BENCHMARKING STUDY
Comparable Uncontrolled Transaction Analysis: Intercompany Royalty for Licensed Semiconductor intellectual Property
Halcyon Semiconductor AG — Halcyon Semiconductor Inc. Intercompany IP License
Prepared by:
Meridian Economics GmbH Leopoldstraße 145 80804 Munich, Germany
Under the Direction of
Calderwood & Harkness LLP 599 Lexington Avenue, 38th Floor New York, NY 10022
Lead Economist: Dr. Annika Breitner, Managing Director, Meridian Economics GmbH
Senior Analyst: Maximilian Voss, Meridian Economics GmbH
Supervising Counsel: Leila Nazari, Senior Associate, Calderwood & Harkness LLP Leonard Cross, Partner, Calderwood & Harkness LLP
Date: June 2025
Matter Number: 1032-00006
Billing Code: HSAG-TP-2025
CONFIDENTIAL — Prepared in Connection with Transfer Pricing Documentation and Bilateral APA Application; Subject to Attorney–Client Privilege and Work Product Doctrine. This document and the information contained herein are privileged and confidential and are prepared at the direction of counsel in anticipation of litigation and/or for the purpose of providing legal advice. This document is not to be disclosed to any person or entity other than the addressees and their authorized representatives without the prior written consent of Calderwood & Harkness LLP.
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1. Executive Summary
1.1 Purpose and Scope
This study presents the Comparable Uncontrolled Transaction ("CUT") analysis for the intercompany royalty payments made by Halcyon Semiconductor Inc. ("HSI"), a Delaware corporation and wholly owned United States subsidiary of Halcyon Semiconductor AG ("HSAG"), a German Aktiengesellschaft, to HSAG under the Intercompany IP License Agreement (the "IP License Agreement") effective January 1, 2019 (the "Controlled Transaction"). The purpose of this analysis is to determine whether the royalty rate charged under the IP License Agreement is consistent with the arm's-length standard, as required under the laws and regulations of both the United States and the Federal Republic of Germany, and under the applicable bilateral income tax treaty.
The royalty compensates HSAG for HSI's right to use HSAG's proprietary semiconductor process technology, design libraries, electronic design automation ("EDA") tool customizations, and related intangible property (collectively, the "Licensed IP") in connection with HSI's US distribution and design-support activities. HSI serves as the exclusive distribution, marketing, and design-support entity for Halcyon-branded semiconductor products in North America, and it leverages the Licensed IP in providing application engineering services to US-based customers, particularly in the automotive, industrial IoT, and data-center end markets.
For fiscal year 2024, royalty payments under the IP License Agreement totaled €68,400,000 (approximately $70,500,000 at the weighted average payment-date EUR/USD exchange rate of 1.0307). This payment represents a 6.0% running royalty on HSI's IP-attributable revenues, computed as follows:
• HSI's total third-party US net revenues for FY 2024: $4,120,000,000
• IP-attributable share: 18.1% (reflecting the portion of customer value driven by HSAG's licensed process technology and design libraries, as distinct from standard commodity-type semiconductor distribution margins)
• IP-attributable revenues: $4,120,000,000 × 18.1% = $745,720,000
• Royalty computation: $745,720,000 × 6.0% = $44,743,200 (rounded)
• Contractual payment denominated in EUR at the weighted average payment-date exchange rate of 1.0307 EUR/USD: €68,400,000 (approximately $70,500,000)
This study has been prepared to support the contemporaneous transfer pricing documentation for fiscal years 2022, 2023, and 2024, and to support the bilateral Advance Pricing Agreement ("APA") application to be filed with the Internal Revenue Service Advance Pricing and Mutual Agreement Program ("IRS APMA") and the German Federal Central Tax Office (Bundeszentralamt für Steuern, or "BZSt"). The proposed APA covers prospective years January 1, 2025 through December 31, 2029, with rollback to January 1, 2022, and is to be pursued under Revenue Procedure 2015-41 and the mutual agreement procedure provisions of Article 25 of the Convention Between the United States of America and the Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital and to Certain Other Taxes, signed June 29, 2006 (the "US-Germany Income Tax Treaty").
