PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT / ATTORNEY-CLIENT COMMUNICATION
CALDERWOOD & HARKNESS LLP Counselors at Law 599 Lexington Avenue, 38th Floor New York, NY 10022 Telephone: (212) 558-4000 Facsimile: (212) 558-3588 www.calderwoodharkness.com
July 8, 2025
Via Email and International Courier
Dr. Tobias Kettner, Partner, Tax Friederike Lang, Associate, Tax Kettner Pflüger Rechtsanwälte Bockenheimer Landstraße 72 60323 Frankfurt am Main Germany
Re: Halcyon Semiconductor AG / Halcyon Semiconductor Inc. — Bilateral Advance Pricing Agreement: Coordination of German Application to Bundeszentralamt für Steuern
C&H Matter Number: 1032-00006
Dear Dr. Kettner and Ms. Lang:
I. Opening and Purpose of Letter
I am writing on behalf of the Calderwood & Harkness LLP ("C&H") engagement team in connection with the above-referenced bilateral Advance Pricing Agreement ("APA") matter. Our engagement team is led by Leonard Cross (Responsible Partner) and Sylvia Hartwell (Billing Partner), and I serve as the Lead Associate and primary day-to-day point of contact for this coordination. My colleague Robert Jansen, Associate in our Tax practice, also supports the engagement on an ongoing basis.
The purpose of this letter is twofold. First, I am transmitting herewith the complete United States APA application package that was formally filed with the Internal Revenue Service ("IRS") Advance Pricing and Mutual Agreement Program ("APMA"), Large Business & International Division, on July 7, 2025. Second, and of equal importance, this letter is intended to facilitate and coordinate the preparation and filing of the parallel German APA application to the Bundeszentralamt für Steuern ("BZSt") in Bonn, Germany, with a target submission date of August 15, 2025.
As you are aware, our respective clients are Halcyon Semiconductor AG ("HSAG"), an Aktiengesellschaft organized under the laws of the Federal Republic of Germany with its registered office at Halcyon-Allee 12, 01099 Dresden, Saxony, Germany, and Halcyon Semiconductor Inc. ("HSI"), a corporation organized under the laws of the State of Delaware with its principal office at 8700 Parmer Lane, Building 4, Austin, Texas 78729, United States. HSAG is the ultimate parent entity of the Halcyon group, and HSI is a wholly-owned direct subsidiary of HSAG.
This letter builds upon the close and productive coordination that C&H and Kettner Pflüger Rechtsanwälte ("Kettner Pflüger") have maintained as, respectively, US tax counsel and German tax counsel to the Halcyon group in this bilateral APA matter. We appreciate the collaborative approach your team has taken throughout the pre-filing and application preparation process, and we look forward to continuing that collaboration through the German application filing and the subsequent competent authority negotiation phase.
Please note that Dr. Erwin Fassbinder (SVP, Group Tax, HSAG) and Priya Raghavan (VP, Tax, HSI) have been copied on this letter in their capacities as the day-to-day client leads for the APA engagement. Both Dr. Fassbinder and Ms. Raghavan are familiar with the contents of this letter and the enclosed materials and have authorized its transmission to your firm.
II. Summary of US APA Application Filed with IRS APMA
A. Filing Details
The formal US APA application was filed on July 7, 2025 with the IRS APMA program, which is situated within the IRS Large Business & International ("LB&I") Division. The application was submitted in the form prescribed by Revenue Procedure 2015-41, 2015-35 I.R.B. 263, which governs the APA program and sets forth the requirements for APA requests, including bilateral and multilateral APAs.
The application package consists of a completed IRS Form 14661 (Advance Pricing Agreement Request) together with a comprehensive supporting narrative and documentary appendices, the contents of which are described in greater detail in Section V of this letter. The full package was submitted in hard copy (three bound copies and one unbound copy) to the APMA office at the IRS LB&I Division, and an electronic copy on encrypted media was included per APMA's current submission guidelines.
A user fee of $113,500 was submitted concurrently with the application. This amount corresponds to the large-case rate applicable to APA requests as of 2025, as set forth in the applicable IRS fee schedule. Payment was made by wire transfer from HSI's operating account at Ridgeline National Bank, Austin, Texas, to the IRS designated depository.
In addition, an executed IRS Form 2848 (Power of Attorney and Declaration of Representative) was filed authorizing the following individuals of Calderwood & Harkness LLP to represent Halcyon Semiconductor Inc. (EIN 84-2917630) before the IRS in connection with transfer pricing matters arising under Section 482 of the Internal Revenue Code for taxable years 2022 through 2029:
• Leonard Cross, Partner, Tax
• Sylvia Hartwell, Partner, Tax
• Leila Nazari, Senior Associate, Tax
A copy of the executed Form 2848 is included among the enclosures to this letter.
