CONFIDENTIAL TREATMENT REQUESTED — RETURN INFORMATION SUBJECT TO IRC § 6103
APPLICATION FOR ADVANCE PRICING AGREEMENT PURSUANT TO REVENUE PROCEDURE 2015-41
Filed with the Internal Revenue Service Advance Pricing and Mutual Agreement Program (APMA) Large Business & International Division
APPLICANT
Halcyon Semiconductor Inc. EIN: 84-2917630 A Delaware Corporation 8700 Parmer Lane, Building 4 Austin, TX 78729
FOREIGN RELATED PARTY / CO-APPLICANT
Halcyon Semiconductor AG Steuernummer: 203/118/04527 USt-IdNr.: DE 814 723 956 An Aktiengesellschaft Organized Under the Laws of the Federal Republic of Germany Halcyon-Allee 12, 01099 Dresden, Saxony, Germany
COUNSEL OF RECORD
Leonard Cross, Partner Leila Nazari, Senior Associate Calderwood & Harkness LLP 599 Lexington Avenue, 38th Floor New York, NY 10022 Telephone: (212) 848-4000 Facsimile: (212) 848-4800 lcross@calderwoodharkness.com lnazari@calderwoodharkness.com
Power of Attorney: IRS Form 2848 enclosed herewith as Appendix H, authorizing Leonard Cross (CAF No. 4827-19835-R), Sylvia Hartwell (CAF No. 5193-28714-R), and Leila Nazari (CAF No. 6041-37291-R) of Calderwood & Harkness LLP to represent Halcyon Semiconductor Inc. before the Internal Revenue Service in all matters relating to this Advance Pricing Agreement application.
Matter Number: C&H 1032-00006
IRS FORM 14661 — APPLICATION FOR ADVANCE PRICING AGREEMENT
(Completed Fields)
Section A — Taxpayer Information
Section B — Foreign Related Party Information
Section C — Type of APA Requested
Section D — APA Term
Section E — Covered Transactions (Summary)
Transaction 1 — Sale of Semiconductor Wafers and Singulated Die (Tangible Goods)
HSAG manufactures and sells semiconductor wafers and singulated die to HSI under the Master Intercompany Supply Agreement. HSI resells finished and packaged semiconductors to unrelated US customers. In FY 2024, the aggregate value of intercompany tangible goods transfers was approximately €987,600,000.
Transaction 2 — Royalty Payments for Licensed Semiconductor Process Technology and Design Libraries (Intangible Property License)
HSI pays HSAG a running royalty under the IP License Agreement for the right to use HSAG's proprietary semiconductor process technology, design libraries, and related intangibles in connection with HSI's US distribution and design-support activities. In FY 2024, total royalty payments were approximately €68,400,000.
Transaction 3 — Cost-Sharing Contributions Under Qualified Cost Sharing Arrangement (Next-Generation R&D)
HSI makes cost-sharing contributions to HSAG under a Qualified Cost Sharing Arrangement for next-generation 2nm and sub-2nm process technology R&D. HSI's cost-sharing percentage is 22.5%, reflecting its anticipated benefit share from North American exploitation rights. In FY 2024, HSI's cost-sharing contributions totaled approximately €224,600,000.
Aggregate Annual Intercompany Flows (FY 2024): €1,280,600,000 (approximately €1.28 billion), comprising the sum of Transactions 1, 2, and 3.
Section F — Proposed Transfer Pricing Methods (Summary)
Section G — Prior APA and Audit History
The Applicant confirms that neither Halcyon Semiconductor Inc. nor Halcyon Semiconductor AG has previously entered into an advance pricing agreement with the Internal Revenue Service or the Bundeszentralamt für Steuern covering any of the transactions described herein. Furthermore, there is no pending IRS examination, proposed adjustment, or competent authority proceeding involving the transfer pricing of HSI for any of the tax years within the proposed rollback period (FY 2022 through FY 2024) or the prospective APA term (FY 2025 through FY 2029).
Section H — User Fee
The user fee of $113,500 reflects the applicable Large Case APA user fee as of the date of this filing, consistent with the fee schedule set forth in Revenue Procedure 2015-41 as updated by subsequent guidance. A check in the amount of $113,500.00 is enclosed with this application and filed as Appendix I.
Section I — Representations and Signatures
The undersigned hereby represent and declare, under penalties of perjury, that the information contained in this application, including all supporting schedules, appendices, and attachments, is true, correct, and complete to the best of their knowledge and belief. The Applicant further consents to the disclosure of return information to the Bundeszentralamt für Steuern (BZSt) as necessary for the bilateral competent authority proceeding under Article 25 of the Convention between the United States of America and the Federal Republic of Germany for the Avoidance of Double Taxation.
HALCYON SEMICONDUCTOR INC.