1.2 Summary of Results
Meridian Economics GmbH identified eight comparable uncontrolled license agreements involving the licensing of semiconductor-related intellectual property between unrelated parties. These agreements were sourced from the Clearpoint Royalty Database (a proprietary subscription database of technology license agreements, accessed through Meridian Economics GmbH's institutional subscription license) and from publicly available filings with the US Securities and Exchange Commission ("SEC"). The comparables were selected following a rigorous multi-step screening process designed to ensure that the identified transactions involve the transfer of comparable intangible property under comparable circumstances, as required by Treasury Regulations Section 1.482-4(c).
The key statistical results of the CUT analysis are as follows:
• Number of comparable uncontrolled license agreements: 8
• Interquartile range ("IQR") of royalty rates: 3.5% – 8.2%
• Median royalty rate: 5.6%
• HSAG's contractual royalty rate: 6.0%
HSAG's contractual royalty rate of 6.0% falls within the interquartile range and above the median, confirming that the royalty is consistent with arm's-length pricing. The above-median positioning is consistent with the fact that HSAG's Licensed IP covers advanced-node semiconductor process technologies (including 5nm and 3nm nodes) that are more cutting-edge and commercially valuable than the technologies licensed in several of the comparable agreements. The CUT result is further corroborated by a residual profit split analysis, which yields an implied royalty rate range of approximately 5.5% to 6.5%, bracketing the 6.0% contractual rate.
1.3 Conclusion
Based on the analysis set forth in this study, the 6.0% royalty rate charged by HSAG to HSI under the IP License Agreement is consistent with the arm's-length standard as articulated in:
• Internal Revenue Code ("IRC") Section 482;
• Treasury Regulations Section 1.482-4 (methods for transfers of intangible property);
• The Organisation for Economic Co-operation and Development ("OECD") Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, 2022 edition (the "OECD Guidelines");
• Article 9 of the US-Germany Income Tax Treaty; and
• Section 1 of the German Foreign Tax Act (Außensteuergesetz, or "AStG").
No adjustment to the intercompany royalty is required for any year within the proposed covered period (FY 2022 through FY 2029).
2. Background and Transaction Description
2.1 Overview of the Halcyon Group
Halcyon Semiconductor AG ("HSAG") is a publicly traded semiconductor manufacturer organized under the laws of the Federal Republic of Germany. HSAG's shares are listed on the Frankfurt Stock Exchange (XETRA) under ISIN DE000HSA0017 and Wertpapierkennnummer ("WKN") HSA001. The company's registered office is located at Halcyon-Allee 12, 01099 Dresden, Saxony, Germany.
HSAG designs and manufactures advanced-node semiconductor wafers, principally at 7-nanometer ("7nm"), 5-nanometer ("5nm"), and 3-nanometer ("3nm") process technology nodes, serving customers in the automotive, industrial Internet of Things ("IoT"), and data-center application segments. HSAG's products include high-performance microcontrollers, power management integrated circuits, analog and mixed-signal devices, and custom application-specific integrated circuits ("ASICs") fabricated using HSAG's proprietary process technologies.
HSAG operates three principal fabrication facilities in Germany:
• Fab 1 & Fab 2: Industriepark Klotzsche, Zur Wetterwarte 50, 01109 Dresden, Saxony, Germany. These facilities house HSAG's 7nm and 5nm production lines and constitute the company's primary high-volume manufacturing campus.
• Fab 3: Technologiepark Chemnitz, Annaberger Straße 240, 09125 Chemnitz, Saxony, Germany. Fab 3 is dedicated to HSAG's next-generation 3nm process technology and serves as the primary R&D and low-volume production facility for emerging node technologies.
