1032-00006 · Halcyon Semiconductor Inc · Correspondence

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PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION

CALDERWOOD & HARKNESS LLP 599 Lexington Avenue, 38th Floor New York, NY 10022

Telephone: (212) 506-7000 Facsimile: (212) 506-7001 www.calderwoodharkness.com

April 25, 2025

VIA ELECTRONIC MAIL AND FIRST-CLASS MAIL

Priya Raghavan Vice President, Tax Halcyon Semiconductor Inc. 8700 Parmer Lane, Building 4 Austin, TX 78729

Dr. Erwin Fassbinder Senior Vice President, Group Tax Halcyon Semiconductor AG Halcyon-Allee 12 01099 Dresden, Saxony Germany

Re: Bilateral Advance Pricing Agreement and Transfer Pricing Documentation Project — Quarterly Status Update (Q1 2025)

C&H Matter Number: 1032-00006 Billing Code: HSAG-TP-2025

Dear Priya and Dr. Fassbinder:

1. Introduction and Purpose

We are pleased to provide you with the first quarterly status report on our engagement concerning the bilateral Advance Pricing Agreement ("APA") between the United States Internal Revenue Service ("IRS") and the German Federal Central Tax Office (Bundeszentralamt für Steuern, "BZSt"), together with the contemporaneous transfer pricing documentation for Halcyon Semiconductor AG ("HSAG") and Halcyon Semiconductor Inc. ("HSI" and, together with HSAG, the "Companies"). This letter covers work performed during the reporting period commencing February 3, 2025 and concluding on the date hereof, April 25, 2025.

As you will recall, Calderwood & Harkness LLP ("C&H") formally opened this engagement on February 3, 2025, and the parties executed the governing engagement letter on March 10, 2025. The engagement letter sets forth the scope of our representation, the fee structure, and the terms of the collaboration among the various professional advisors involved in this matter. This quarterly status letter is provided in accordance with Section 8.2 of the engagement letter, which contemplates quarterly written status reports to the principal client contacts at both HSAG and HSI.

By way of brief recap, the scope of the engagement encompasses three categories of controlled intercompany transactions between HSAG and HSI:

(a) Tangible Goods — Wafer and Die Sales. HSAG manufactures semiconductor wafers and dies at its fabrication facilities in Dresden and Chemnitz, Germany, which are sold to HSI for distribution to end customers and integration into modules in the North American market. In fiscal year 2024, aggregate intercompany sales of tangible goods totaled approximately €987.6 million.

(b) Royalties for Licensed Semiconductor intellectual Property. HSI pays royalties to HSAG for the right to use, sublicense, and distribute products incorporating HSAG's proprietary process technology, design libraries, and related semiconductor intellectual property. In fiscal year 2024, royalty payments from HSI to HSAG totaled approximately €68.4 million.

(c) Cost-Sharing Contributions under the Qualified Cost Sharing Arrangement. HSI and HSAG are parties to a Qualified Cost Sharing Arrangement ("CSA") under which both entities share the costs of ongoing research and development activities in proportion to their reasonably anticipated benefits. In fiscal year 2024, HSI's cost-sharing contributions totaled approximately €224.6 million.

In aggregate, these three categories of intercompany transactions represent annual controlled transaction flows of approximately €1.28 billion, making this one of the most significant transfer pricing matters within the Halcyon Semiconductor group.

The bilateral APA will cover five prospective tax years, commencing January 1, 2025 and ending December 31, 2029. In addition, the application will include a formal request to roll back the agreed transfer pricing methodology to three prior tax years, covering January 1, 2022 through December 31, 2024, for a total of eight covered tax years. The rollback request is intended to provide certainty with respect to the open statute-of-limitations years and to resolve any pending or potential transfer pricing adjustments for those periods on a consistent basis.

The sections below provide a detailed summary of the work completed to date, upcoming milestones, the current budget utilization and fee status, and coordination and communication items requiring your attention.

2. Engagement Progress — Work Completed to Date

2.1 Engagement Setup and Coordination

Conflict Check. A comprehensive conflict check was completed on February 3, 2025, the date on which the engagement was formally opened. The conflict check was conducted in accordance with C&H's standard procedures and encompassed all current and former client relationships, adverse-party databases, and affiliations of the engagement team members. No conflicts of interest were identified, and the engagement was cleared for acceptance without conditions.

Subcontractor Engagement — Meridian Economics GmbH. On February 18, 2025, a subcontractor engagement letter was executed with Meridian Economics GmbH ("Meridian"), an independent transfer pricing economics firm headquartered in Munich, Germany. The engagement of Meridian was contemplated by the engagement letter and was discussed during the kick-off call held on February 7, 2025. Meridian's team will be led by Dr. Annika Breitner, Managing Director, and Maximilian Voss, Senior Analyst. Meridian has been retained to perform the benchmarking studies and economic analyses that will form the quantitative backbone of both the APA application and the contemporaneous transfer pricing documentation. Meridian's engagement is structured on a fixed-fee basis of €485,000, payable in installments tied to the delivery of specified work products, as set forth in the subcontractor engagement letter.

German Tax Counsel Coordination — Kettner Pflüger Rechtsanwälte. Coordination has been established with Kettner Pflüger Rechtsanwälte ("Kettner Pflüger"), the Frankfurt am Main-based law firm that serves as HSAG's German tax counsel. As you know, Dr. Tobias Kettner and Friederike Lang of Kettner Pflüger will be responsible for preparing and submitting the parallel German APA application to the BZSt and for the German-side transfer pricing documentation obligations under the German Foreign Tax Act (Außensteuergesetz, "AStG") and the Records Creation Ordinance (Gewinnabgrenzungsaufzeichnungsverordnung, "GAufzV"). C&H and Kettner Pflüger held an initial coordination call on February 21, 2025, during which we aligned on the project timeline, the division of responsibilities, and the procedures for sharing work product between the US and German engagement teams. We expect to hold bi-weekly coordination calls with Kettner Pflüger going forward to ensure consistency of positions and efficient information flow.

Project Plan and Timeline Memorandum. A detailed project plan and timeline memorandum was prepared and circulated to the full C&H engagement team on February 14, 2025. The engagement team consists of Leonard Cross (Partner, Responsible Attorney), Sylvia Hartwell (Partner, Billing Attorney), Leila Nazari (Senior Associate, Lead Attorney), and Robert Jansen (Associate). The project plan identifies all major work streams, key milestones, internal deadlines, and deliverable dates, and assigns primary responsibility for each task to a specific team member. The project plan has been shared with Priya Raghavan and Dr. Fassbinder for informational purposes and serves as the primary project management tool for the engagement.

2.2 Functional Analysis — Interviews Completed

Functional analysis interviews have been completed for both HSI and HSAG. The functional analysis is a critical component of the transfer pricing analysis, as it provides the factual foundation for characterizing each entity's role in the controlled transactions, identifying the functions performed, assets employed, and risks assumed by each party, and ultimately determining the appropriate transfer pricing methodology and tested party.

HSI Interviews. Interviews with HSI personnel were conducted in person at HSI's headquarters in Austin, Texas over the course of two days, March 11–12, 2025. The following individuals were interviewed:

• Victor Almeida, President and General Manager of HSI, who provided an overview of HSI's business operations, strategic direction, customer relationships, and the organizational interface between HSI and HSAG;

• Priya Raghavan, Vice President, Tax, who discussed the intercompany pricing policies currently in effect, the historical evolution of the transfer pricing framework, and the Companies' compliance history with respect to US and German transfer pricing rules; and

• Thomas Kuroda, Vice President, Supply Chain Operations, who provided detailed information regarding HSI's role in the supply chain, including order management, inventory logistics, warehousing at the Austin distribution center, quality assurance procedures, and the extent of any value-added processing or testing performed by HSI prior to shipment to end customers.