B. Co-Applicants Identified
The US APA application identifies the following co-applicants and associated identifying information:
Halcyon Semiconductor AG ("HSAG")
• Steuernummer: 203/118/04527
• USt-IdNr. (VAT Identification Number): DE 814 723 956
• ISIN: DE000HSA0017
• WKN: HSA001
• Stock Exchange Listing: Frankfurt Stock Exchange (XETRA), Prime Standard
• Registered Office: Halcyon-Allee 12, 01099 Dresden, Saxony, Germany
Halcyon Semiconductor Inc. ("HSI")
• EIN (Employer Identification Number): 84-2917630
• Delaware File Number: 7341825
• Registered Agent: c/o Capitol Registered Agents LLC, 1209 Orange Street, Wilmington, DE 19801
• Principal Office: 8700 Parmer Lane, Building 4, Austin, TX 78729
C. APA Type and Treaty Basis
The application requests a bilateral APA between the IRS, acting as the competent authority for the United States, and the BZSt, acting as the competent authority for the Federal Republic of Germany. The bilateral APA process will be conducted pursuant to Article 25 (Mutual Agreement Procedure) of the Convention between the United States of America and the Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital and to Certain Other Taxes, signed on June 29, 2006 (the "US-Germany Treaty" or the "Treaty").
The substantive arm's-length standard governing the transfer pricing of the covered intercompany transactions is set forth in Article 9 (Associated Enterprises) of the Treaty, which provides the treaty-level basis for adjusting the conditions of transactions between associated enterprises to conform with those that would have been agreed upon by independent enterprises dealing at arm's length.
D. Proposed APA Term and Rollback
The US APA application proposes the following covered period:
• Prospective APA Term: Five (5) taxable years, from January 1, 2025 through December 31, 2029.
• Rollback Request: Three (3) prior taxable years, from January 1, 2022 through December 31, 2024.
• Total Covered Period (if Rollback Granted): Eight (8) taxable years, from January 1, 2022 through December 31, 2029.
Both HSAG and HSI maintain a fiscal year ending on December 31. Accordingly, each taxable year covered by the proposed APA term corresponds to a calendar year. The rollback request is made pursuant to Section 11.04 of Revenue Procedure 2015-41, and the application includes the required representations regarding the consistency of facts, circumstances, and transfer pricing methodology during the rollback period with those applicable to the prospective APA term.
E. Pre-Filing Conference Background
Prior to filing the formal application, C&H undertook the pre-filing process established under Section 4 of Revenue Procedure 2015-41 as follows:
• Anonymous Pre-Filing Memorandum: An anonymous pre-filing memorandum was submitted to IRS APMA on April 14, 2025. The memorandum described the taxpayer's industry, organizational structure, covered transactions, and proposed transfer pricing methodology on an anonymized basis.
• Pre-Filing Conference: A pre-filing conference was held on May 19, 2025 at the APMA offices in Washington, D.C. The conference was attended by Leonard Cross and Leila Nazari on behalf of C&H, and by APMA team leader Margaret Cheng and economist David Kowalski on behalf of the IRS.
During the pre-filing conference, the IRS indicated general receptivity to the bilateral APA approach and the proposed methodologies. The IRS raised two substantive areas requiring additional elaboration in the formal application: (i) the availability and comparability of uncontrolled license agreements for the royalty transaction, particularly with respect to the CUT method analysis; and (ii) the valuation methodology and supporting assumptions for the platform contribution transaction ("PCT") buy-in payment under the cost sharing arrangement. Both of these areas have been addressed in detail in the formal application narrative and the supporting economic analysis appendices.
We note that the pre-filing conference summary memorandum, prepared by C&H, is included among the enclosures to this letter.
III. Covered Transactions — Summary
The bilateral APA covers three categories of intercompany transactions between HSAG and HSI. Below is a summary of each covered transaction, including the nature of the transaction, the governing intercompany agreement, and the relevant financial data for the most recent fiscal year (FY 2024).