By: ________
Name: Priya Raghavan
Title: Vice President, Tax
Date: ________
CALDERWOOD & HARKNESS LLP (Authorized Representative)
By: ________
Name: Leonard Cross
Title: Partner
Date: ________
SUPPORTING NARRATIVE
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1. Executive Summary
Halcyon Semiconductor Inc. ("HSI" or the "Applicant"), a Delaware corporation and wholly owned subsidiary of Halcyon Semiconductor AG ("HSAG" or the "Parent"), respectfully submits this Application for Advance Pricing Agreement ("APA") pursuant to Revenue Procedure 2015-41. This application is filed with the Internal Revenue Service's Advance Pricing and Mutual Agreement Program ("APMA") within the Large Business & International Division and requests a bilateral APA between the United States competent authority (Internal Revenue Service) and the German competent authority (Bundeszentralamt für Steuern, "BZSt") covering intercompany transactions in the HSAG–HSI semiconductor supply chain.
The purpose of this application is to establish arm's-length transfer pricing for three intercompany transactions between HSI and HSAG, thereby providing tax certainty to both the Applicant and its German parent, eliminating the risk of double taxation, and fostering a cooperative and transparent relationship with both the IRS and the BZSt.
The three covered transactions, with their FY 2024 values, are as follows:
1. Tangible Goods — Semiconductor Wafer and Die Sales (HSAG → HSI): HSAG manufactures advanced-node semiconductor wafers and singulated die at its fabrication facilities in Germany and sells these products to HSI under a Master Intercompany Supply Agreement. In FY 2024, intercompany tangible goods transfers totaled approximately €987,600,000 (approximately $1,076,000,000).
2. Royalties — IP License (HSI → HSAG): HSI pays HSAG a running royalty under an IP License Agreement for the right to use HSAG's proprietary semiconductor process technology, design libraries, and related intangibles in its US operations. In FY 2024, royalty payments totaled approximately €68,400,000 (approximately $70,500,000).
3. Cost-Sharing Contributions — Qualified Cost Sharing Arrangement (HSI → HSAG): HSI makes cost-sharing contributions to HSAG under a Qualified Cost Sharing Arrangement for next-generation 2nm and sub-2nm process technology research and development. HSI's cost-sharing percentage is 22.5%, reflecting its anticipated benefit share from North American exploitation rights. In FY 2024, HSI's cost-sharing contributions totaled approximately €224,600,000 (approximately $231,300,000).
The aggregate annual intercompany flows between HSAG and HSI in FY 2024 amounted to approximately €1,280,600,000 (approximately €1.28 billion).
The transfer pricing methods proposed in this application are as follows:
• Transaction 1 (Tangible Goods): Comparable Profits Method ("CPM") under Treasury Regulation § 1.482-5 (equivalent to the Transactional Net Margin Method, or "TNMM," under OECD terminology), with HSI as the tested party and operating margin on net resales as the profit level indicator. The proposed arm's-length range is an interquartile range of 2.8% to 6.1%, with a median of 4.4%.
• Transaction 2 (Royalties): Comparable Uncontrolled Transaction ("CUT") method under Treasury Regulation § 1.482-4(c), corroborated by a residual profit split analysis. The proposed arm's-length royalty rate is 6.0% of IP-attributable revenues, which falls within the interquartile range of 3.5% to 8.2% derived from eight comparable uncontrolled license agreements.
• Transaction 3 (Cost Sharing): Income method under Treasury Regulation § 1.482-7(g)(1) to determine the reasonably anticipated benefits of each CSA participant. HSI's proposed anticipated benefit share of 22.5% is derived from a projection of North American exploitation rights for the developed intangibles.
The Applicant requests a prospective APA term of five tax years, from January 1, 2025 through December 31, 2029. In addition, the Applicant requests a rollback of the APA terms and conditions to three prior tax years, from January 1, 2022 through December 31, 2024, for a total covered period of eight tax years (FY 2022 through FY 2029). The rollback is appropriate because the facts, intercompany agreements, functional profiles, and economic conditions during the rollback period are materially consistent with those during the prospective term, and there is no pending IRS examination of HSI's transfer pricing for the rollback years.
HSI submitted an anonymous pre-filing memorandum to the IRS APMA on April 14, 2025, and a pre-filing conference was held on May 19, 2025. During the pre-filing conference, the IRS indicated its receptivity to the bilateral approach and raised questions regarding the CUT comparables for the royalty transaction and the CSA platform contribution transaction valuation methodology. All feedback received from the IRS during the pre-filing process has been addressed in this application and its supporting appendices.
A parallel German APA application is being prepared by Kettner Pflüger Rechtsanwälte (Dr. Tobias Kettner and Friederike Lang) for submission to the BZSt in Bonn, Germany, with a targeted submission date of August 15, 2025. The proposed methods and arm's-length ranges in the German application have been aligned with those in this US application to facilitate efficient bilateral competent authority negotiations under Article 25 of the US-Germany Income Tax Treaty.