HSAG Interviews. Interviews with HSAG personnel were conducted via secure video conference on March 18–19, 2025, with follow-up sessions on March 25, 2025. The following individuals were interviewed:

• Dr. Hendrik Möller, Chief Technology Officer of HSAG, who provided extensive information regarding HSAG's fabrication operations at the Dresden Fab 1 and Fab 2 facilities (located in the Industriepark Klotzsche) and the Chemnitz Fab 3 facility, including process technology node capabilities (7nm, 5nm, and the recently qualified 3nm process technology), capital expenditure requirements, yield management, and the nature and scope of HSAG's research and development activities. Dr. Möller confirmed that HSAG's total R&D expenditure for fiscal year 2024 was approximately €1.42 billion, of which approximately €998.2 million constitutes qualified intangible development costs under the CSA. The balance of R&D expenditure relates to activities outside the scope of the CSA, including pre-competitive research and certain government-funded collaborative projects; and

• Dr. Erwin Fassbinder, Senior Vice President, Group Tax, who discussed HSAG's perspective on the intercompany pricing policies, the historical and current structure of the IP license and CSA arrangements, and HSAG's compliance posture under German transfer pricing rules.

Key Characterization Conclusions. Based on the functional analysis interviews and our review of supporting documentation, we have reached the following preliminary entity characterization conclusions, which are consistent with the approach discussed during the engagement planning phase:

• HSI functions as a limited-risk distributor and design-support entity. HSI does not own significant intangible assets (other than its participant interest under the CSA), does not perform manufacturing or core R&D functions, bears limited inventory and credit risk, and derives the majority of its revenue from the resale of HSAG-manufactured products to North American customers under HSAG's brand and technology specifications. HSI is the least complex entity and is therefore suitable as the tested party for purposes of the Comparable Profits Method ("CPM") under IRC § 482 and the Transactional Net Margin Method ("TNMM") under the OECD Transfer Pricing Guidelines.

• HSAG is the complex, IP-rich principal entity that performs advanced-node semiconductor manufacturing, owns and develops valuable process technology and design libraries, maintains the core R&D infrastructure, and bears the preponderance of market risk, technology risk, and capital risk within the intercompany value chain. HSAG is not suitable as the tested party given the unique and valuable nature of its intangible assets and the complexity of its operations.

Functional analysis memoranda for both HSI and HSAG are currently being finalized by Leila Nazari and Robert Jansen. We anticipate that draft memoranda will be circulated to Priya Raghavan and Dr. Fassbinder for review in mid-May 2025, with the objective of incorporating any factual corrections or comments before the memoranda are finalized for inclusion in the APA application and contemporaneous documentation.

2.3 Industry Analysis

An industry analysis memorandum covering the global semiconductor industry has been drafted and is currently under internal review by the C&H engagement team. The memorandum addresses the competitive dynamics of the semiconductor industry with particular focus on the automotive, industrial Internet of Things ("IoT"), and data-center segments in which the Halcyon Semiconductor group primarily operates. The analysis covers the period from fiscal year 2020 through fiscal year 2024 and addresses industry cyclicality, the capital-intensive nature of advanced-node semiconductor fabrication, research and development investment trends, supply chain disruptions experienced during 2020–2022, the impact of government incentive programs (including the US CHIPS and Science Act and the European Chips Act), and the competitive landscape among leading integrated device manufacturers and foundries. This industry context is essential to the APA application, as it provides the IRS and BZSt with the economic backdrop against which the Companies' intercompany transactions and transfer pricing methodology should be evaluated. Meridian Economics has provided market data inputs for the industry analysis memorandum, and we have coordinated with Meridian to ensure consistency between the industry analysis and the assumptions underlying the benchmarking studies.

2.4 Benchmarking Studies — In Progress

Meridian Economics has commenced both of the principal benchmarking studies required for this engagement. We provide a summary of the current status of each study below.

Tangible Goods — CPM/TNMM Benchmarking Study. Meridian has substantially completed the initial screening of potential comparable companies for purposes of benchmarking HSI's profitability as a limited-risk distributor of semiconductor products in the North American market. The screening process utilized the Fenmore Services Inc. database and applied quantitative and qualitative screening criteria consistent with IRS and OECD guidance, including industry classification (SIC codes 5065 and 5045; NAICS codes 423690 and 423430), functional comparability, geographic focus, data availability, and independence from controlled transactions. The preliminary comparable set includes 17 companies with financial data available for the five fiscal years 2020–2024. The preliminary interquartile range of operating profit margins for the comparable set is 2.8% to 6.1%, with a median of 4.4%. HSI's fiscal year 2024 operating margin of 4.80% — derived from operating income of approximately $197.8 million on net revenue of approximately $4.12 billion — falls within the preliminary interquartile range, which provides initial support for the arm's-length nature of the intercompany pricing for tangible goods. The final comparable set is subject to refinement as Meridian completes its detailed comparability analysis, including review of annual reports, potential comparability adjustments (e.g., working capital adjustments), and rejection of companies with material non-comparable characteristics.

Royalties — CUT Analysis. Meridian is conducting a Comparable Uncontrolled Transaction ("CUT") analysis to benchmark the royalty rate charged by HSAG to HSI for the license of semiconductor intellectual property. The analysis involves the identification and screening of comparable uncontrolled license agreements for semiconductor-related technology and intellectual property. Meridian has searched the Clearpoint Royalty Database and reviewed publicly available SEC filings, including license agreements filed as exhibits to Form 10-K and Form 8-K filings, for comparable licensing arrangements. To date, eight potential comparable license agreements have been identified. The preliminary interquartile range of royalty rates observed in the comparable agreements is 3.5% to 8.2%, with a median of 5.6%. HSAG's royalty rate of 6.0%, applied to HSI's net revenue from products incorporating the licensed intellectual property, falls within the preliminary interquartile range. We note that the CUT analysis will be corroborated by a residual profit split analysis to confirm that the allocation of residual profits between HSAG and HSI is consistent with each entity's contributions of unique and valuable intangible assets.

Cost-Sharing Contributions. The transfer pricing methodology for cost-sharing contributions under the CSA will be analyzed under the income method in accordance with Treasury Regulation § 1.482-7. This analysis will draw on data developed in both of the foregoing benchmarking studies as well as the CSA documentation discussed in Section 3.4 below.

Final benchmarking reports for both the tangible goods and royalties analyses are expected to be delivered by Meridian in late May 2025, which will allow sufficient time for C&H review and incorporation into the formal APA application targeted for filing in early July 2025.

2.5 Pre-Filing Memorandum Submitted

On April 14, 2025, an anonymous pre-filing memorandum was submitted to the IRS Advance Pricing and Mutual Agreement Program ("APMA") requesting a pre-filing conference. The pre-filing memorandum was prepared in accordance with Revenue Procedure 2015-41, which governs the APA process, and was transmitted to the APMA office in Washington, D.C.

The pre-filing memorandum provides a factual and analytical overview of the proposed APA without identifying the taxpayer by name. Consistent with standard practice under Revenue Procedure 2015-41, the memorandum describes the taxpayer's industry (semiconductor manufacturing and distribution) and organizational structure in general terms, identifies the three categories of controlled transactions at issue, sets forth the proposed transfer pricing methods for each category (CPM/TNMM for tangible goods, CUT for royalties corroborated by a residual profit split, and the income method for CSA contributions per Treasury Regulation § 1.482-7), describes the proposed APA term (five prospective years, 2025–2029) and the rollback request (three prior years, 2022–2024), and provides a high-level summary of the economic analysis supporting the proposed methods. The memorandum does not identify HSAG or HSI by name, EIN, or Steuernummer.

We received confirmation from the APMA office on April 18, 2025 that the pre-filing memorandum has been received and assigned for scheduling. As discussed in Section 3.1 below, the pre-filing conference has been scheduled for May 19, 2025.

3. Upcoming Milestones

3.1 Pre-Filing Conference with IRS APMA — May 19, 2025

The pre-filing conference with the IRS APMA program has been scheduled for May 19, 2025 at the IRS offices in Washington, D.C. This is a significant milestone in the APA process, as the pre-filing conference provides the first opportunity for substantive dialogue with the APMA team regarding the proposed bilateral APA.