A. Tangible Goods (Wafer/Die Sales) — HSAG to HSI
HSAG is a leading semiconductor manufacturer specializing in advanced logic and mixed-signal process technologies. HSAG manufactures semiconductor wafers and singulated die at the following fabrication facilities in Germany:
• Fab 1 & Fab 2: Industriepark Klotzsche, Zur Wetterwarte 50, 01109 Dresden, Saxony, Germany (primary facilities for advanced node production, including 7nm and 5nm process nodes)
• Fab 3: Technologiepark Chemnitz, Annaberger Straße 240, 09125 Chemnitz, Saxony, Germany (trailing-edge and specialty process nodes, including analog/mixed-signal and power management ICs)
These wafers and die are sold on an intercompany basis to HSI under the Master Intercompany Supply Agreement ("MISA"), which became effective on January 1, 2019 and was amended on July 1, 2022 to, among other things, update the pricing mechanism and incorporate revised delivery and quality terms. The MISA governs the pricing, delivery, quality assurance, warranty, and risk allocation terms applicable to the intercompany sale of tangible goods from HSAG to HSI.
Upon receipt from HSAG, HSI performs certain value-added activities in the United States, including final testing, packaging (where applicable), quality inspection, and distribution. HSI resells finished and packaged semiconductor products to unrelated third-party customers in the United States, including original equipment manufacturers ("OEMs"), electronic component distributors, and hyperscale data center operators.
For the fiscal year ended December 31, 2024, the aggregate intercompany value of tangible goods transferred from HSAG to HSI was €987,600,000, which was approximately $1,076,000,000 at the average 2024 EUR/USD exchange rate of 1.0896.
B. Royalties (IP License) — HSI to HSAG
In addition to the tangible goods transaction, HSI pays HSAG a running royalty for the right to use HSAG's proprietary semiconductor process technology, design libraries, electronic design automation ("EDA") tools and methodologies, and related intangible property. The royalty compensates HSAG for its development and ownership of valuable manufacturing intangibles, including process recipes, lithography techniques, transistor architecture designs, and proprietary testing and yield optimization methodologies.
The intercompany license is governed by the IP License Agreement ("IPLA"), which became effective on January 1, 2019. The IPLA grants HSI a non-exclusive, non-transferable license to use the licensed intangible property solely in connection with HSI's marketing, distribution, and sale of HSAG-manufactured semiconductor products in the North American market.
The royalty rate is set at 6.0% of HSI's net United States revenues attributable to products incorporating the licensed intangible property. For the fiscal year ended December 31, 2024, HSI's royalty payments to HSAG totaled €68,400,000, which was approximately $70,500,000 using the payment-date weighted average EUR/USD exchange rate of 1.0307.
C. Cost-Sharing Contributions (R&D CSA) — HSI to HSAG
HSAG and HSI are parties to a Qualified Cost Sharing Arrangement ("CSA") for next-generation semiconductor process research and development, with a particular focus on 2nm and sub-2nm process technology nodes. The CSA became effective on July 15, 2018 and was entered into in accordance with the requirements of Treasury Regulations Section 1.482-7.
Under the CSA, HSI's cost-sharing percentage is 22.5%, which reflects HSI's anticipated benefit share derived from the exploitation of intangible property developed under the CSA in the North American market. This percentage is subject to review and adjustment on a triennial basis in accordance with the CSA's terms.
For the fiscal year ended December 31, 2024, total qualified R&D costs incurred under the CSA were €998,200,000. HSI's 22.5% share amounted to €224,600,000, which was approximately $231,300,000 at the applicable exchange rates.
In connection with the inception of the CSA on July 15, 2018, HSI made a platform contribution transaction ("PCT") buy-in payment of $312,500,000 to HSAG. The PCT payment was determined using the income method, applying a discount rate of 11.8% over a 15-year projection period. The PCT valuation was prepared by Stonebridge Valuation Partners LLC (Marcus Reinhardt, Managing Director; 200 Park Avenue, Suite 1510, New York, NY 10166) and is documented in the CSA Documentation Addendum enclosed with this letter.
D. Aggregate Annual Intercompany Flows (FY 2024)
The aggregate intercompany flows between HSAG and HSI for fiscal year 2024 are summarized as follows:
As the table illustrates, the total annual intercompany flows between the two co-applicants are approximately €1.28 billion (approximately $1.38 billion), underscoring the materiality and economic significance of the covered transactions and the importance of achieving certainty through the bilateral APA process.
IV. Proposed Transfer Pricing Methods — Alignment Between US and German Applications
This section summarizes the transfer pricing methods proposed in the US APA application for each category of covered transaction. A central objective of this letter is to ensure that the German application to the BZSt presents methodologies that are fully consistent with those set forth in the US application, while using the terminology and regulatory references appropriate under German and OECD transfer pricing frameworks.
A. Tangible Goods — Transactional Net Margin Method (TNMM) / Comparable Profits Method (CPM)
For the tangible goods (wafer/die sales) transaction, the proposed transfer pricing method is the Comparable Profits Method ("CPM") under US Treasury Regulations Section 1.482-5, which is functionally equivalent to the Transactional Net Margin Method ("TNMM") under Chapter II of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (2022 edition) (the "OECD Guidelines").