2. Description of the Halcyon Semiconductor Group
2.1 Overview of HSAG
Halcyon Semiconductor AG ("HSAG") is an Aktiengesellschaft organized and existing under the laws of the Federal Republic of Germany. HSAG's shares are publicly listed on the Frankfurt Stock Exchange under the XETRA electronic trading system. The company's International Securities Identification Number (ISIN) is DE000HSA0017, and its Wertpapierkennnummer (WKN) is HSA001.
HSAG's registered office and corporate headquarters are located at Halcyon-Allee 12, 01099 Dresden, Saxony, Germany. The company was originally founded in 2003 as a spin-off from the Technical University of Dresden's Advanced Microelectronics Laboratory and has grown into one of Europe's leading pure-play foundry and integrated device manufacturers specializing in advanced-node semiconductor technologies.
Principal Business Activities. HSAG's principal business is the design and manufacture of advanced-node semiconductor wafers for the automotive, industrial Internet-of-Things ("IoT"), and data-center application markets. HSAG operates fabrication facilities capable of producing semiconductors at the 7-nanometer ("7nm"), 5-nanometer ("5nm"), and 3-nanometer ("3nm") process technology nodes. HSAG's customer base includes major original equipment manufacturers ("OEMs"), electronic design automation companies, hyperscale cloud providers, and automotive Tier 1 suppliers, with end markets spanning North America, Europe, and Asia-Pacific.
HSAG also conducts substantial research and development activities focused on next-generation process technologies, including 2nm and sub-2nm nodes, which are the subject of the Qualified Cost Sharing Arrangement described in Section 3.3 of this narrative.
Corporate Leadership. The members of HSAG's Vorstand (Management Board) and key senior officers relevant to this application include:
• Dr. Klaus-Dieter Wehrheim, Vorstandsvorsitzender (Chief Executive Officer)
• Margarethe Stein, Finanzvorstand (Chief Financial Officer)
• Dr. Hendrik Möller, Technikvorstand (Chief Technology Officer)
• Dr. Erwin Fassbinder, Senior Vice President, Group Tax
Consolidated Financial Highlights — FY 2024. HSAG's consolidated financial results for the fiscal year ended December 31, 2024, as audited by Gresham Whitfield LLP, are summarized as follows:
These financial results reflect the consolidated performance of the HSAG group, including HSI, Halcyon Semiconductor Japan K.K. ("HSJ"), and Halcyon Semiconductor (Shanghai) Co., Ltd. ("HSC"). HSAG's robust R&D investment — representing 16.2% of consolidated revenue — underscores the company's position as the group's innovation engine and principal developer of proprietary semiconductor process technology.
Global Workforce. As of December 31, 2024, the HSAG group employed approximately 22,400 individuals globally, of which approximately 14,600 were based in Germany. The German workforce is concentrated at the company's fabrication facilities and R&D centers in the Dresden and Chemnitz metropolitan areas.
Fabrication Facilities. HSAG operates three fabrication facilities ("fabs") in Germany:
• Fab 1 and Fab 2: Located at Industriepark Klotzsche, Zur Wetterwarte 50, 01109 Dresden, Saxony, Germany. These facilities are co-located on a single campus and specialize in 7nm and 5nm process technology wafer fabrication. Fab 1 was commissioned in 2012 and underwent a major capacity expansion in 2018. Fab 2 was commissioned in 2019 and became fully operational in Q2 2020.
• Fab 3: Located at Technologiepark Chemnitz, Annaberger Straße 240, 09125 Chemnitz, Saxony, Germany. Fab 3 is HSAG's most advanced facility, purpose-built for 3nm and next-generation process technology production. Construction commenced in 2020, with initial production capability achieved in Q3 2023 and full-scale commercial production beginning in Q1 2024. Fab 3 represents a capital investment of approximately €4.2 billion.
Together, the three fabrication facilities give HSAG substantial manufacturing capacity across multiple advanced process nodes, positioning the company as a critical supplier for the global semiconductor industry.
2.2 Overview of HSI
Halcyon Semiconductor Inc. ("HSI") is a corporation organized under the laws of the State of Delaware (File Number 7341825) and is a wholly owned subsidiary of HSAG. HSI was incorporated on March 15, 2017 and commenced operations on January 1, 2018, following an organizational restructuring of HSAG's North American distribution activities.
Tax Identification. HSI's Employer Identification Number (EIN) is 84-2917630.
Registered Agent. HSI's registered agent for service of process in Delaware is c/o Capitol Registered Agents LLC, 1209 Orange Street, Wilmington, Delaware 19801.