HSAG's consolidated financial results for fiscal year 2024 reflect the company's position as a leading advanced-node semiconductor manufacturer:
• Consolidated revenue: €8,740,000,000
• EBITDA: €2,620,000,000 (30.0% margin)
• EBIT (operating income): €1,570,000,000 (18.0% margin)
• Total R&D expenditure: €1,420,000,000 (16.2% of revenue)
HSAG's high EBIT margin of 18.0% is reflective of the significant value embedded in HSAG's proprietary process technologies and design intellectual property, which enable premium pricing relative to commodity semiconductor manufacturers. The company's substantial R&D investment of €1,420,000,000 in FY 2024 underscores its commitment to continuous innovation and advancement of its process technology portfolio.
HSAG employs approximately 22,400 individuals globally, of whom approximately 14,600 are based in Germany. The German workforce includes the substantial majority of the company's R&D engineers, process technologists, and design library architects who are responsible for the development, enhancement, maintenance, and protection of the Licensed IP.
HSAG's senior management team includes:
• Chief Executive Officer: Dr. Klaus-Dieter Wehrheim
• Chief Financial Officer: Margarethe Stein
• Chief Technology Officer: Dr. Hendrik Möller
• Senior Vice President, Group Tax: Dr. Erwin Fassbinder
In addition to HSI, HSAG's global corporate structure includes several other affiliated entities, including Halcyon Semiconductor Japan K.K. ("HSJ"), organized under the laws of Japan with its principal office in Tokyo, and Halcyon Semiconductor (Shanghai) Co., Ltd. ("HSC"), organized under the laws of the People's Republic of China with its principal office in Shanghai. The intercompany transactions between HSAG and HSJ, and between HSAG and HSC, are outside the scope of this analysis and are addressed in separate transfer pricing documentation.
2.2 Overview of HSI
Halcyon Semiconductor Inc. ("HSI") is a Delaware C-corporation (Employer Identification Number 84-2917630; Delaware Division of Corporations File Number 7341825) and wholly owned subsidiary of HSAG. HSI was incorporated on March 12, 2010 and has operated continuously since that date as the Halcyon Group's exclusive distribution, marketing, and design-support entity for the North American market.
HSI's primary business function is the distribution and sale of Halcyon-branded semiconductor products to third-party customers in the United States and, to a limited extent, Canada and Mexico. HSI also provides design-support services to US customers, including application engineering assistance that leverages HSAG's design libraries and process technology know-how. HSI does not perform semiconductor manufacturing; all wafers and die are manufactured by HSAG at its German fabrication facilities and sold to HSI under a separate intercompany tangible goods purchase agreement.
HSI's principal facilities are located at:
• Principal Office and Operations Center: 8700 Parmer Lane, Building 4, Austin, TX 78729
• Design Center: 2455 Augustine Drive, Suite 300, Santa Clara, CA 95054
• Regional Sales Office (Detroit): 1100 Town Center Drive, Suite 420, Southfield, MI 48075
• Regional Sales Office (Portland): 9600 SW Nimbus Avenue, Suite 210, Beaverton, OR 97008
The Austin office houses HSI's executive management, supply chain operations, finance, and human resources functions. The Santa Clara design center employs application engineers who provide customer-facing design-support services using HSAG's design libraries and EDA tool customizations; it is important to note that the Santa Clara design center applies HSAG's existing IP in a customer-support context but does not independently develop new process technologies or design libraries. The Detroit and Portland regional sales offices serve the automotive and industrial customer segments, respectively.
HSI's financial results for fiscal year 2024 are summarized below:
• Net revenue (third-party US sales): $4,120,000,000
• Cost of goods sold: $3,380,000,000 (including intercompany purchases from HSAG)
• Gross profit: $740,000,000 (17.96% gross margin)
• Operating expenses: $542,200,000
• Operating income: $197,800,000 (4.80% operating margin)
HSI employs approximately 2,850 individuals across its four locations, the majority of whom are engaged in sales, marketing, customer support, and supply chain operations functions. HSI's management team includes:
• President & General Manager: Victor Almeida
• Vice President, Tax: Priya Raghavan
• Vice President, Supply Chain Operations: Thomas Kuroda
2.3 The Controlled Transaction — IP License Agreement
The Controlled Transaction at issue in this analysis is the intercompany royalty payment made by HSI to HSAG under the IP License Agreement. The key terms of the IP License Agreement are as follows:
Effective Date. The IP License Agreement became effective on January 1, 2019. It was negotiated and executed in the fourth quarter of 2018 in connection with a broader restructuring of the Halcyon Group's intercompany arrangements, which also included the establishment of the Cost Sharing Arrangement effective July 15, 2018.