Tested Party: HSI has been selected as the tested party on the basis that it is the least complex entity and functions as a limited-risk distributor within the Halcyon group's value chain. HSI does not own significant unique intangible property (other than its rights under the CSA), does not bear significant entrepreneurial risk with respect to product development or manufacturing, and performs routine distribution, marketing support, and customer service functions in the North American market.
Profit Level Indicator: The profit level indicator ("PLI") selected is the operating margin on net resales (i.e., operating income divided by net third-party revenue), which is the most reliable measure of HSI's arm's-length profitability given its functional profile and the nature of its activities.
Benchmarking Study: The benchmarking study was prepared by Meridian Economics GmbH (Dr. Annika Breitner, Managing Director, and Maximilian Voss, Senior Analyst; Leopoldstraße 145, 80804 Munich, Germany). The study identified 17 comparable North American semiconductor distributors using a systematic screening methodology applied to publicly available financial data for the five-year period from fiscal years 2020 through 2024. The five-year weighted average was employed to smooth cyclical fluctuations inherent in the semiconductor industry.
The results of the benchmarking study are as follows:
• Interquartile Range ("IQR") of Operating Margins: 2.8% – 6.1%
• Median Operating Margin: 4.4%
• HSI's FY 2024 Operating Margin: 4.80%
HSI's reported operating margin of 4.80% falls within the interquartile range and is slightly above the median, confirming that the intercompany pricing of tangible goods under the MISA yields arm's-length results.
Terminological Note for the German Application: We respectfully request that Kettner Pflüger present this method as the TNMM in the German application, consistent with the OECD Guidelines (Chapter II, Paragraphs 2.64–2.113). The substantive analysis is identical; however, the TNMM designation is the standard terminology employed by the BZSt and the German tax authorities, and its use will facilitate clarity during the competent authority process. For purposes of the German regulatory framework, the relevant legal bases are § 1 of the Außensteuergesetz ("AStG") and the Gewinnabgrenzungsaufzeichnungsverordnung ("GAufzV").
B. Royalties — Comparable Uncontrolled Transaction (CUT) Method
For the royalty (IP license) transaction, the proposed transfer pricing method is the Comparable Uncontrolled Transaction ("CUT") Method under US Treasury Regulations Section 1.482-4, which corresponds to the CUP method as applied to intangible property transactions under the OECD Guidelines (Chapter VI).
Tested Party: HSAG, in its capacity as the licensor of semiconductor process technology and related intangibles.
Comparable License Agreements: The benchmarking analysis identified eight comparable uncontrolled license agreements involving semiconductor intellectual property. These comparables were sourced from the Clearpoint Royalty Database and publicly available filings with the US Securities and Exchange Commission ("SEC"), including Forms 10-K, 10-Q, and 8-K. Each comparable was evaluated for comparability based on the nature of the licensed technology, the scope and geographic limitations of the license grant, the industry context, and the contractual terms (including exclusivity, sublicensing rights, and duration).
The results of the CUT analysis are as follows:
• Interquartile Range ("IQR") of Royalty Rates: 3.5% – 8.2%
• Median Royalty Rate: 5.6%
• HSAG's Royalty Rate (per IPLA): 6.0% of HSI's net US revenues attributable to licensed IP
HSAG's 6.0% royalty rate falls within the interquartile range and is above the median, reflecting the high value of HSAG's proprietary process technology relative to the comparable license agreements in the data set. As a corroborative measure, a residual profit split analysis was also performed, the results of which are consistent with the CUT method findings. The residual profit split corroboration is documented in the Economic Analysis Appendix enclosed with this letter.
German Regulatory References: For purposes of the German application, the relevant legal bases are § 1 AStG and the OECD Guidelines, Chapter VI (Special Considerations for Intangibles). We request that Kettner Pflüger present the CUT method using OECD-consistent terminology and cross-reference the applicable provisions of the OECD Guidelines as well as the German administrative guidance.
C. Cost Sharing — Income Method (Anticipated Benefit Shares) per Treas. Reg. § 1.482-7
For the CSA cost-sharing contributions and the PCT buy-in payment, the proposed methodology follows the income method prescribed by Treasury Regulations Section 1.482-7 for determining the participants' shares of reasonably anticipated benefits from the CSA activities.
HSI's anticipated benefit share of 22.5% is derived from a projection of the relative economic benefits that HSI is expected to obtain from the exploitation of intangible property developed under the CSA in the North American market. The anticipated benefit shares are reviewed and adjusted on a triennial basis, as provided in the CSA terms, to account for changes in the participants' projected exploitation activities and market conditions.