Principal Office. HSI's principal office and corporate headquarters are located at 8700 Parmer Lane, Building 4, Austin, Texas 78729. The Austin facility serves as the hub for HSI's management, finance, tax, legal, human resources, and supply chain operations functions.
Additional Locations. HSI maintains the following additional facilities in the United States:
• Design Center: 2455 Augustine Drive, Suite 300, Santa Clara, California 95054. The Santa Clara design center employs approximately 180 design-support engineers who provide application engineering, reference design development, and technical support to US customers integrating HSAG's semiconductor products into their end-use applications. The design center does not perform original semiconductor process R&D; rather, it leverages HSAG's existing design libraries and process technology to develop customer-specific design solutions and reference architectures.
• Regional Sales Office — Automotive: 1100 Town Center Drive, Suite 420, Southfield, Michigan 48075. The Southfield office serves HSI's automotive customers, including major US-based OEMs and Tier 1 suppliers located in the Detroit metropolitan area. Approximately 65 employees, primarily field application engineers and account managers, are based at this location.
• Regional Sales Office — Data Center and Industrial IoT: 9600 SW Nimbus Avenue, Suite 210, Beaverton, Oregon 97008. The Beaverton office supports HSI's relationships with data-center and industrial IoT customers in the Pacific Northwest, including major hyperscale cloud providers and industrial automation companies. Approximately 40 employees work from this location.
Role in the Halcyon Group. HSI functions as the exclusive US distribution, marketing, and design-support entity for Halcyon products in North America. Specifically, HSI:
• Purchases semiconductor wafers and singulated die from HSAG;
• Markets, distributes, and resells finished and packaged semiconductor products to unrelated US customers;
• Provides pre-sale and post-sale technical support, application engineering, and design-support services to customers;
• Manages customer relationships, order fulfillment, logistics, and warranty administration in the North American market;
• Participates in the Qualified Cost Sharing Arrangement with HSAG for next-generation R&D; and
• Pays royalties to HSAG for the licensed use of HSAG's proprietary process technology, design libraries, and trademarks.
HSI does not perform original semiconductor process R&D, does not own fabrication facilities, and does not bear the entrepreneurial risks associated with advanced-node semiconductor manufacturing or IP development. HSI is characterized as a limited-risk distributor with ancillary design-support functions for purposes of the transfer pricing analysis set forth in this application.
Corporate Leadership. HSI's key officers and personnel relevant to this application include:
• Victor Almeida, President and General Manager
• Priya Raghavan, Vice President, Tax
• Thomas Kuroda, Vice President, Supply Chain Operations
Financial Highlights — FY 2024. HSI's financial results for the fiscal year ended December 31, 2024, are summarized as follows:
HSI's FY 2024 operating margin of 4.80% falls within the interquartile range (2.8%–6.1%) of comparable semiconductor distributors identified in the benchmarking study presented in the Economic Analysis Appendix (Appendix A).
Employees. As of December 31, 2024, HSI employed approximately 2,850 individuals across its Austin headquarters, Santa Clara design center, and regional sales offices.
2.3 Other Affiliated Entities (Not in APA Scope)
In addition to HSI, the HSAG group includes the following subsidiaries that are not parties to this APA application. Their intercompany transactions with HSAG are outside the scope of this bilateral request:
• Halcyon Semiconductor Japan K.K. ("HSJ"): A Kabushiki Kaisha organized under the laws of Japan, with its registered office in Chiyoda-ku, Tokyo, Japan. HSJ serves as HSAG's distribution and design-support entity for the Japanese market. HSAG holds an 85% ownership interest in HSJ, with the remaining 15% held by Fujimura Electronics Corporation, a Japanese strategic partner.
• Halcyon Semiconductor (Shanghai) Co., Ltd. ("HSC"): A wholly foreign-owned enterprise ("WFOE") organized under the laws of the People's Republic of China, with its registered office in the Zhangjiang Hi-Tech Park, Pudong New Area, Shanghai, China. HSC operates as HSAG's distribution and customer support entity for the Greater China market. HSAG holds a 100% ownership interest in HSC.
The intercompany transactions between HSAG and each of HSJ and HSC — which primarily involve sales of tangible goods and royalty arrangements similar in structure to those between HSAG and HSI — are not covered by this bilateral APA application. HSAG maintains separate transfer pricing documentation and contemporaneous analyses for these affiliates in accordance with the applicable domestic documentation requirements of Japan and China, respectively.
2.4 Group Organizational Chart
The following is a simplified organizational chart of the Halcyon Semiconductor group as of the date of this application. A detailed organizational chart, including subsidiary ownership percentages, directors, and jurisdiction-specific details, is provided in Appendix J.