Parties. The licensor is HSAG, as the owner of the Licensed IP. The licensee is HSI, as the entity that exploits the Licensed IP in the North American market.
Licensed Intangibles. The IP License Agreement grants HSI a license to use the following categories of HSAG's proprietary intangible property:
(a) Semiconductor process technology for 7nm, 5nm, and 3nm nodes, including proprietary manufacturing recipes, process integration know-how, and yield optimization techniques;
(b) Design libraries, including standard cell libraries, input/output ("I/O") libraries, and memory compilers tailored to HSAG's process nodes;
(c) EDA tool customizations, including proprietary design rule files ("DRFs") and process design kits ("PDKs") developed by HSAG for use with industry-standard EDA software platforms; and
(d) Related know-how, including technical documentation, training materials, and ongoing technical support provided by HSAG's engineering staff to enable HSI's design-support personnel to effectively apply the Licensed IP in customer engagements.
Royalty Rate. HSI pays HSAG a running royalty of 6.0% of HSI's net revenues attributable to the Licensed IP (the "IP-attributable revenues").
IP-Attributable Share Determination. The IP-attributable share of HSI's total third-party US net revenues is determined to be 18.1%, reflecting the portion of customer value that is directly driven by HSAG's licensed process technology and design libraries. This percentage was established based on an analysis of HSI's product portfolio, customer purchasing decisions, and the relative contribution of HSAG's IP to the end-user value proposition, as distinct from the value attributable to standard commodity-type semiconductor distribution functions. The 18.1% IP-attributable share is reviewed annually and has remained unchanged since the inception of the IP License Agreement.
FY 2024 Royalty Computation. The royalty payment for fiscal year 2024 was computed as follows:
• HSI total third-party US net revenues: $4,120,000,000
• IP-attributable share: 18.1%
• IP-attributable revenues: $4,120,000,000 × 18.1% = $745,720,000
• Royalty: $745,720,000 × 6.0% = $44,743,200 (rounded)
• Contractual payment denominated in EUR at the weighted average payment-date exchange rate of 1.0307 EUR/USD: €68,400,000 (approximately $70,500,000)
Payment Terms. Royalty payments are made quarterly in arrears, within 45 calendar days of the end of each fiscal quarter. Payments are denominated in euros and converted from US dollars at the applicable payment-date EUR/USD exchange rate as published by the European Central Bank.
Distinction from Other Intercompany Charges. The royalty under the IP License Agreement is distinct from, and paid in addition to, the following intercompany charges:
(a) Intercompany tangible goods pricing: HSI purchases semiconductor wafers and die from HSAG under a separate Intercompany Supply Agreement, with FY 2024 intercompany purchases totaling €987,600,000. The tangible goods pricing is analyzed separately under the Comparable Profits Method ("CPM") / Transactional Net Margin Method ("TNMM") in the companion Benchmarking Study — Tangible Goods.
(b) Cost-sharing contributions under the CSA: HSI makes cost-sharing payments to HSAG under the Cost Sharing Arrangement effective July 15, 2018, with FY 2024 contributions totaling €224,600,000. The CSA is documented and analyzed separately under Treasury Regulations Section 1.482-7.