Leonard Cross and Leila Nazari will attend the pre-filing conference on behalf of Calderwood & Harkness. Priya Raghavan has indicated her intention to participate on behalf of HSI, and we welcome her attendance. We are currently preparing an internal preparation memorandum that will cover anticipated IRS questions, detailed talking points on the proposed transfer pricing methods for each of the three transaction categories, a justification for the rollback request, and potential areas of IRS concern that we should be prepared to address. A draft of this preparation memorandum will be circulated to Priya Raghavan and Dr. Fassbinder no later than May 9, 2025, to allow sufficient time for comment and coordination before the conference.

The primary objectives of the pre-filing conference are to: (i) gauge the IRS's receptivity to the bilateral APA approach in the US-Germany context; (ii) obtain preliminary feedback on the proposed transfer pricing methods, particularly the use of the CPM/TNMM for tangible goods and the CUT for royalties; (iii) assess IRS views on the rollback request and identify any potential obstacles; and (iv) understand the APMA team's current caseload and likely timeline for processing the formal application once filed. This feedback will be instrumental in finalizing the formal APA application and will inform any adjustments to our analytical approach.

3.2 Formal APA Application Filing — Target July 7, 2025

The target date for filing the formal APA application with the IRS APMA program is July 7, 2025. The formal application will consist of the following components:

(a) IRS Form 14661 (Application for Advance Pricing Agreement), fully completed and executed by an authorized officer of HSI;

(b) A comprehensive narrative memorandum setting forth the factual background, the functional analysis of HSI and HSAG, the industry analysis, and a detailed description of the three categories of controlled transactions and the intercompany agreements governing each;

(c) An economic analysis appendix containing the final benchmarking studies prepared by Meridian Economics, the proposed arm's-length ranges, and the economic rationale for the selected transfer pricing methods;

(d) A legal analysis appendix addressing the applicable provisions of IRC § 482, the Treasury Regulations thereunder, the OECD Transfer Pricing Guidelines, and Article 25 (Mutual Agreement Procedure) of the US-Germany Income Tax Treaty (signed June 29, 2006, as amended by the 2006 Protocol); and

(e) A financial data appendix containing segmented financial statements and intercompany transaction schedules for HSI and HSAG, reconciled to the Companies' audited financial statements for fiscal years 2020 through 2024.

The application will identify HSAG (Steuernummer 203/118/04527) and HSI (Employer Identification Number 84-2917630) as co-applicants seeking a bilateral APA under the mutual agreement procedure provisions of Article 25 of the US-Germany Income Tax Treaty. The current large-case APA user fee of $113,500 will accompany the filing.

Concurrent with the filing of the formal application, we will submit a Power of Attorney on IRS Form 2848, authorizing Leonard Cross, Sylvia Hartwell, and Leila Nazari of Calderwood & Harkness LLP to represent HSI before the IRS in all matters related to the APA application.

The financial data appendix will include segmented financials and intercompany transaction schedules that have been reconciled to the Companies' audited financial statements. The Companies' external auditor is Gresham Whitfield LLP, with the US engagement partner being Janet Okonkwo (Houston office) and the group audit partner being Simon Cardwell (London office). We will coordinate with the Companies' finance teams and, as needed, with Gresham Whitfield to ensure the accuracy and completeness of the financial data included in the application.

3.3 German APA Application Submission — Target August 15, 2025

Kettner Pflüger Rechtsanwälte will prepare and submit the parallel German APA application to the BZSt, targeting a filing date of August 15, 2025. The sequencing of the German filing approximately five to six weeks after the US filing is intentional and consistent with common practice in bilateral APAs involving the United States and Germany, as it allows for the US application to be substantially finalized first, after which the finalized application package can be transmitted to German counsel for alignment.

Accordingly, C&H will transmit the finalized US application package, including the narrative memorandum, economic analysis, legal analysis, and financial data appendices, to Dr. Tobias Kettner promptly following the US filing. This will enable Kettner Pflüger to ensure consistency of proposed transfer pricing methods, financial data presentations, and treaty-based competent authority procedure arguments across the two applications. Consistency between the US and German applications is essential to facilitating an efficient competent authority negotiation process and minimizing the risk of divergent positions between the IRS and the BZSt.

3.4 FY 2024 Contemporaneous Transfer Pricing Documentation — Deadline September 30, 2025

The contemporaneous transfer pricing documentation deliverables for HSI include the following, all of which are targeted for completion by September 30, 2025:

(a) Master File for the Halcyon Semiconductor group, prepared in accordance with the OECD Base Erosion and Profit Shifting ("BEPS") Action 13 framework, providing a high-level overview of the group's organizational structure, business operations, intangible assets, intercompany financial activities, and global allocation of income and economic activity;

(b) US Local File for HSI for FY 2024, documenting the arm's-length nature of the three categories of controlled transactions between HSI and HSAG for the fiscal year ended December 31, 2024;

(c) US Local Files for HSI for FY 2022 and FY 2023 (the two earlier rollback years), which will be prepared on the same timeline to support the rollback request included in the APA application and to ensure that comprehensive contemporaneous documentation exists for all three rollback years; and

(d) IRC § 6662(e) Penalty Protection Statements, which will be prepared and attached to each US Local File. These statements are designed to satisfy the reasonable-cause and good-faith exception under IRC § 6664(c) and to establish that HSI maintained contemporaneous documentation sufficient to demonstrate that it applied the specified transfer pricing method and reasonably concluded that the method provided the most reliable measure of an arm's-length result, thereby providing protection against the potential imposition of transfer pricing penalties under IRC § 6662(e).

In addition, a CSA Documentation Addendum will be finalized as part of the contemporaneous documentation. The CSA Documentation Addendum will address the platform contribution transaction ("PCT") buy-in payment of $312.5 million made by HSI in connection with the formation of the CSA in 2018. The PCT buy-in payment was valued by Stonebridge Valuation Partners LLC using the income method, applying a discount rate of 11.8% and a projection period of 15 years. The CSA Documentation Addendum will also set forth and support the 22.5% reasonably anticipated benefit share ("RAB share") attributed to HSI, which serves as the basis for HSI's annual cost-sharing contributions. The CSA documentation will be prepared in accordance with Treasury Regulation § 1.482-7 and will be included as an integral component of the US Local Files and the APA application.

3.5 Intercompany Agreement Review

A comprehensive review of the existing intercompany agreements governing the controlled transactions between HSI and HSAG is planned for the second quarter of 2025. The agreements to be reviewed include:

(a) The Master Intercompany Supply Agreement between HSAG and HSI, originally effective January 1, 2019, as amended on July 1, 2022, governing the terms of intercompany sales of wafers, dies, and other tangible goods;

(b) The intellectual Property License Agreement between HSAG and HSI, effective January 1, 2019, governing the license of HSAG's process technology, design libraries, and related semiconductor intellectual property to HSI; and

(c) The Qualified Cost Sharing Arrangement between HSAG and HSI, effective July 15, 2018, governing the sharing of research and development costs and the allocation of rights to intangible property developed under the arrangement.

The purpose of this review is to ensure that the terms and conditions of the existing intercompany agreements are fully consistent with the transfer pricing methods and arm's-length ranges proposed in the APA application, and to identify any provisions that may require amendment or supplementation to align with the APA positions. To the extent that amendments are warranted, we will work with the Companies' legal teams and, where appropriate, Kettner Pflüger, to draft and execute the necessary modifications prior to the formal APA filing.