Halcyon Semiconductor AG (Germany — Ultimate Parent; XETRA-listed)
• Halcyon Semiconductor Inc. (Delaware, USA) — 100% owned by HSAG
• Halcyon Semiconductor Japan K.K. (Japan) — 85% owned by HSAG; 15% owned by Fujimura Electronics Corporation
• Halcyon Semiconductor (Shanghai) Co., Ltd. (China) — 100% owned by HSAG
2.5 Independent Auditor
The Halcyon Semiconductor group's consolidated financial statements are audited by Gresham Whitfield LLP, a registered public accounting firm. The principal engagement personnel are:
• Group Audit Partner: Simon Cardwell, Gresham Whitfield LLP, 25 Old Broad Street, London EC2N 1HQ, United Kingdom
• US Engagement Partner: Janet Okonkwo, Gresham Whitfield LLP, 811 Main Street, Suite 3400, Houston, Texas 77002
Gresham Whitfield LLP has served as the group's independent auditor since FY 2019. The firm's audit opinions for the period FY 2020 through FY 2024 are unqualified, and detailed reconciliations between HSI's management accounts and the Gresham Whitfield LLP audited financial statements are included in the Financial Data Appendix (Appendix C).
2.6 Principal Lender
HSI maintains a $600,000,000 senior unsecured revolving credit facility with a syndicate of lenders, with Ridgeline National Bank serving as administrative agent. The facility was entered into on September 1, 2021 and has been amended and restated as of April 15, 2024. The revolving credit facility supports HSI's working capital requirements, including the financing of intercompany inventory purchases from HSAG.
The principal contact at Ridgeline National Bank is:
• Senior Relationship Manager: Daniel Furlong, Ridgeline National Bank, 401 South Tryon Street, Charlotte, North Carolina 28202
As of December 31, 2024, HSI had $215,000,000 in outstanding borrowings under the revolving credit facility. The facility is guaranteed by HSAG under a parent company guarantee and does not contain restrictive covenants that would materially affect HSI's ability to comply with the terms of this APA.
3. Description of Covered Transactions
This Section 3 describes the three intercompany transactions between HSAG and HSI that are proposed to be covered by the bilateral APA. Each transaction is described in terms of its factual background, contractual framework, and economic substance.
3.1 Transaction 1 — Tangible Goods: Semiconductor Wafer and Die Sales (HSAG → HSI)
3.1.1 Transaction Description. Transaction 1 involves the sale of semiconductor wafers and singulated die from HSAG to HSI. HSAG manufactures these products at its three fabrication facilities located in Dresden (Fab 1 and Fab 2) and Chemnitz (Fab 3), Germany. The fabrication process involves the conversion of silicon wafers through hundreds of complex processing steps — including photolithography, etching, ion implantation, chemical vapor deposition, and chemical-mechanical planarization — to produce patterned wafers bearing integrated circuit designs at the 7nm, 5nm, and 3nm process technology nodes. Following wafer fabrication, die are singulated (i.e., individual chips are cut from the wafer) and shipped to packaging and testing subcontractors or directly to HSI's designated US warehousing facilities.
HSI purchases the manufactured wafers and die from HSAG under the terms of the Master Intercompany Supply Agreement, which was originally entered into on January 1, 2019, and subsequently amended on July 1, 2022. The July 2022 amendment primarily updated pricing schedules and volume-tier structures to reflect the commercial ramp of Fab 3 (3nm node) production, but did not materially alter the functional profiles, risk allocations, or contractual framework governing the intercompany tangible goods transactions. A copy of the Master Intercompany Supply Agreement, including the July 2022 amendment, is provided in Appendix E.
Upon receipt of the wafers and die, HSI resells finished and packaged semiconductors to unrelated US customers, which include original equipment manufacturers (OEMs), electronic components distributors, hyperscale cloud service providers, automotive Tier 1 suppliers, and industrial automation companies. HSI's customer base is diversified across the automotive, industrial IoT, and data-center application markets, with no single customer accounting for more than 9% of HSI's net revenue in FY 2024.
In FY 2024, the aggregate value of intercompany tangible goods transfers from HSAG to HSI was €987,600,000, which is equivalent to approximately $1,076,000,000 at the average 2024 EUR/USD exchange rate of 1.0896.
The products transferred encompass the full range of HSAG's advanced-node semiconductor offerings, including:
• 7nm automotive-grade microcontrollers and sensor interface ICs;
• 5nm data-center accelerator chips and high-bandwidth memory controller die;
• 3nm system-on-chip (SoC) products for next-generation automotive advanced driver-assistance systems (ADAS) and industrial edge computing platforms.
3.1.2 Terms of Sale. Transfer prices for the intercompany sale of tangible goods are determined under the Master Intercompany Supply Agreement. The agreement establishes a product-category-based pricing framework, under which transfer prices are set and updated on a quarterly basis. Pricing is based on product category, process node, volume tier, and customer allocation. The quarterly pricing process involves the joint participation of HSAG's supply chain management function and HSI's VP Supply Chain Operations, with oversight by the respective tax departments to ensure compliance with the arm's-length standard.