The PCT buy-in payment of $312,500,000, made at the CSA's inception on July 15, 2018, was valued using the income method with a discount rate of 11.8% and a 15-year projection period, as documented in the Stonebridge Valuation Partners LLC report included in the CSA Documentation Addendum.
Terminological Note for the German Application: We recognize that the US CSA regulations under Treasury Regulations Section 1.482-7 employ terminology and analytical frameworks that differ in certain respects from the OECD's guidance on Cost Contribution Arrangements ("CCAs") set forth in Chapter VIII of the OECD Guidelines. We respectfully request that Kettner Pflüger frame the German application in a manner that is consistent with both the US CSA regulatory framework and the OECD CCA guidance, to the extent practicable, so as to minimize potential areas of disagreement during the competent authority negotiations. The CSA Documentation Addendum enclosed with this letter provides a detailed reconciliation of the US and OECD terminology and analytical approaches.
D. Request for Kettner Pflüger's Confirmation of Methodological Alignment
We respectfully request that Kettner Pflüger confirm, at the earliest practicable date, that the proposed transfer pricing methods described above — namely, the TNMM (for tangible goods), the CUT method (for royalties), and the income method (for cost-sharing contributions and PCT valuation) — are acceptable and appropriate under the applicable German transfer pricing rules, including § 1 AStG, §§ 90(3) of the Abgabenordnung ("AO"), and the GAufzV.
In the event that Kettner Pflüger identifies any divergence between US and German regulatory expectations regarding the proposed methodologies, or if the German regulatory framework would require modifications, alternative presentations, or additional analyses not included in the US application, we request prompt notification so that the C&H and Kettner Pflüger teams can confer and align before the August 15, 2025 German filing deadline. It is of paramount importance that the US and German applications present a unified and consistent transfer pricing position to the respective competent authorities, and any material inconsistency between the two filings could complicate and delay the bilateral negotiation process.
V. Financial Data and Documentation Enclosed
A. List of Enclosures (Physical and Electronic)
The following documents are enclosed with this letter, both in physical form (via international courier) and in electronic form (via encrypted file transfer to the secure portal previously established between our firms):
1. Complete copy of the IRS Form 14661 (Advance Pricing Agreement Request) and supporting narrative, including all exhibits and schedules thereto.
2. Economic Analysis Appendix, comprising the benchmarking studies for the tangible goods transaction (CPM/TNMM analysis with 17 comparable North American semiconductor distributors) and the royalty transaction (CUT analysis with 8 comparable uncontrolled license agreements), as prepared by Meridian Economics GmbH.
3. Legal Analysis Memorandum, addressing the applicable legal framework under Internal Revenue Code Section 482, Treasury Regulations Sections 1.482-1 through 1.482-9, the OECD Transfer Pricing Guidelines (2022 edition), and Articles 9 and 25 of the US-Germany Treaty.
4. Financial Data Appendix (Microsoft Excel workbook), containing segmented financial data for HSI and HSAG, intercompany transaction schedules, and reconciliations to audited financial statements for the five-year period from FY 2020 through FY 2024.
5. CSA Documentation Addendum, including the PCT valuation summary prepared by Stonebridge Valuation Partners LLC (Marcus Reinhardt, Managing Director), the CSA agreement (as amended), and supporting financial projections and discount rate analyses.
6. Functional Analysis Memoranda for HSI and HSAG, describing the functions performed, assets employed, and risks assumed by each entity in connection with the covered intercompany transactions.
7. Industry Analysis Memorandum, providing an overview of the global semiconductor industry, market structure, competitive dynamics, and relevant economic conditions during the proposed APA term and rollback period.
8. Copy of the anonymous pre-filing memorandum submitted to IRS APMA on April 14, 2025, together with C&H's summary memorandum of the pre-filing conference held on May 19, 2025.
9. Executed IRS Form 2848 (Power of Attorney and Declaration of Representative).
All electronic files have been uploaded to the Calderwood & Harkness / Kettner Pflüger shared secure portal under folder designation "HSAG-APA-2025-Filing." Access credentials for the portal remain unchanged from those previously communicated.
B. Key HSI Financial Data (FY 2024, USD)
The following table summarizes the key financial data for HSI for the fiscal year ended December 31, 2024, as reported in the US APA application:
These figures are derived from HSI's audited financial statements and have been reconciled to the segmented intercompany transaction data included in the Financial Data Appendix (Enclosure No. 4).