Aggregate Annual Intercompany Flows. For FY 2024, the aggregate intercompany payments from HSI to HSAG totaled €1,280,600,000, comprising:
• Tangible goods (wafer/die purchases): €987,600,000
• Royalties (IP License Agreement): €68,400,000
• Cost-sharing contributions (CSA): €224,600,000
• Total: €1,280,600,000
2.4 Relationship to Other Controlled Transactions
The royalty transaction analyzed in this study is one of three principal intercompany transactions between HSAG and HSI. Each transaction is analyzed separately under the most appropriate transfer pricing method, consistent with the best method rule of Treasury Regulations Section 1.482-1(c). The relationship among the three transactions is summarized below:
Tangible Goods (Wafer/Die Sales). The intercompany pricing for semiconductor wafers and die sold by HSAG to HSI is analyzed separately under the CPM/TNMM, with HSI as the tested party. The companion Benchmarking Study — Tangible Goods identifies a set of comparable uncontrolled companies performing distribution and limited design-support functions in the semiconductor industry and establishes an arm's-length interquartile range for HSI's operating margin. HSI's FY 2024 operating margin of 4.80% falls within the benchmark IQR of 2.8% to 6.1% (median 4.4%). The tangible goods benchmarking study is incorporated by reference but is not reproduced in this document.
Cost Sharing Arrangement. The CSA, effective July 15, 2018, governs the sharing of costs and risks associated with the ongoing development of HSAG's next-generation semiconductor process technologies between HSAG and HSI. HSI's anticipated benefit share under the CSA is 22.5%, reflecting the North American market's estimated share of the expected benefits from the intangible development activities covered by the arrangement. At the inception of the CSA, HSI made a platform contribution transaction ("PCT") buy-in payment of $312,500,000, which was valued by Stonebridge Valuation Partners LLC (Marcus Reinhardt, Managing Director, 200 Park Avenue, Suite 1510, New York, NY 10166) using the income method with an 11.8% discount rate and a 15-year projection period. The CSA is analyzed separately under Treasury Regulations Section 1.482-7 in the CSA Documentation Addendum.
Independence of the Royalty Transaction. The royalty transaction under the IP License Agreement is tested independently under the CUT method. While the royalty, tangible goods pricing, and cost-sharing contributions are interrelated components of the overall Halcyon Group value chain, each transaction is priced and documented on a standalone basis. The CUT analysis presented in this study evaluates whether the 6.0% royalty rate, standing alone, satisfies the arm's-length standard. The residual profit split corroboration in Section 9 considers the interaction of the royalty with the tangible goods pricing to confirm the overall consistency of the intercompany transfer pricing system.
3. Legal Framework
3.1 US Federal Tax Law
The intercompany royalty transaction between HSAG and HSI is subject to the arm's-length standard as set forth in IRC Section 482 and the Treasury Regulations promulgated thereunder. The relevant statutory and regulatory provisions are summarized below.
IRC Section 482. IRC Section 482 authorizes the Secretary of the Treasury (and by delegation, the Internal Revenue Service) to distribute, apportion, or allocate gross income, deductions, credits, or allowances between or among two or more organizations, trades, or businesses (whether or not incorporated, whether or not organized in the United States, and whether or not affiliated) owned or controlled directly or indirectly by the same interests, if such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such organizations, trades, or businesses. The standard to be applied in all cases is that of a taxpayer dealing at arm's length with an uncontrolled taxpayer.
Treasury Regulations Section 1.482-1 — General Principles. The regulations under Section 1.482-1 set forth the general principles governing the application of the arm's-length standard, including the purpose and scope of Section 482, the arm's-length standard itself, the best method rule, and the comparability analysis framework. Section 1.482-1(b) provides that the purpose of Section 482 is to place a controlled taxpayer on a tax parity with an uncontrolled taxpayer by determining the true taxable income from the property and business of a controlled taxpayer. Section 1.482-1(c) sets forth the best method rule, which provides that the arm's-length result of a controlled transaction must be determined under the method that, under the facts and circumstances, provides the most reliable measure of an arm's-length result. Factors relevant to the best method determination include the degree of comparability between the controlled transaction and any uncontrolled comparables and the quality of the data and assumptions used in the analysis.