Title to, and risk of loss with respect to, the semiconductor wafers and die transfers from HSAG to HSI upon delivery to HSI's designated US warehousing facilities, which are located in Austin, Texas and Chandler, Arizona. Delivery is effected through HSAG's freight-forwarding arrangements, with goods shipped from HSAG's German fabrication facilities via air freight or ocean freight, depending on product urgency and customer demand.
Payment terms under the Master Intercompany Supply Agreement require HSI to pay HSAG within 60 days from the date of invoice. Invoices are denominated in euros (EUR), and HSI bears the foreign exchange risk associated with the conversion of its US-dollar-denominated revenues into euros for settlement of intercompany payables.
3.2 Transaction 2 — Royalties: IP License (HSI → HSAG)
3.2.1 Transaction Description. Transaction 2 involves the payment of royalties by HSI to HSAG for the licensed use of HSAG's proprietary semiconductor process technology, design libraries, and related intangible property in connection with HSI's US distribution and design-support activities.
The royalty payments are governed by the IP License Agreement, which was entered into on January 1, 2019 and has not been materially amended since its inception. A copy of the IP License Agreement is provided in Appendix E. Under the IP License Agreement, HSAG grants HSI a non-exclusive, non-transferable license to use specified intangible property in the United States in connection with HSI's authorized business activities, which include the distribution, marketing, and resale of HSAG products; the provision of design-support and application engineering services to US customers; and the development of customer-specific reference designs and solutions leveraging HSAG's design libraries and process technology.
In FY 2024, HSI's total royalty payments to HSAG under the IP License Agreement amounted to €68,400,000, which is equivalent to approximately $70,500,000 at the weighted average payment-date EUR/USD exchange rate of 1.0307.
The royalty is computed as a 6.0% running royalty on IP-attributable revenues. The concept of "IP-attributable revenues" is defined in the IP License Agreement as the portion of HSI's net US revenue that is reasonably attributable to the exploitation of the licensed intangible property. For FY 2024, IP-attributable revenues were calculated as follows:
HSI net US revenue: $4,120,000,000 IP-attributable share: 18.1% IP-attributable revenues: $745,720,000 Royalty rate: 6.0% Computed royalty (USD): approximately $44,743,000 Contractual royalty (EUR, at payment-date weighted average rate): €68,400,000
The difference between the USD-computed royalty amount and the EUR-denominated contractual royalty reflects the timing of quarterly royalty payments and the application of payment-date exchange rates as specified in the IP License Agreement.
3.2.2 Licensed Intangibles. The intangible property licensed from HSAG to HSI under the IP License Agreement encompasses the following categories:
1. Semiconductor Process Technology: HSAG's proprietary process technology for the fabrication of integrated circuits at the 7nm, 5nm, and 3nm process nodes. This technology is the product of HSAG's substantial and sustained R&D investment (€1,420,000,000 in FY 2024 alone) and represents the core competitive advantage of the HSAG group. The process technology encompasses process recipes, equipment specifications, yield-enhancement techniques, defect-reduction algorithms, and related manufacturing know-how.
2. Design Libraries and Related Design IP: HSAG maintains an extensive library of standard cell designs, input/output cells, memory compilers, analog/mixed-signal IP blocks, and interface protocol IP blocks that are optimized for each of HSAG's process nodes. HSI's design-support engineers at the Santa Clara design center utilize these libraries to develop customer-specific reference designs and application notes, which are critical to the customer engagement and sales process.
3. Trademarks and Trade Names: HSI is authorized to use the "Halcyon" brand name, logo, and associated trademarks in its North American marketing and customer-facing activities. The HSAG brand is well-recognized in the semiconductor industry and carries significant goodwill, particularly among automotive OEM and data-center customers.
The licensed intangibles represent high-value, unique assets developed and maintained by HSAG. HSAG retains full ownership of all licensed intangibles and is solely responsible for their ongoing development, enhancement, maintenance, and protection.
3.3 Transaction 3 — Cost-Sharing Contributions: R&D Qualified Cost Sharing Arrangement (HSAG ↔ HSI)
3.3.1 Transaction Description. Transaction 3 involves HSI's cost-sharing contributions to HSAG under a Qualified Cost Sharing Arrangement ("CSA") for next-generation semiconductor process technology research and development.
HSAG and HSI are parties to a Qualified Cost Sharing Arrangement that was executed on July 15, 2018, pursuant to Treasury Regulation § 1.482-7. The CSA covers the development of 2nm and sub-2nm process technology — the next frontier in semiconductor miniaturization — which is expected to yield significant commercial applications in the automotive, data-center, and advanced computing markets beginning in approximately 2028. A copy of the CSA is provided in Appendix E.
