2017–2020 were produced in response to IDR No. 40. The filing requirements and reporting categories for PHL should be confirmed with Crestfield & Associates LLP to ensure that all required informational returns have been timely and accurately filed for each of the examination years. Any deficiencies in informational reporting could give rise to penalties under IRC § 6038 or § 6038B and could potentially be used by the IRS to challenge the credibility of PPC's compliance posture.
D. GILTI and BEAT Considerations
PHL's disregarded-entity status has important implications for the application of the post-TCJA international tax provisions, particularly the GILTI (Global Intangible Low-Taxed Income) regime under IRC § 951A and the BEAT (Base Erosion and Anti-Abuse Tax) under IRC § 59A.
GILTI. The GILTI provisions, effective for taxable years of foreign corporations beginning after December 31, 2017 (and therefore applicable to TY 2018–2020 of the examination period), require U.S. shareholders of CFCs to include in gross income their pro rata share of the CFC's "tested income" (reduced by a deemed tangible income return). Because PHL is a disregarded entity, PBI — not PHL — is the relevant CFC for GILTI purposes. PPC is treated as directly owning PBI, and PBI's tested income is included in PPC's GILTI calculation. PHL itself, as a disregarded entity, is not a CFC and does not generate tested income or tested loss.
The interaction between any IRC § 482 adjustments proposed by the IRS and PPC's GILTI position is significant. To the extent the IRS's proposed adjustments would reallocate income from PBI to PPC, such adjustments could reduce PBI's tested income and thereby reduce PPC's GILTI inclusion. Conversely, if adjustments increase PPC's U.S. taxable income, PPC may be entitled to additional foreign tax credits under IRC § 960 to offset the GILTI inclusion. These interactions are complex and are addressed in a separate memorandum (GILTI/BEAT impact analysis, dated October 2022).
BEAT. The BEAT provisions apply to applicable taxpayers (generally, large corporations with average annual gross receipts of at least $500 million over a three-year period) and impose a minimum tax based on "modified taxable income," which adds back certain "base erosion payments" made to foreign related parties. Because PHL is a disregarded entity, payments from PPC to PHL are not recognized for U.S. tax purposes, and PHL cannot be a recipient of base erosion payments. Payments from PPC to PBI, however, may be base erosion payments if they constitute deductible amounts paid to a foreign related party. The legacy IP royalty payments from PBI to PPC, by contrast, flow in the opposite direction (from a foreign entity to a U.S. entity) and are not base erosion payments. The BEAT analysis is also addressed in the separate GILTI/BEAT impact analysis memorandum.
The U.S. corporate tax rate change — from 35% in TY 2017 (pre-TCJA) to 21% in TY 2018–2020 (post-TCJA), effective January 1, 2018 pursuant to the Tax Cuts and Jobs Act, Pub. L. No. 115-97 — and the broader suite of TCJA international provisions are relevant context for the examination. However, these rate changes and new provisions do not alter PHL's entity classification, which is governed solely by the check-the-box regulations and PPC's Form 8832 election.
E. Irish Tax Considerations
While this memorandum focuses on U.S. federal income tax classification and transfer pricing, certain Irish and cross-border tax considerations relating to PHL's structural role are worth noting for completeness and to ensure coordination with PBI's Irish tax advisors.
From an Irish tax perspective, PBI is taxed as an Irish-resident company. PBI's trading income — which includes income from the commercialization of pharmaceutical products in non-Americas markets — is subject to the standard Irish corporate tax rate of 12.5% on trading income. In addition, PBI has claimed the benefits of Ireland's Knowledge Development box ("KDB") regime, which provides an effective tax rate of 6.25% on qualifying profits derived from qualifying intellectual property assets. PBI has claimed KDB benefits from FY 2016 forward, and the KDB claims are reflected in PBI's Irish tax returns for the relevant periods.
PHL's Luxembourg status is relevant to the cross-border dividend flows from PBI to PHL and from PHL (or, given PHL's disregarded-entity status for U.S. purposes, effectively PPC) onward. The following treaty instruments may be relevant:
• Luxembourg-Ireland tax treaty (and EU Parent-Subsidiary Directive): May provide for reduced or eliminated withholding tax on dividends paid by PBI (an Irish company) to PHL (a Luxembourg company). The EU Parent-Subsidiary Directive generally eliminates withholding tax on qualifying dividends between parent and subsidiary companies in EU Member States, subject to anti-avoidance provisions.
• U.S.-Ireland tax treaty: May be relevant to the extent that PBI's disregarded-entity treatment of PHL causes dividends from PBI to be treated as paid directly to PPC (a U.S. entity) for U.S. tax purposes, potentially raising questions about which treaty governs the withholding tax treatment from Ireland's perspective.