C. Key HSAG Consolidated Financial Data (FY 2024, EUR)
The following table summarizes selected consolidated financial data for HSAG for the fiscal year ended December 31, 2024:
HSAG's consolidated financial data reflects the company's position as a significant participant in the global semiconductor manufacturing industry, with substantial R&D investment and a predominantly Germany-based workforce.
D. Audited Financial Statements
All financial data set forth in the US APA application and the enclosed appendices has been reconciled to the audited financial statements of HSAG and HSI, as audited by Gresham Whitfield LLP. The relevant audit engagements are led by:
• Simon Cardwell — Group Audit Partner, Gresham Whitfield LLP, London
• Janet Okonkwo — US Engagement Audit Partner, Gresham Whitfield LLP, Houston
HSAG's consolidated financial statements are prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union. HSI's standalone financial statements are prepared in accordance with US Generally Accepted Accounting Principles ("US GAAP"). The Financial Data Appendix includes reconciliation schedules addressing material differences between the two reporting frameworks, where applicable.
We request that Kettner Pflüger advise whether the BZSt will require German-language audited financial statements to be submitted with the German APA application, or whether English-language originals accompanied by German-language executive summaries will be sufficient. If German-language translations are required, we should coordinate promptly on the scope and timeline for the translation effort.
VI. German APA Application — Coordination Items
A. Target Submission Date: August 15, 2025
As discussed among the teams, the target date for filing the German APA application with the BZSt is August 15, 2025. This timeline provides approximately five weeks from the date of this letter for the preparation, review, and finalization of the German application.
We respectfully request that Kettner Pflüger confirm that this target submission date remains achievable from your team's perspective, taking into account any competing workload or resource constraints. If there are any circumstances that may jeopardize the August 15, 2025 deadline, we ask that you notify us immediately so that we can jointly assess options, including the possibility of requesting an extension from the BZSt or adjusting the coordination timeline.
To ensure consistency between the US and German applications, we further request that Kettner Pflüger provide a draft of the German application narrative to C&H for review by August 1, 2025. This will allow our team approximately two weeks to review the draft for substantive consistency with the US filing, to identify any areas requiring alignment or further discussion, and to provide consolidated comments before the German filing date.
B. German Regulatory Framework
It is our understanding, based on our prior discussions, that the German APA application will be filed under the following regulatory framework:
• § 1 Außensteuergesetz ("AStG"): The principal German statutory provision governing arm's-length pricing of cross-border intercompany transactions.
• §§ 90(3) and 162(3)–(4) Abgabenordnung ("AO"): The provisions addressing the taxpayer's documentation obligations and the consequences of inadequate transfer pricing documentation, including the potential for estimated assessments.
• Gewinnabgrenzungsaufzeichnungsverordnung ("GAufzV"): The ordinance specifying the content and scope of contemporaneous transfer pricing documentation required under German law.
• Article 25 of the US-Germany Treaty: The mutual agreement procedure provision that serves as the treaty-level legal basis for the bilateral APA and the competent authority negotiations between the IRS and the BZSt.
We request that Kettner Pflüger confirm whether the BZSt requires any additional application form or filing fee beyond what has been discussed in our prior coordination calls. To our knowledge, the BZSt does not currently impose a filing fee for APA applications comparable to the IRS user fee; however, we wish to ensure that no procedural requirement has been overlooked.
C. Contemporaneous TP Documentation (Master File and Local File)
In parallel with the APA application process, C&H is preparing the contemporaneous transfer pricing documentation for the Halcyon group in accordance with the OECD BEPS Action 13 three-tiered documentation framework:
• Master File: C&H is preparing the OECD BEPS Action 13 Master File for the Halcyon group, covering the group's organizational structure, description of business operations, intangible property, intercompany financial activities, and consolidated financial and tax positions.
• US Local Files (HSI): C&H is preparing US Local Files for HSI for fiscal years 2022, 2023, and 2024, documenting the transfer pricing of HSI's intercompany transactions with HSAG.
• Deadline: The deadline for completion of the FY 2024 documentation is September 30, 2025.
We request that Kettner Pflüger confirm the following:
(a) The German Local File requirements applicable to HSAG, including the scope, content, and statutory deadlines under §§ 90(3) AO and the GAufzV;
(b) Whether the HSAG-side German Local File is being prepared separately under Kettner Pflüger's supervision for submission to the German tax authorities, and if so, the anticipated timeline for completion; and
(c) Whether any coordination is needed between the C&H-prepared Master File and the Kettner Pflüger-prepared German Local File to ensure consistency.