4. Budget Utilization and Fee Summary

4.1 Phase 1 Fee Cap Status

As set forth in the engagement letter, the Phase 1 engagement — encompassing the preparation and filing of the APA application and the preparation of contemporaneous transfer pricing documentation — is subject to a fee cap of $1,850,000. The table below summarizes the fees incurred through April 25, 2025:

In addition, Meridian Economics GmbH has invoiced approximately €180,000 of its €485,000 fixed fee for work performed to date, consisting of the preliminary database screening and the initial phases of the benchmarking analyses. At current exchange rates, this equates to approximately $195,000, which is payable directly by the Companies to Meridian in accordance with the subcontractor engagement letter and is not included in the C&H Phase 1 fee cap.

Total Phase 1 C&H fees billed and accrued through April 25, 2025 are approximately $369,600, representing approximately 20.0% of the $1,850,000 Phase 1 fee cap. We are pleased to report that the engagement remains on budget, and fee spending is tracking in line with the project plan. The current burn rate reflects the front-loaded nature of the engagement, as the functional analysis, industry analysis, pre-filing memorandum, and initial benchmarking work require significant effort in the early months of the engagement. We anticipate that the pace of fee accrual will moderate slightly in Q2 before increasing again as the formal APA application is prepared and filed.

For your reference, Phase 2 of the engagement — which covers APA negotiation support, including preparation for and participation in IRS APMA team meetings, competent authority sessions, and APA closure — has not yet commenced. The estimated duration of Phase 2 is 2025 through 2027, subject to the pace of the competent authority negotiations. The fee cap for Phase 2 is $975,000, bringing the total engagement fee cap across both phases to $2,825,000.

4.2 Kettner Pflüger Rechtsanwälte

As noted above, Kettner Pflüger Rechtsanwälte has been engaged directly by HSAG at an estimated fee of €320,000 for the preparation of German transfer pricing documentation and coordination with the BZSt on the German side of the bilateral APA. Kettner Pflüger has commenced preliminary work, including participation in coordination calls with C&H and initial review of HSAG's existing German documentation. The billing status for Kettner Pflüger's engagement will be reported by Dr. Tobias Kettner directly to Dr. Fassbinder, in accordance with the separate engagement terms between HSAG and Kettner Pflüger.

5. Coordination and Communication Items

We wish to bring the following coordination and communication items to your attention:

Internal Stakeholder Communications. We respectfully remind you that Margarethe Stein (Chief Financial Officer, HSAG) and Victor Almeida (President and General Manager, HSI) should be kept apprised of the engagement timeline, particularly the pre-filing conference scheduled for May 19, 2025 and the formal APA application target date of July 7, 2025. Both individuals may be called upon to respond to financial data requests, review draft sections of the application, or provide signatory approvals in connection with the formal application filing. Similarly, we understand that Dr. Klaus-Dieter Wehrheim (Chief Executive Officer, HSAG) will receive a summary briefing from Dr. Fassbinder at appropriate intervals. We are happy to prepare a concise executive summary for Dr. Wehrheim's benefit if that would be helpful.

Financial Data Request. We request that HSI's finance team prepare segmented financial data for fiscal years 2020 through 2023 for inclusion in the APA financial data appendix. We have already received the fiscal year 2024 segmented financial data, for which we are grateful. The segmented financials should present HSI's controlled transaction data (net revenue, cost of goods sold, gross profit, operating expenses, and operating income) separately for each of the three covered transaction categories to the extent that HSI's internal financial reporting permits such segmentation. The financial data should be reconciled to the Gresham Whitfield LLP audit workpapers for the relevant fiscal years. We ask that this data be compiled and transmitted to Leila Nazari no later than June 6, 2025, to allow adequate time for incorporation into the application.

Credit Facility Considerations. We note for completeness that HSI maintains a $600 million revolving credit facility with Ridgeline National Bank, N.A. (acting as administrative agent, with Daniel Furlong serving as relationship manager). The filing of the APA application is not expected to affect any representations, warranties, or covenants under the credit facility agreement, and the APA process is a voluntary, cooperative engagement with the IRS that does not constitute an audit, examination, or adverse tax proceeding. However, as a matter of prudent practice, C&H recommends that HSI's treasury team review the credit facility agreement (and any related tax indemnity or tax sharing agreements) to confirm that there are no tax-related notification obligations triggered by the filing of an APA application or a transfer pricing report. Should HSI's treasury team identify any such provisions, we would be happy to assist in evaluating the notification requirements.

Affiliated Entities Outside Scope. We confirm that Halcyon Semiconductor Japan K.K. ("HSJ"), based in Tokyo, and Halcyon Semiconductor (Shanghai) Co., Ltd. ("HSC"), based in Shanghai, are not within the scope of the current bilateral APA engagement. However, both entities will be referenced in the Master File for purposes of organizational completeness and to provide the IRS and BZSt with a comprehensive picture of the Halcyon Semiconductor group's global operations and intercompany transaction flows. Should the Companies wish to explore APA coverage for transactions involving HSJ or HSC in the future, we would be pleased to discuss that possibility separately.

6. Next Quarterly Update

The next quarterly status update, covering the second quarter of 2025, is expected to be delivered in late July 2025. The timing of the Q2 update is designed to follow the pre-filing conference (May 19, 2025) and to coincide closely with the formal APA application filing (target July 7, 2025), so that the Q2 update can report on both of these significant milestones.

Specifically, the Q2 2025 status update will address:

• Feedback received from the IRS APMA team during the pre-filing conference, including any concerns or requests raised by the APMA team and our assessment of IRS receptivity to the proposed bilateral APA approach, methods, and rollback;

• The status of the formal APA application, including confirmation of filing, any issues encountered during the filing process, and next steps following acceptance of the application by the APMA program; and

• Progress on the contemporaneous transfer pricing documentation, including the Master File, US Local Files, and CSA Documentation Addendum.

7. Closing

We appreciate the opportunity to provide this quarterly status report and trust that it gives you a comprehensive picture of the progress made during the first quarter of the engagement. Should you have any questions regarding any aspect of this letter or the engagement generally, please do not hesitate to contact Leonard Cross (responsible partner) at (212) 506-7112 or lcross@calderwoodharkness.com, or Leila Nazari (lead associate) at (212) 506-7238 or lnazari@calderwoodharkness.com. We are available to discuss the engagement at any time and are happy to arrange a call or meeting at your convenience.

We wish to express our sincere appreciation for the continued cooperation and responsiveness of the HSAG and HSI tax teams. The functional analysis interviews were conducted efficiently and the quality of the information provided has been excellent, which has enabled us to maintain the project timeline and deliver high-quality work product. We look forward to continuing to work closely with both of you as we advance toward the pre-filing conference and formal APA application filing.

Please note that this letter constitutes a privileged and confidential attorney-client communication. It is intended solely for the use of the addressees and the individuals identified on the distribution list below. The contents of this letter should not be disclosed to any third party without the prior written consent of Calderwood & Harkness LLP.

Very truly yours,

CALDERWOOD & HARKNESS LLP

By: ________

Leonard Cross Partner, Tax Calderwood & Harkness LLP 599 Lexington Avenue, 38th Floor New York, NY 10022 Direct: (212) 506-7112

Email: lcross@calderwoodharkness.com

cc:

Sylvia Hartwell, Partner, Tax, Calderwood & Harkness LLP Leila Nazari, Senior Associate, Tax, Calderwood & Harkness LLP Victor Almeida, President & General Manager, Halcyon Semiconductor Inc. (courtesy copy)

PRIVILEGED & CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION C&H Matter No. 1032-00006	Billing Code: HSAG-TP-2025 © 2025 Calderwood & Harkness LLP. All rights reserved.
Timekeeper	Role	Hourly Rate	Approx. Hours Billed (Q1)	Approx. Fees
Leonard Cross	Partner (Responsible)	$1,250/hr	62	$77,500
Sylvia Hartwell	Partner (Billing)	$1,175/hr	18	$21,150
Leila Nazari	Senior Associate (Lead)	$825/hr	174	$143,550
Robert Jansen	Associate	$650/hr	196	$127,400
Total C&H Fees (Phase 1, Q1)	450	$369,600

PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION
CALDERWOOD & HARKNESS LLP 599 Lexington Avenue, 38th Floor New York, NY 10022
Telephone: (212) 506-7000 Facsimile: (212) 506-7001 www.calderwoodharkness.com
April 25, 2025
VIA ELECTRONIC MAIL AND FIRST-CLASS MAIL
Priya Raghavan Vice President, Tax Halcyon Semiconductor Inc. 8700 Parmer Lane, Building 4 Austin, TX 78729
Dr. Erwin Fassbinder Senior Vice President, Group Tax Halcyon Semiconductor AG Halcyon-Allee 12 01099 Dresden, Saxony Germany
Re: Bilateral Advance Pricing Agreement and Transfer Pricing Documentation Project — Quarterly Status Update (Q1 2025)
C&H Matter Number: 1032-00006 Billing Code: HSAG-TP-2025
Dear Priya and Dr. Fassbinder:
1. Introduction and Purpose
We are pleased to provide you with the first quarterly status report on our engagement concerning the bilateral Advance Pricing Agreement ("APA") between the United States Internal Revenue Service ("IRS") and the German Federal Central Tax Office (Bundeszentralamt für Steuern, "BZSt"), together with the contemporaneous transfer pricing documentation for Halcyon Semiconductor AG ("HSAG") and Halcyon Semiconductor Inc. ("HSI" and, together with HSAG, the "Companies"). This letter covers work performed during the reporting period commencing February 3, 2025 and concluding on the date hereof, April 25, 2025.
As you will recall, Calderwood & Harkness LLP ("C&H") formally opened this engagement on February 3, 2025, and the parties executed the governing engagement letter on March 10, 2025. The engagement letter sets forth the scope of our representation, the fee structure, and the terms of the collaboration among the various professional advisors involved in this matter. This quarterly status letter is provided in accordance with Section 8.2 of the engagement letter, which contemplates quarterly written status reports to the principal client contacts at both HSAG and HSI.
By way of brief recap, the scope of the engagement encompasses three categories of controlled intercompany transactions between HSAG and HSI:
(a) Tangible Goods — Wafer and Die Sales. HSAG manufactures semiconductor wafers and dies at its fabrication facilities in Dresden and Chemnitz, Germany, which are sold to HSI for distribution to end customers and integration into modules in the North American market. In fiscal year 2024, aggregate intercompany sales of tangible goods totaled approximately €987.6 million.
(b) Royalties for Licensed Semiconductor intellectual Property. HSI pays royalties to HSAG for the right to use, sublicense, and distribute products incorporating HSAG's proprietary process technology, design libraries, and related semiconductor intellectual property. In fiscal year 2024, royalty payments from HSI to HSAG totaled approximately €68.4 million.
(c) Cost-Sharing Contributions under the Qualified Cost Sharing Arrangement. HSI and HSAG are parties to a Qualified Cost Sharing Arrangement ("CSA") under which both entities share the costs of ongoing research and development activities in proportion to their reasonably anticipated benefits. In fiscal year 2024, HSI's cost-sharing contributions totaled approximately €224.6 million.
In aggregate, these three categories of intercompany transactions represent annual controlled transaction flows of approximately €1.28 billion, making this one of the most significant transfer pricing matters within the Halcyon Semiconductor group.
The bilateral APA will cover five prospective tax years, commencing January 1, 2025 and ending December 31, 2029. In addition, the application will include a formal request to roll back the agreed transfer pricing methodology to three prior tax years, covering January 1, 2022 through December 31, 2024, for a total of eight covered tax years. The rollback request is intended to provide certainty with respect to the open statute-of-limitations years and to resolve any pending or potential transfer pricing adjustments for those periods on a consistent basis.
The sections below provide a detailed summary of the work completed to date, upcoming milestones, the current budget utilization and fee status, and coordination and communication items requiring your attention.
2. Engagement Progress — Work Completed to Date
2.1 Engagement Setup and Coordination
Conflict Check. A comprehensive conflict check was completed on February 3, 2025, the date on which the engagement was formally opened. The conflict check was conducted in accordance with C&H's standard procedures and encompassed all current and former client relationships, adverse-party databases, and affiliations of the engagement team members. No conflicts of interest were identified, and the engagement was cleared for acceptance without conditions.
Subcontractor Engagement — Meridian Economics GmbH. On February 18, 2025, a subcontractor engagement letter was executed with Meridian Economics GmbH ("Meridian"), an independent transfer pricing economics firm headquartered in Munich, Germany. The engagement of Meridian was contemplated by the engagement letter and was discussed during the kick-off call held on February 7, 2025. Meridian's team will be led by Dr. Annika Breitner, Managing Director, and Maximilian Voss, Senior Analyst. Meridian has been retained to perform the benchmarking studies and economic analyses that will form the quantitative backbone of both the APA application and the contemporaneous transfer pricing documentation. Meridian's engagement is structured on a fixed-fee basis of €485,000, payable in installments tied to the delivery of specified work products, as set forth in the subcontractor engagement letter.
German Tax Counsel Coordination — Kettner Pflüger Rechtsanwälte. Coordination has been established with Kettner Pflüger Rechtsanwälte ("Kettner Pflüger"), the Frankfurt am Main-based law firm that serves as HSAG's German tax counsel. As you know, Dr. Tobias Kettner and Friederike Lang of Kettner Pflüger will be responsible for preparing and submitting the parallel German APA application to the BZSt and for the German-side transfer pricing documentation obligations under the German Foreign Tax Act (Außensteuergesetz, "AStG") and the Records Creation Ordinance (Gewinnabgrenzungsaufzeichnungsverordnung, "GAufzV"). C&H and Kettner Pflüger held an initial coordination call on February 21, 2025, during which we aligned on the project timeline, the division of responsibilities, and the procedures for sharing work product between the US and German engagement teams. We expect to hold bi-weekly coordination calls with Kettner Pflüger going forward to ensure consistency of positions and efficient information flow.
Project Plan and Timeline Memorandum. A detailed project plan and timeline memorandum was prepared and circulated to the full C&H engagement team on February 14, 2025. The engagement team consists of Leonard Cross (Partner, Responsible Attorney), Sylvia Hartwell (Partner, Billing Attorney), Leila Nazari (Senior Associate, Lead Attorney), and Robert Jansen (Associate). The project plan identifies all major work streams, key milestones, internal deadlines, and deliverable dates, and assigns primary responsibility for each task to a specific team member. The project plan has been shared with Priya Raghavan and Dr. Fassbinder for informational purposes and serves as the primary project management tool for the engagement.
2.2 Functional Analysis — Interviews Completed
Functional analysis interviews have been completed for both HSI and HSAG. The functional analysis is a critical component of the transfer pricing analysis, as it provides the factual foundation for characterizing each entity's role in the controlled transactions, identifying the functions performed, assets employed, and risks assumed by each party, and ultimately determining the appropriate transfer pricing methodology and tested party.
HSI Interviews. Interviews with HSI personnel were conducted in person at HSI's headquarters in Austin, Texas over the course of two days, March 11–12, 2025. The following individuals were interviewed:
• Victor Almeida, President and General Manager of HSI, who provided an overview of HSI's business operations, strategic direction, customer relationships, and the organizational interface between HSI and HSAG;
• Priya Raghavan, Vice President, Tax, who discussed the intercompany pricing policies currently in effect, the historical evolution of the transfer pricing framework, and the Companies' compliance history with respect to US and German transfer pricing rules; and
• Thomas Kuroda, Vice President, Supply Chain Operations, who provided detailed information regarding HSI's role in the supply chain, including order management, inventory logistics, warehousing at the Austin distribution center, quality assurance procedures, and the extent of any value-added processing or testing performed by HSI prior to shipment to end customers.
HSAG Interviews. Interviews with HSAG personnel were conducted via secure video conference on March 18–19, 2025, with follow-up sessions on March 25, 2025. The following individuals were interviewed:
• Dr. Hendrik Möller, Chief Technology Officer of HSAG, who provided extensive information regarding HSAG's fabrication operations at the Dresden Fab 1 and Fab 2 facilities (located in the Industriepark Klotzsche) and the Chemnitz Fab 3 facility, including process technology node capabilities (7nm, 5nm, and the recently qualified 3nm process technology), capital expenditure requirements, yield management, and the nature and scope of HSAG's research and development activities. Dr. Möller confirmed that HSAG's total R&D expenditure for fiscal year 2024 was approximately €1.42 billion, of which approximately €998.2 million constitutes qualified intangible development costs under the CSA. The balance of R&D expenditure relates to activities outside the scope of the CSA, including pre-competitive research and certain government-funded collaborative projects; and
• Dr. Erwin Fassbinder, Senior Vice President, Group Tax, who discussed HSAG's perspective on the intercompany pricing policies, the historical and current structure of the IP license and CSA arrangements, and HSAG's compliance posture under German transfer pricing rules.
Key Characterization Conclusions. Based on the functional analysis interviews and our review of supporting documentation, we have reached the following preliminary entity characterization conclusions, which are consistent with the approach discussed during the engagement planning phase:
• HSI functions as a limited-risk distributor and design-support entity. HSI does not own significant intangible assets (other than its participant interest under the CSA), does not perform manufacturing or core R&D functions, bears limited inventory and credit risk, and derives the majority of its revenue from the resale of HSAG-manufactured products to North American customers under HSAG's brand and technology specifications. HSI is the least complex entity and is therefore suitable as the tested party for purposes of the Comparable Profits Method ("CPM") under IRC § 482 and the Transactional Net Margin Method ("TNMM") under the OECD Transfer Pricing Guidelines.
• HSAG is the complex, IP-rich principal entity that performs advanced-node semiconductor manufacturing, owns and develops valuable process technology and design libraries, maintains the core R&D infrastructure, and bears the preponderance of market risk, technology risk, and capital risk within the intercompany value chain. HSAG is not suitable as the tested party given the unique and valuable nature of its intangible assets and the complexity of its operations.
Functional analysis memoranda for both HSI and HSAG are currently being finalized by Leila Nazari and Robert Jansen. We anticipate that draft memoranda will be circulated to Priya Raghavan and Dr. Fassbinder for review in mid-May 2025, with the objective of incorporating any factual corrections or comments before the memoranda are finalized for inclusion in the APA application and contemporaneous documentation.
2.3 Industry Analysis
An industry analysis memorandum covering the global semiconductor industry has been drafted and is currently under internal review by the C&H engagement team. The memorandum addresses the competitive dynamics of the semiconductor industry with particular focus on the automotive, industrial Internet of Things ("IoT"), and data-center segments in which the Halcyon Semiconductor group primarily operates. The analysis covers the period from fiscal year 2020 through fiscal year 2024 and addresses industry cyclicality, the capital-intensive nature of advanced-node semiconductor fabrication, research and development investment trends, supply chain disruptions experienced during 2020–2022, the impact of government incentive programs (including the US CHIPS and Science Act and the European Chips Act), and the competitive landscape among leading integrated device manufacturers and foundries. This industry context is essential to the APA application, as it provides the IRS and BZSt with the economic backdrop against which the Companies' intercompany transactions and transfer pricing methodology should be evaluated. Meridian Economics has provided market data inputs for the industry analysis memorandum, and we have coordinated with Meridian to ensure consistency between the industry analysis and the assumptions underlying the benchmarking studies.
2.4 Benchmarking Studies — In Progress
Meridian Economics has commenced both of the principal benchmarking studies required for this engagement. We provide a summary of the current status of each study below.
Tangible Goods — CPM/TNMM Benchmarking Study. Meridian has substantially completed the initial screening of potential comparable companies for purposes of benchmarking HSI's profitability as a limited-risk distributor of semiconductor products in the North American market. The screening process utilized the Fenmore Services Inc. database and applied quantitative and qualitative screening criteria consistent with IRS and OECD guidance, including industry classification (SIC codes 5065 and 5045; NAICS codes 423690 and 423430), functional comparability, geographic focus, data availability, and independence from controlled transactions. The preliminary comparable set includes 17 companies with financial data available for the five fiscal years 2020–2024. The preliminary interquartile range of operating profit margins for the comparable set is 2.8% to 6.1%, with a median of 4.4%. HSI's fiscal year 2024 operating margin of 4.80% — derived from operating income of approximately $197.8 million on net revenue of approximately $4.12 billion — falls within the preliminary interquartile range, which provides initial support for the arm's-length nature of the intercompany pricing for tangible goods. The final comparable set is subject to refinement as Meridian completes its detailed comparability analysis, including review of annual reports, potential comparability adjustments (e.g., working capital adjustments), and rejection of companies with material non-comparable characteristics.
Royalties — CUT Analysis. Meridian is conducting a Comparable Uncontrolled Transaction ("CUT") analysis to benchmark the royalty rate charged by HSAG to HSI for the license of semiconductor intellectual property. The analysis involves the identification and screening of comparable uncontrolled license agreements for semiconductor-related technology and intellectual property. Meridian has searched the Clearpoint Royalty Database and reviewed publicly available SEC filings, including license agreements filed as exhibits to Form 10-K and Form 8-K filings, for comparable licensing arrangements. To date, eight potential comparable license agreements have been identified. The preliminary interquartile range of royalty rates observed in the comparable agreements is 3.5% to 8.2%, with a median of 5.6%. HSAG's royalty rate of 6.0%, applied to HSI's net revenue from products incorporating the licensed intellectual property, falls within the preliminary interquartile range. We note that the CUT analysis will be corroborated by a residual profit split analysis to confirm that the allocation of residual profits between HSAG and HSI is consistent with each entity's contributions of unique and valuable intangible assets.
Cost-Sharing Contributions. The transfer pricing methodology for cost-sharing contributions under the CSA will be analyzed under the income method in accordance with Treasury Regulation § 1.482-7. This analysis will draw on data developed in both of the foregoing benchmarking studies as well as the CSA documentation discussed in Section 3.4 below.
Final benchmarking reports for both the tangible goods and royalties analyses are expected to be delivered by Meridian in late May 2025, which will allow sufficient time for C&H review and incorporation into the formal APA application targeted for filing in early July 2025.
2.5 Pre-Filing Memorandum Submitted
On April 14, 2025, an anonymous pre-filing memorandum was submitted to the IRS Advance Pricing and Mutual Agreement Program ("APMA") requesting a pre-filing conference. The pre-filing memorandum was prepared in accordance with Revenue Procedure 2015-41, which governs the APA process, and was transmitted to the APMA office in Washington, D.C.
The pre-filing memorandum provides a factual and analytical overview of the proposed APA without identifying the taxpayer by name. Consistent with standard practice under Revenue Procedure 2015-41, the memorandum describes the taxpayer's industry (semiconductor manufacturing and distribution) and organizational structure in general terms, identifies the three categories of controlled transactions at issue, sets forth the proposed transfer pricing methods for each category (CPM/TNMM for tangible goods, CUT for royalties corroborated by a residual profit split, and the income method for CSA contributions per Treasury Regulation § 1.482-7), describes the proposed APA term (five prospective years, 2025–2029) and the rollback request (three prior years, 2022–2024), and provides a high-level summary of the economic analysis supporting the proposed methods. The memorandum does not identify HSAG or HSI by name, EIN, or Steuernummer.
We received confirmation from the APMA office on April 18, 2025 that the pre-filing memorandum has been received and assigned for scheduling. As discussed in Section 3.1 below, the pre-filing conference has been scheduled for May 19, 2025.
3. Upcoming Milestones
3.1 Pre-Filing Conference with IRS APMA — May 19, 2025
The pre-filing conference with the IRS APMA program has been scheduled for May 19, 2025 at the IRS offices in Washington, D.C. This is a significant milestone in the APA process, as the pre-filing conference provides the first opportunity for substantive dialogue with the APMA team regarding the proposed bilateral APA.