• U.S.-Luxembourg tax treaty: May be relevant to the treatment of any distributions or deemed distributions from PHL to PPC, although PHL's disregarded-entity status may limit the practical significance of this treaty for U.S. tax purposes.
Coordination with Thornbury & Keogh (lead partner Ciarán Thornbury, 22 Fitzwilliam Square, Dublin 2, D02 YH68, Ireland), PBI's Irish tax advisors, is ongoing regarding these cross-border aspects. Thornbury & Keogh has been engaged to advise PBI on Irish tax compliance, the KDB claims, and the Irish tax implications of any IRS transfer pricing adjustments that may affect PBI's reported income. It is important that the U.S. and Irish tax positions be coordinated to avoid inconsistencies and to ensure that PPC is in a position to claim appropriate foreign tax credits and to pursue any available relief under the U.S.-Ireland tax treaty's mutual agreement procedure, if necessary.
VII. Coordination with Other Work Streams
The analysis in this memorandum supports and is consistent with the broader defense strategy outlined in the Defense Strategy Memorandum dated July 12, 2022, prepared by Leonard Cross and Garrett Simmons. PHL's classification as a disregarded entity is a foundational fact that underlies several of the key legal and factual positions taken in the defense strategy.
This memorandum should be read in conjunction with the following key related deliverables, each of which addresses a discrete aspect of the IRS examination and defense:
Functional Analysis of PBI (October 2022) — This analysis documents PBI's substantive functions, assets, and risks in detail, demonstrating that PBI has genuine economic substance in Ireland. Key metrics include: 185 employees based in Ireland by the end of 2020; 42 board meetings held in Dublin during the 2017–2020 examination period; €47.2 million in cumulative regulatory spend during the examination period; independent pricing and commercialization decisions across 68 country markets; and approximately 18,000 square feet of office space at the Sandyford Business Park location. This functional analysis is critical to refuting any IRS contention that PBI lacks substance or that its functions should be attributed to PPC.
CSA Regulatory Analysis (August 5, 2022) — This memorandum analyzes PPC's and PBI's compliance with the CSA regulations under Treas. Reg. § 1.482-7, including the requirements for documentation, the arm's-length standard for cost-sharing payments, and the proper treatment of stock-based compensation costs.
Legacy IP License Analysis (July 2022) — This memorandum analyzes the 4.5% royalty arrangement between PPC (as licensor) and PBI (as licensee) for arm's-length compliance under IRC § 482 and the applicable regulations, including the comparable uncontrolled transaction (CUT) method and other transfer pricing methodologies.
IRC § 367(d) Analysis (September 28, 2022) — This memorandum addresses the outbound transfer of intangible property considerations arising from the establishment of the CSA and the contribution of pre-existing IP to the arrangement, including the interaction between § 367(d) and the cost-sharing regulations.
GILTI/BEAT Impact Analysis (October 2022) — This memorandum addresses the implications of the post-TCJA international tax provisions (GILTI under IRC § 951A and BEAT under IRC § 59A) for PPC's tax positions, including the interaction between any IRC § 482 adjustments and PPC's GILTI inclusions and foreign tax credit positions.
Economic Substance Analysis (August 18, 2022) — This memorandum analyzes the economic substance doctrine and the DEMPE framework as applied to PBI, demonstrating that PBI's functions, assets, and risks support the allocation of income to PBI under the transfer pricing framework. This analysis reinforces the conclusion that PHL — which has no economic substance — is appropriately treated as transparent and irrelevant to the substantive transfer pricing dispute.
Each of these work products has been prepared on the understanding that PHL is a disregarded entity and that the relevant controlled transactions are between PPC and PBI. Consistency on this foundational point across all work streams is essential.
VIII. Recommendations and Action Items
Based on the foregoing analysis, the following action items are recommended to ensure that PHL's entity classification is properly documented and that the defense team's presentation to the IRS is consistent and complete:
1. Confirm Form 8832 Election. Obtain from Crestfield & Associates LLP (Susan Lam, transfer pricing partner) a copy of the filed Form 8832 for PHL and confirm that the election remains in effect and has not been revoked or superseded. The original filed Form 8832, including the IRS acknowledgment or date-stamped copy, should be located and added to the defense file. If the Form 8832 was not included in the IDR No. 1 response, confirm whether the IRS has separately requested or obtained a copy of the election, and be prepared to produce it promptly upon request.
2. IDR Preparedness. Ensure that PHL's disregarded-entity status is clearly documented and explained in any IDR responses that reference the corporate structure. The IDR No. 1 response (dated July 8, 2022) included organizational charts reflecting the PPC-PHL-PBI-PMI ownership chain, with annotations indicating PHL's disregarded-entity status. Any future IDR responses or submissions should be consistent with this characterization. If the IRS examination team raises questions about PHL's status or role, the defense team should be prepared to provide a clear and concise explanation, supported by the Form 8832 and PHL's constitutional documents.