For your reference, the Halcyon group includes two affiliated entities outside the scope of the bilateral APA: Halcyon Semiconductor Japan K.K., located in Tokyo, Japan, and Halcyon Semiconductor (Shanghai) Co., Ltd., located in Shanghai, China. These entities are referenced in the Master File to the extent their operations relate to the group's overall value chain and organizational structure, but their intercompany transactions with HSAG and HSI are not covered by the bilateral APA and are being addressed through separate transfer pricing documentation processes.
D. Competent Authority Process Logistics
Once both the US and German APA applications have been filed, the IRS APMA and the BZSt will engage in competent authority negotiations under Article 25 of the US-Germany Treaty. These negotiations will involve the exchange of the respective APA applications (or relevant portions thereof) between the two competent authorities, followed by rounds of discussion, information exchange, and negotiation aimed at reaching a mutual agreement on the arm's-length terms and conditions for the covered intercompany transactions.
Calderwood & Harkness LLP will serve as primary counsel for HSI throughout the competent authority negotiation phase and will coordinate with Kettner Pflüger on any joint submissions, responses to competent authority inquiries, or other communications requiring input from both the US and German sides of the engagement.
We request that Kettner Pflüger designate a point of contact for ongoing communications during the competent authority negotiation phase. We assume that Dr. Tobias Kettner and Friederike Lang will continue in their current roles as the lead partner and associate, respectively, on this matter, but we would appreciate formal confirmation. In addition, please advise whether any other members of the Kettner Pflüger team will be involved in the negotiation phase so that we may update our contact list accordingly.
E. Intercompany Agreement Amendments
As part of the APA process, C&H is preparing draft amended and restated versions of the following intercompany agreements to incorporate APA-consistent pricing mechanisms and year-end true-up provisions:
• Master Intercompany Supply Agreement (MISA): The amended MISA will incorporate a transfer pricing adjustment mechanism designed to ensure that HSI's operating margin on intercompany purchases falls within the arm's-length range established by the APA, with a year-end true-up provision allowing for adjustments to intercompany pricing if actual results deviate from the target range.
• IP License Agreement (IPLA): The amended IPLA will incorporate provisions specifying the royalty rate and calculation methodology consistent with the APA terms, along with any related adjustments.
These drafts will be shared with Kettner Pflüger for German-law review once the APA terms are substantially agreed between the competent authorities. It is important that the amended intercompany agreements comply with both US and German legal requirements, including any formalities required under German corporate or tax law.
In addition, the Cost Sharing Arrangement (effective July 15, 2018) may require conforming amendments to reflect any changes to the cost-sharing percentages, PCT valuation methodology, or other CSA terms agreed upon during the APA negotiations. C&H will circulate any proposed amendments to the CSA for Kettner Pflüger's review as they are developed.
VII. Engagement Team Contacts and Communication Protocol
A. Calderwood & Harkness LLP Engagement Team
The C&H engagement team for this matter consists of the following individuals:
All day-to-day coordination and substantive communications should be directed to Leila Nazari in the first instance. Leonard Cross and Sylvia Hartwell are available for partner-level discussions and strategic consultations as needed.
B. Client Contacts
The day-to-day client contacts for the APA engagement are as follows:
Dr. Fassbinder and Ms. Raghavan are authorized to provide instructions and approvals on behalf of HSAG and HSI, respectively, on matters within the scope of the APA engagement. Communications with Margarethe Stein (CFO) should be limited to financial data matters and budgetary oversight. Communications with Dr. Klaus-Dieter Wehrheim (CEO) should be reserved for escalation situations only and should be coordinated through Dr. Fassbinder.
C. Meridian Economics GmbH
As noted above, the economic analysis and benchmarking studies for this APA were prepared by Meridian Economics GmbH. The key contacts at Meridian Economics are:
• Dr. Annika Breitner, Managing Director
• Maximilian Voss, Senior Analyst
Dr. Breitner and Mr. Voss are available for direct coordination with Kettner Pflüger on benchmarking and economic analysis questions, including questions relating to the adaptation of the benchmarking studies for the German application. However, any such direct coordination should be subject to C&H's prior approval. Please direct requests to engage with Meridian Economics through Leila Nazari.
D. Communication Protocol
To ensure the integrity of the privileged nature of our communications and the consistency of the APA strategy across the US and German workstreams, we propose the following communication protocol:
1. Routing of Substantive Communications: All substantive communications regarding APA strategy, application content, competent authority responses, and negotiation positions shall be routed through Leila Nazari (C&H) and the designated Kettner Pflüger contact (presumed to be Dr. Tobias Kettner and/or Friederike Lang, pending confirmation).
2. Privilege Markings: All privileged communications shall be marked as "Privileged and Confidential — Attorney Work Product / Attorney-Client Communication" or the equivalent German-language designation, as appropriate.