Under the CSA, HSAG serves as the principal R&D performer, conducting substantially all of the qualified research and development activities at its fabrication facilities and R&D centers in Dresden and Chemnitz, Germany. HSI, as a cost-sharing participant, is entitled to exploit the developed intangibles (i.e., the 2nm and sub-2nm process technology) in the North American market in exchange for its proportionate share of qualified R&D costs.
HSI's cost-sharing percentage is 22.5%, which reflects its anticipated benefit share derived from North American exploitation rights for the developed intangibles. The anticipated benefit share was originally determined at the inception of the CSA in July 2018 and has been reviewed on a triennial basis, consistent with the terms of the CSA and the principles of Treasury Regulation § 1.482-7(e). The most recent triennial review was completed in July 2024 and confirmed that a 22.5% anticipated benefit share for HSI remains appropriate.
In FY 2024, total qualified R&D costs under the CSA were €998,200,000 — a subset of HSAG's total R&D expenditure of €1,420,000,000. (The difference of €421,800,000 represents R&D expenditure outside the scope of the CSA, primarily relating to the maintenance and incremental improvement of existing 7nm and 5nm process nodes.) HSI's FY 2024 cost-sharing contribution was therefore:
€998,200,000 × 22.5% = €224,600,000 (approximately $231,300,000)
3.3.2 Platform Contribution Transaction (PCT). Upon execution of the CSA on July 15, 2018, HSI made a platform contribution transaction ("PCT") payment to HSAG in the amount of $312,500,000. The PCT payment compensated HSAG for making available to the CSA pre-existing intangible property and resources — including HSAG's existing semiconductor process technology (at that time, through the 7nm node), design libraries, skilled R&D workforce, and fabrication infrastructure — that are reasonably anticipated to contribute to the development of the 2nm and sub-2nm process technology being developed under the CSA.
The PCT was valued using the income method, in accordance with Treasury Regulation § 1.482-7(g)(4). The key valuation parameters were as follows:
• discount Rate: 11.8%, reflecting the weighted average cost of capital for a market participant in the advanced semiconductor fabrication industry, adjusted for the risk profile of the pre-existing platform contributions.
• Projection Period: 15 years from the date of the CSA (July 15, 2018 through July 14, 2033), reflecting the anticipated useful life of the pre-existing platform contributions to the next-generation R&D program.
• Projected Income Streams: Forecasted incremental income attributable to HSI's exploitation of the developed intangibles in the North American market, derived from HSAG management's long-range technology and market development plan as of July 2018.
The PCT valuation was performed by Stonebridge Valuation Partners LLC, an independent valuation firm. The engagement was led by Marcus Reinhardt, Managing Director, at the firm's New York office located at 200 Park Avenue, Suite 1510, New York, NY 10166. A copy of the Stonebridge Valuation Partners PCT Valuation Report is provided in Appendix F.
3.4 Aggregate Intercompany Flows
The following table summarizes the aggregate intercompany flows between HSAG and HSI for FY 2024, comprising the three covered transactions:
These aggregate flows underscore the materiality of the intercompany transactions between HSAG and HSI and the importance of establishing arm's-length pricing certainty through the bilateral APA process. Historical intercompany transaction data for FY 2020 through FY 2024, including detailed schedules and reconciliations, are provided in the Financial Data Appendix (Appendix C).
4. Functional Analysis Summary
This section summarizes the functions performed, assets employed, and risks assumed by each of HSI and HSAG in connection with the covered transactions. A detailed functional analysis for each entity is provided in the Functional Analysis Memoranda filed as Appendix D.
4.1 Functions, Assets, and Risks — HSI
Functions Performed. HSI performs the following functions in connection with the covered transactions:
• Distribution and Resale: HSI serves as the exclusive distribution, marketing, and resale entity for Halcyon semiconductor products in the North American market. HSI purchases finished wafers and die from HSAG, manages customer orders, coordinates logistics and warehousing, and resells packaged semiconductor products to unrelated US customers.
• Marketing and Sales: HSI conducts sales and marketing activities in the United States, including direct customer engagement, trade show participation, demand-generation activities, digital marketing, and account management. HSI employs approximately 350 sales and marketing professionals across its Austin headquarters and regional offices.
• Customer Service: HSI provides pre-sale and post-sale customer support, including technical consultation during the design-in phase, order status management, warranty administration, and product return handling.
• Design Support: HSI maintains a design center in Santa Clara, California, where approximately 180 design-support engineers develop customer-specific reference designs, application notes, and integration guides using HSAG's design libraries and process technology. The Santa Clara design center's activities are limited to application-level design work and do not encompass original semiconductor process R&D, new product architecture development, or independent IP creation.
• Order Management and Logistics Coordination: HSI manages the end-to-end order fulfillment process, from customer order receipt through inventory allocation, warehousing, and delivery.