3. Consistent Characterization. Ensure that all Calderwood & Harkness LLP work product — including memoranda, draft IDR responses, presentations, and any submissions to the IRS or IRS Appeals — consistently treats PPC-PBI transactions as direct intercompany transactions, without suggesting any separate role for PHL in the transfer pricing chain. Any reference to PHL should clearly note its disregarded-entity status and its lack of independent economic activity. Inconsistent characterization across work product could undermine the defense team's credibility and create unnecessary confusion.
4. Informational Filing Review. Confirm with Crestfield & Associates LLP that all required informational returns have been timely filed for PHL and PBI for TY 2017–2020, including: (a) Form 8858 (Information Return of U.S. Persons With Respect to Foreign Disregarded Entities and Foreign Branches) for PHL; (b) Form 5471 (Information Return of U.S. Persons With Respect to Certain Foreign Corporations) for PBI; and (c) any other applicable informational returns, such as Form 8865 (if applicable) and FinCEN Form 114 (FBAR) reporting for any PHL Luxembourg bank accounts. Any late-filed or unfiled informational returns should be identified and addressed promptly, as penalties under IRC §§ 6038, 6038B, and 6679 could be asserted and could undermine PPC's compliance posture.
5. Luxembourg Tax Filings. While PHL's Luxembourg tax filings are not directly relevant to the U.S. examination, ensure that PHL's Luxembourg tax filings are consistent with its holding-company function and do not reflect any activities or income inconsistent with PHL's role as described in this memorandum. If PHL's Luxembourg tax returns claim the participation exemption on dividends from PBI, the basis for the exemption should be documented. Coordinate with Thornbury & Keogh or any Luxembourg tax advisors engaged by PPC to verify that PHL's Luxembourg filings are in order and consistent with the U.S. defense position.
IX. Conclusion
Based on the analysis set forth in this memorandum, the following conclusions are reached:
PHL is properly classified as a disregarded entity for U.S. federal income tax purposes based on PPC's timely filing of IRS Form 8832. As a Luxembourg Société à responsabilité limitée with a single member (PPC), PHL is an eligible entity under the check-the-box regulations set forth in Treas. Reg. §§ 301.7701-1 through 301.7701-3 and is not a per se corporation under Treas. Reg. § 301.7701-2(b)(8). While PHL's default classification (absent an election) would have been as an association taxable as a corporation — because PHL is a single-member foreign eligible entity whose sole member has limited liability — PPC's Form 8832 election overrides this default and classifies PHL as a disregarded entity effective from formation.
PHL's disregarded-entity status means that PHL is transparent for U.S. federal income tax purposes. PPC is treated as directly owning PBI, and all intercompany transactions — including the CSA cost-sharing arrangement, the legacy IP royalty (4.5% rate), and the PCT ($312 million) — are properly analyzed as direct transactions between PPC and PBI under IRC § 482. PHL's legal interposition in the ownership chain does not create any additional controlled transactions, tested parties, or transfer pricing issues.
PHL performs no DEMPE functions with respect to the pharmaceutical IP at issue in the examination. PHL has no employees, no independent revenue-generating activities, and no operational presence beyond its Luxembourg corporate registration. PHL does not participate in the CSA, the legacy IP license, or the PCT. PHL's sole function is to serve as a legal holding company for PBI — a function that, while commercially reasonable and consistent with standard multinational pharmaceutical structures, does not create any substantive U.S. tax consequences given PHL's disregarded-entity classification.
PHL's existence as an intermediate holding company does not create additional transfer pricing exposure and does not alter the substantive analysis of the IRS's proposed adjustments totaling $380.4 million across TY 2017–2020. The defense team should continue to treat PHL as transparent in all communications with the IRS and in all work product, and should ensure that all informational reporting and documentation requirements relating to PHL are satisfied.
Classification: PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT
This memorandum has been prepared by counsel in connection with the provision of legal advice and in anticipation of litigation. It is protected by the attorney-client privilege and the work product doctrine. It should not be disclosed to any third party without the prior written consent of Calderwood & Harkness LLP and PPC.
Matter Number: 1018-00009
Prepared by: Leila Nazari, Working Associate Tax Department Calderwood & Harkness LLP 1735 Market Street, Suite 3100 Philadelphia, PA 19103
Adjustment Category | Amount
CSA cost-sharing adjustments | $235.01 million
Legacy IP royalty adjustments | $188.04 million
Correlative offset | ($42.65 million)
Total proposed adjustments | $380.4 million

PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT

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