3. Restrictions on Third-Party Sharing: No substantive APA strategy materials, application drafts, economic analyses, or legal memoranda shall be shared with third parties — including, without limitation, Gresham Whitfield LLP (auditors), Ridgeline National Bank (HSI's primary banking relationship), or any other non-counsel party — without prior written authorization from both C&H and Kettner Pflüger. This restriction is intended to preserve the privileged and work-product character of these materials.
4. Secure Communications: All electronic transmissions of APA-related materials shall utilize the encrypted secure portal previously established between our firms, or alternatively, encrypted email with AES-256 encryption or higher. Unencrypted transmission of substantive APA materials is strictly prohibited.
VIII. Requested Action Items for Kettner Pflüger
To facilitate timely preparation and filing of the German APA application, and to ensure alignment with the US application, we respectfully request that Kettner Pflüger address the following action items:
1. Confirm Receipt of Enclosures — By July 15, 2025: Please confirm receipt of the enclosed US APA application package and all nine enclosures listed in Section V.A above, including both the physical courier package and the electronic files uploaded to the secure portal.
2. Confirm German Filing Deadline — At your earliest convenience: Please confirm that August 15, 2025 remains achievable as the German APA application submission date to the BZSt. If any circumstance may jeopardize this target, please advise immediately.
3. Provide Draft German Application Narrative — By August 1, 2025: Please provide a draft of the German APA application narrative to C&H for consistency review. The draft should include the proposed covered transactions description, transfer pricing methodology presentation, and any BZSt-specific disclosures or representations.
4. Confirm Methodological Alignment: Please confirm that the proposed transfer pricing methods — TNMM (for tangible goods), CUT (for royalties), and income method for CSA anticipated benefit shares — are acceptable and appropriate under German transfer pricing rules (§ 1 AStG, §§ 90(3) AO, GAufzV) and that no alternative or additional methods will be proposed in the German application that would create inconsistency with the US filing.
5. Advise on BZSt-Specific Filing Requirements: Please advise on any BZSt-specific filing requirements, fees, forms, or procedural steps that have not yet been addressed in our prior discussions, including any requirements specific to bilateral APA applications involving US competent authority counterparts.
6. Confirm German Local File Status: Please confirm the status of the HSAG-side German Local File for FY 2024 and the rollback years (FY 2022 and FY 2023), including the anticipated completion timeline and any coordination needed with C&H's Master File preparation.
7. Confirm Translation Requirements: Please advise whether the BZSt requires German-language translations of the financial appendices, benchmarking studies, and other supporting documentation, or whether English-language originals with German-language summaries will be sufficient.
8. Designate Point of Contact for Competent Authority Phase: Please formally designate the Kettner Pflüger point(s) of contact who will serve as the primary interlocutors during the competent authority negotiation phase following the filing of both applications.
We would be grateful to receive responses to these action items in accordance with the indicated deadlines. If any of the requested deadlines present difficulties, please let us know so that we can discuss alternative arrangements.
IX. Budget and Fee Matters
For informational purposes, we set forth below a summary of the budget and fee arrangements applicable to this engagement, to the extent relevant to the coordination between our firms.
Calderwood & Harkness LLP Engagement Fees: As set forth in the engagement letter between C&H and HSI dated February 10, 2025, C&H's total engagement fee cap for this matter is $2,825,000, structured as follows:
• Phase 1 — APA Application and Contemporaneous Documentation: $1,850,000 (covering the preparation, filing, and defense of the US APA application and the preparation of contemporaneous transfer pricing documentation, including Master File and US Local Files)
• Phase 2 — APA Negotiation Support: $975,000 (covering ongoing representation during the competent authority negotiation phase, including responses to IRS APMA inquiries, joint submissions, and negotiation strategy support through final APA execution)
Meridian Economics GmbH: The economic analysis and benchmarking work by Meridian Economics GmbH has been subcontracted through C&H at a fixed fee of €485,000, which is included within the Phase 1 fee cap described above.
Kettner Pflüger Rechtsanwälte: We understand that Kettner Pflüger's estimated fees of €320,000 for German documentation preparation and BZSt coordination are engaged directly by HSAG pursuant to a separate engagement letter between Kettner Pflüger and HSAG, and that these fees fall outside C&H's billing scope. We reference these fees here solely for informational and coordination purposes, and we do not intend to assume any responsibility for or oversight of Kettner Pflüger's billing arrangements with HSAG.
C&H Billing Code: The C&H billing code for this matter is HSAG-TP-2025. Please reference this code in any correspondence or invoices directed to C&H in connection with this engagement.
X. Closing