Assets Employed. HSI's assets relevant to the covered transactions include:
• Limited Intangibles: HSI possesses marketing-related intangibles (customer relationships, market knowledge, and distribution network) developed in the ordinary course of its distribution activities. These intangibles are of limited scope and value relative to HSAG's proprietary semiconductor process technology and design IP.
• Working Capital: HSI maintains substantial inventory (finished and in-transit semiconductor products), accounts receivable, and cash balances to support its distribution operations, funded in part by the $600,000,000 revolving credit facility described in Section 2.6.
• Leased Facilities: HSI's Austin headquarters, Santa Clara design center, and regional sales offices are leased.
• Information Technology Systems: HSI operates enterprise resource planning (ERP) systems, customer relationship management (CRM) platforms, and supply chain management tools to support its distribution and customer-facing activities.
Risks Assumed. HSI assumes the following risks in connection with the covered transactions:
• Inventory Risk (Moderate): HSI holds finished semiconductor inventory and bears the risk of inventory obsolescence due to product lifecycle changes, customer order cancellations, and technology transitions. However, HSAG's intercompany pricing includes provisions for certain slow-moving inventory adjustments, and HSI's inventory risk is mitigated by rolling demand forecasts and just-in-time supply chain management.
• Credit Risk (Moderate): HSI extends trade credit to its US customers and bears the risk of customer default. HSI maintains credit insurance on approximately 60% of its receivables portfolio.
• Limited Market Risk: HSI faces demand fluctuations in the US semiconductor market; however, its risk is limited by the diversity of its end-market customer base and the strength of the Halcyon brand.
• Foreign Exchange Risk: HSI bears exposure to EUR/USD exchange rate movements in connection with its euro-denominated intercompany payables to HSAG.
• No Significant R&D Risk: HSI does not bear the risk of R&D failure, technology obsolescence, or the significant capital expenditures associated with semiconductor fabrication.
• No Manufacturing Risk: HSI does not operate fabrication facilities and does not bear the risks associated with semiconductor manufacturing, including yield risk, equipment risk, or regulatory compliance risk.
Characterization. Based on the foregoing analysis, HSI is appropriately characterized as the least complex entity in the controlled transaction chain — a limited-risk distributor with ancillary design-support functions. HSI does not own significant unique intangible property (other than routine marketing intangibles), does not perform entrepreneurial functions, and does not bear the material risks associated with semiconductor fabrication or process technology R&D. This characterization supports the selection of HSI as the tested party for the tangible goods transaction under the CPM/TNMM.
Key Personnel:
• Victor Almeida, President and General Manager
• Thomas Kuroda, Vice President, Supply Chain Operations
• Priya Raghavan, Vice President, Tax
Headcount: Approximately 2,850 employees as of December 31, 2024.
4.2 Functions, Assets, and Risks — HSAG
Functions Performed. HSAG performs the following functions:
• Semiconductor Wafer Fabrication: HSAG manufactures semiconductor wafers at advanced process nodes (7nm, 5nm, and 3nm) at its three fabrication facilities in Dresden and Chemnitz, Germany. The fabrication process is capital-intensive, technologically complex, and requires deep engineering expertise, rigorous quality control, and continuous process optimization. HSAG employs over 8,500 manufacturing and process engineering personnel at its fabrication facilities.
• Process Technology R&D: HSAG conducts extensive research and development to advance semiconductor process technology, including the development of next-generation 2nm and sub-2nm nodes. HSAG's R&D activities encompass fundamental materials science research, device physics modeling, process recipe development, yield engineering, equipment co-development with tool suppliers, and design-technology co-optimization. In FY 2024, HSAG's total R&D expenditure was €1,420,000,000, representing 16.2% of consolidated revenue.
• intellectual Property Development and Ownership: HSAG develops, owns, and maintains the group's proprietary semiconductor process technology, design libraries, patents, and trade secrets. HSAG's patent portfolio includes over 4,700 active patents and patent applications across the United States, Europe, Japan, China, and other jurisdictions.
• Group Strategic Management: HSAG exercises group-level strategic management, including long-range technology roadmap development, capital expenditure planning, global supply chain optimization, and group-wide financial management.
• Supply Chain Management: HSAG manages the global supply chain for the Halcyon group, including raw materials procurement, capacity allocation across fabrication facilities, and coordination of product shipments to affiliated and unaffiliated customers worldwide.
Assets Employed. HSAG's assets relevant to the covered transactions include:
• Fabrication Facilities: Three state-of-the-art semiconductor fabrication facilities (Fab 1, Fab 2, and Fab 3) with an aggregate book value of approximately €6.8 billion and replacement cost estimated in excess of €12 billion. These facilities represent world-class manufacturing infrastructure capable of producing semiconductors at the most advanced commercially available process nodes.