Leonard Cross and Leila Nazari will attend the pre-filing conference on behalf of Calderwood & Harkness. Priya Raghavan has indicated her intention to participate on behalf of HSI, and we welcome her attendance. We are currently preparing an internal preparation memorandum that will cover anticipated IRS questions, detailed talking points on the proposed transfer pricing methods for each of the three transaction categories, a justification for the rollback request, and potential areas of IRS concern that we should be prepared to address. A draft of this preparation memorandum will be circulated to Priya Raghavan and Dr. Fassbinder no later than May 9, 2025, to allow sufficient time for comment and coordination before the conference.
The primary objectives of the pre-filing conference are to: (i) gauge the IRS's receptivity to the bilateral APA approach in the US-Germany context; (ii) obtain preliminary feedback on the proposed transfer pricing methods, particularly the use of the CPM/TNMM for tangible goods and the CUT for royalties; (iii) assess IRS views on the rollback request and identify any potential obstacles; and (iv) understand the APMA team's current caseload and likely timeline for processing the formal application once filed. This feedback will be instrumental in finalizing the formal APA application and will inform any adjustments to our analytical approach.
3.2 Formal APA Application Filing — Target July 7, 2025
The target date for filing the formal APA application with the IRS APMA program is July 7, 2025. The formal application will consist of the following components:
(a) IRS Form 14661 (Application for Advance Pricing Agreement), fully completed and executed by an authorized officer of HSI;
(b) A comprehensive narrative memorandum setting forth the factual background, the functional analysis of HSI and HSAG, the industry analysis, and a detailed description of the three categories of controlled transactions and the intercompany agreements governing each;
(c) An economic analysis appendix containing the final benchmarking studies prepared by Meridian Economics, the proposed arm's-length ranges, and the economic rationale for the selected transfer pricing methods;
(d) A legal analysis appendix addressing the applicable provisions of IRC § 482, the Treasury Regulations thereunder, the OECD Transfer Pricing Guidelines, and Article 25 (Mutual Agreement Procedure) of the US-Germany Income Tax Treaty (signed June 29, 2006, as amended by the 2006 Protocol); and
(e) A financial data appendix containing segmented financial statements and intercompany transaction schedules for HSI and HSAG, reconciled to the Companies' audited financial statements for fiscal years 2020 through 2024.
The application will identify HSAG (Steuernummer 203/118/04527) and HSI (Employer Identification Number 84-2917630) as co-applicants seeking a bilateral APA under the mutual agreement procedure provisions of Article 25 of the US-Germany Income Tax Treaty. The current large-case APA user fee of $113,500 will accompany the filing.
Concurrent with the filing of the formal application, we will submit a Power of Attorney on IRS Form 2848, authorizing Leonard Cross, Sylvia Hartwell, and Leila Nazari of Calderwood & Harkness LLP to represent HSI before the IRS in all matters related to the APA application.
The financial data appendix will include segmented financials and intercompany transaction schedules that have been reconciled to the Companies' audited financial statements. The Companies' external auditor is Gresham Whitfield LLP, with the US engagement partner being Janet Okonkwo (Houston office) and the group audit partner being Simon Cardwell (London office). We will coordinate with the Companies' finance teams and, as needed, with Gresham Whitfield to ensure the accuracy and completeness of the financial data included in the application.
3.3 German APA Application Submission — Target August 15, 2025
Kettner Pflüger Rechtsanwälte will prepare and submit the parallel German APA application to the BZSt, targeting a filing date of August 15, 2025. The sequencing of the German filing approximately five to six weeks after the US filing is intentional and consistent with common practice in bilateral APAs involving the United States and Germany, as it allows for the US application to be substantially finalized first, after which the finalized application package can be transmitted to German counsel for alignment.
Accordingly, C&H will transmit the finalized US application package, including the narrative memorandum, economic analysis, legal analysis, and financial data appendices, to Dr. Tobias Kettner promptly following the US filing. This will enable Kettner Pflüger to ensure consistency of proposed transfer pricing methods, financial data presentations, and treaty-based competent authority procedure arguments across the two applications. Consistency between the US and German applications is essential to facilitating an efficient competent authority negotiation process and minimizing the risk of divergent positions between the IRS and the BZSt.
3.4 FY 2024 Contemporaneous Transfer Pricing Documentation — Deadline September 30, 2025
The contemporaneous transfer pricing documentation deliverables for HSI include the following, all of which are targeted for completion by September 30, 2025:
(a) Master File for the Halcyon Semiconductor group, prepared in accordance with the OECD Base Erosion and Profit Shifting ("BEPS") Action 13 framework, providing a high-level overview of the group's organizational structure, business operations, intangible assets, intercompany financial activities, and global allocation of income and economic activity;
(b) US Local File for HSI for FY 2024, documenting the arm's-length nature of the three categories of controlled transactions between HSI and HSAG for the fiscal year ended December 31, 2024;
(c) US Local Files for HSI for FY 2022 and FY 2023 (the two earlier rollback years), which will be prepared on the same timeline to support the rollback request included in the APA application and to ensure that comprehensive contemporaneous documentation exists for all three rollback years; and
(d) IRC § 6662(e) Penalty Protection Statements, which will be prepared and attached to each US Local File. These statements are designed to satisfy the reasonable-cause and good-faith exception under IRC § 6664(c) and to establish that HSI maintained contemporaneous documentation sufficient to demonstrate that it applied the specified transfer pricing method and reasonably concluded that the method provided the most reliable measure of an arm's-length result, thereby providing protection against the potential imposition of transfer pricing penalties under IRC § 6662(e).
In addition, a CSA Documentation Addendum will be finalized as part of the contemporaneous documentation. The CSA Documentation Addendum will address the platform contribution transaction ("PCT") buy-in payment of $312.5 million made by HSI in connection with the formation of the CSA in 2018. The PCT buy-in payment was valued by Stonebridge Valuation Partners LLC using the income method, applying a discount rate of 11.8% and a projection period of 15 years. The CSA Documentation Addendum will also set forth and support the 22.5% reasonably anticipated benefit share ("RAB share") attributed to HSI, which serves as the basis for HSI's annual cost-sharing contributions. The CSA documentation will be prepared in accordance with Treasury Regulation § 1.482-7 and will be included as an integral component of the US Local Files and the APA application.
3.5 Intercompany Agreement Review
A comprehensive review of the existing intercompany agreements governing the controlled transactions between HSI and HSAG is planned for the second quarter of 2025. The agreements to be reviewed include:
(a) The Master Intercompany Supply Agreement between HSAG and HSI, originally effective January 1, 2019, as amended on July 1, 2022, governing the terms of intercompany sales of wafers, dies, and other tangible goods;
(b) The intellectual Property License Agreement between HSAG and HSI, effective January 1, 2019, governing the license of HSAG's process technology, design libraries, and related semiconductor intellectual property to HSI; and
(c) The Qualified Cost Sharing Arrangement between HSAG and HSI, effective July 15, 2018, governing the sharing of research and development costs and the allocation of rights to intangible property developed under the arrangement.
The purpose of this review is to ensure that the terms and conditions of the existing intercompany agreements are fully consistent with the transfer pricing methods and arm's-length ranges proposed in the APA application, and to identify any provisions that may require amendment or supplementation to align with the APA positions. To the extent that amendments are warranted, we will work with the Companies' legal teams and, where appropriate, Kettner Pflüger, to draft and execute the necessary modifications prior to the formal APA filing.
4. Budget Utilization and Fee Summary
4.1 Phase 1 Fee Cap Status
As set forth in the engagement letter, the Phase 1 engagement — encompassing the preparation and filing of the APA application and the preparation of contemporaneous transfer pricing documentation — is subject to a fee cap of $1,850,000. The table below summarizes the fees incurred through April 25, 2025:
In addition, Meridian Economics GmbH has invoiced approximately €180,000 of its €485,000 fixed fee for work performed to date, consisting of the preliminary database screening and the initial phases of the benchmarking analyses. At current exchange rates, this equates to approximately $195,000, which is payable directly by the Companies to Meridian in accordance with the subcontractor engagement letter and is not included in the C&H Phase 1 fee cap.
Total Phase 1 C&H fees billed and accrued through April 25, 2025 are approximately $369,600, representing approximately 20.0% of the $1,850,000 Phase 1 fee cap. We are pleased to report that the engagement remains on budget, and fee spending is tracking in line with the project plan. The current burn rate reflects the front-loaded nature of the engagement, as the functional analysis, industry analysis, pre-filing memorandum, and initial benchmarking work require significant effort in the early months of the engagement. We anticipate that the pace of fee accrual will moderate slightly in Q2 before increasing again as the formal APA application is prepared and filed.
For your reference, Phase 2 of the engagement — which covers APA negotiation support, including preparation for and participation in IRS APMA team meetings, competent authority sessions, and APA closure — has not yet commenced. The estimated duration of Phase 2 is 2025 through 2027, subject to the pace of the competent authority negotiations. The fee cap for Phase 2 is $975,000, bringing the total engagement fee cap across both phases to $2,825,000.
4.2 Kettner Pflüger Rechtsanwälte
As noted above, Kettner Pflüger Rechtsanwälte has been engaged directly by HSAG at an estimated fee of €320,000 for the preparation of German transfer pricing documentation and coordination with the BZSt on the German side of the bilateral APA. Kettner Pflüger has commenced preliminary work, including participation in coordination calls with C&H and initial review of HSAG's existing German documentation. The billing status for Kettner Pflüger's engagement will be reported by Dr. Tobias Kettner directly to Dr. Fassbinder, in accordance with the separate engagement terms between HSAG and Kettner Pflüger.
5. Coordination and Communication Items
We wish to bring the following coordination and communication items to your attention:
Internal Stakeholder Communications. We respectfully remind you that Margarethe Stein (Chief Financial Officer, HSAG) and Victor Almeida (President and General Manager, HSI) should be kept apprised of the engagement timeline, particularly the pre-filing conference scheduled for May 19, 2025 and the formal APA application target date of July 7, 2025. Both individuals may be called upon to respond to financial data requests, review draft sections of the application, or provide signatory approvals in connection with the formal application filing. Similarly, we understand that Dr. Klaus-Dieter Wehrheim (Chief Executive Officer, HSAG) will receive a summary briefing from Dr. Fassbinder at appropriate intervals. We are happy to prepare a concise executive summary for Dr. Wehrheim's benefit if that would be helpful.
Financial Data Request. We request that HSI's finance team prepare segmented financial data for fiscal years 2020 through 2023 for inclusion in the APA financial data appendix. We have already received the fiscal year 2024 segmented financial data, for which we are grateful. The segmented financials should present HSI's controlled transaction data (net revenue, cost of goods sold, gross profit, operating expenses, and operating income) separately for each of the three covered transaction categories to the extent that HSI's internal financial reporting permits such segmentation. The financial data should be reconciled to the Gresham Whitfield LLP audit workpapers for the relevant fiscal years. We ask that this data be compiled and transmitted to Leila Nazari no later than June 6, 2025, to allow adequate time for incorporation into the application.
Credit Facility Considerations. We note for completeness that HSI maintains a $600 million revolving credit facility with Ridgeline National Bank, N.A. (acting as administrative agent, with Daniel Furlong serving as relationship manager). The filing of the APA application is not expected to affect any representations, warranties, or covenants under the credit facility agreement, and the APA process is a voluntary, cooperative engagement with the IRS that does not constitute an audit, examination, or adverse tax proceeding. However, as a matter of prudent practice, C&H recommends that HSI's treasury team review the credit facility agreement (and any related tax indemnity or tax sharing agreements) to confirm that there are no tax-related notification obligations triggered by the filing of an APA application or a transfer pricing report. Should HSI's treasury team identify any such provisions, we would be happy to assist in evaluating the notification requirements.
Affiliated Entities Outside Scope. We confirm that Halcyon Semiconductor Japan K.K. ("HSJ"), based in Tokyo, and Halcyon Semiconductor (Shanghai) Co., Ltd. ("HSC"), based in Shanghai, are not within the scope of the current bilateral APA engagement. However, both entities will be referenced in the Master File for purposes of organizational completeness and to provide the IRS and BZSt with a comprehensive picture of the Halcyon Semiconductor group's global operations and intercompany transaction flows. Should the Companies wish to explore APA coverage for transactions involving HSJ or HSC in the future, we would be pleased to discuss that possibility separately.
6. Next Quarterly Update
The next quarterly status update, covering the second quarter of 2025, is expected to be delivered in late July 2025. The timing of the Q2 update is designed to follow the pre-filing conference (May 19, 2025) and to coincide closely with the formal APA application filing (target July 7, 2025), so that the Q2 update can report on both of these significant milestones.
Specifically, the Q2 2025 status update will address:
• Feedback received from the IRS APMA team during the pre-filing conference, including any concerns or requests raised by the APMA team and our assessment of IRS receptivity to the proposed bilateral APA approach, methods, and rollback;
• The status of the formal APA application, including confirmation of filing, any issues encountered during the filing process, and next steps following acceptance of the application by the APMA program; and
• Progress on the contemporaneous transfer pricing documentation, including the Master File, US Local Files, and CSA Documentation Addendum.
7. Closing
We appreciate the opportunity to provide this quarterly status report and trust that it gives you a comprehensive picture of the progress made during the first quarter of the engagement. Should you have any questions regarding any aspect of this letter or the engagement generally, please do not hesitate to contact Leonard Cross (responsible partner) at (212) 506-7112 or lcross@calderwoodharkness.com, or Leila Nazari (lead associate) at (212) 506-7238 or lnazari@calderwoodharkness.com. We are available to discuss the engagement at any time and are happy to arrange a call or meeting at your convenience.
We wish to express our sincere appreciation for the continued cooperation and responsiveness of the HSAG and HSI tax teams. The functional analysis interviews were conducted efficiently and the quality of the information provided has been excellent, which has enabled us to maintain the project timeline and deliver high-quality work product. We look forward to continuing to work closely with both of you as we advance toward the pre-filing conference and formal APA application filing.
Please note that this letter constitutes a privileged and confidential attorney-client communication. It is intended solely for the use of the addressees and the individuals identified on the distribution list below. The contents of this letter should not be disclosed to any third party without the prior written consent of Calderwood & Harkness LLP.
Very truly yours,
CALDERWOOD & HARKNESS LLP
By: ________
Leonard Cross Partner, Tax Calderwood & Harkness LLP 599 Lexington Avenue, 38th Floor New York, NY 10022 Direct: (212) 506-7112
Email: lcross@calderwoodharkness.com
cc:
Sylvia Hartwell, Partner, Tax, Calderwood & Harkness LLP Leila Nazari, Senior Associate, Tax, Calderwood & Harkness LLP Victor Almeida, President & General Manager, Halcyon Semiconductor Inc. (courtesy copy)
PRIVILEGED & CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION C&H Matter No. 1032-00006 | Billing Code: HSAG-TP-2025 © 2025 Calderwood & Harkness LLP. All rights reserved.
Timekeeper | Role | Hourly Rate | Approx. Hours Billed (Q1) | Approx. Fees
Leonard Cross | Partner (Responsible) | $1,250/hr | 62 | $77,500
Sylvia Hartwell | Partner (Billing) | $1,175/hr | 18 | $21,150
Leila Nazari | Senior Associate (Lead) | $825/hr | 174 | $143,550
Robert Jansen | Associate | $650/hr | 196 | $127,400
Total C&H Fees (Phase 1, Q1) | 450 | $369,600

PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION

VIA ELECTRONIC MAIL AND FIRST-CLASS MAIL

CALDERWOOD & HARKNESS LLP

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