Treasury Regulations Section 1.482-4 — Methods for Transfers of Intangible Property. The regulations under Section 1.482-4 provide specific methods for determining arm's-length consideration for transfers of intangible property, including:
(a) The Comparable Uncontrolled Transaction ("CUT") method (Section 1.482-4(c));
(b) The Comparable Profits Method ("CPM") (Section 1.482-5, incorporated by reference);
(c) Profit split methods (Section 1.482-6, incorporated by reference); and
(d) Unspecified methods (Section 1.482-4(d)).
Treasury Regulations Section 1.482-4(c) — CUT Method. The CUT method evaluates whether the amount charged in a controlled transfer of intangible property is arm's length by reference to the amount charged in a comparable uncontrolled transaction. A CUT is a transfer of intangible property in which: (i) the intangible property is comparable to the intangible property transferred in the controlled transaction, and (ii) the circumstances of the uncontrolled transfer are comparable to the circumstances of the controlled transfer.
Section 1.482-4(c)(2) identifies the following comparability factors specific to intangible property transactions:
(a) The terms of the transfer, including the royalty base, the rate of royalty, and the form of consideration;
(b) The stage of development of the intangible at the time of the transfer;
(c) The rights conveyed in the intangible, including the right to use, exploit, or further develop the intangible and any restrictions on such rights;
(d) The uniqueness of the intangible and the period for which it remains unique;
(e) The duration of the license or other transfer;
(f) The economic and product liability risks to be assumed by the transferee;
(g) The existence and extent of any collateral transactions or ongoing business relationships between the transferor and the transferee; and
(h) The functions to be performed by the transferor and the transferee, including any ancillary or subsidiary services.
Best Method Rule and CUT Preference. Under the best method rule of Section 1.482-1(c), the CUT method is generally the preferred method for testing the arm's-length nature of a royalty when sufficiently reliable comparable uncontrolled transactions involving the transfer of comparable intangible property under comparable circumstances are available. The CUT method provides the most direct and reliable measure of the arm's-length royalty because it relies on observed royalty rates in comparable transactions between unrelated parties, rather than on indirect measures such as profitability benchmarks or theoretical profit allocations.
Arm's-Length Range. Treasury Regulations Section 1.482-1(e)(2)(iii) provides that when the results of applying the selected method to two or more comparable uncontrolled transactions produce a range of results, the arm's-length range is ordinarily the interquartile range (i.e., the range from the 25th to the 75th percentile). If the taxpayer's result falls within the interquartile range, no adjustment is warranted. If the taxpayer's result falls outside the interquartile range, the taxpayer's result may be adjusted to the median.
3.2 OECD Transfer Pricing Guidelines (2022 Edition)
The OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, published in their most recent edition in January 2022 (the "OECD Guidelines"), provide internationally recognized guidance on the application of the arm's-length principle to intercompany transactions, including transactions involving intangible property. While the OECD Guidelines are not binding on the United States in the same manner as domestic law, they are widely regarded as authoritative interpretive guidance and are directly applicable under German transfer pricing law.
Chapter VI — Special Considerations for Intangibles. Chapter VI of the OECD Guidelines addresses the identification and characterization of intangibles, the determination of arm's-length conditions for transactions involving intangibles, and the relationship between intangible property ownership and the functions of development, enhancement, maintenance, protection, and exploitation ("DEMPE"). The DEMPE framework requires that the returns attributable to intangible property be allocated to the entity (or entities) that perform the DEMPE functions, bear the associated risks, and exercise control over those functions and risks. In the Halcyon Group, HSAG performs the vast majority of the DEMPE functions with respect to the Licensed IP, bearing the technological, financial, and commercial risks associated with R&D investment, process technology development, and IP protection.
Paragraphs 6.153–6.178 — CUP/CUT Method for Intangibles. The OECD Guidelines recognize the Comparable Uncontrolled Price ("CUP") method (the OECD equivalent of the CUT method under US regulations) as the most direct and reliable method for pricing transactions involving intangible property when reliable comparable uncontrolled transactions are available. Paragraphs 6.153 through 6.178 discuss the factors affecting the comparability of license agreements, including the nature and characteristics of the intangible, the functional profiles of the licensor and licensee, the contractual terms of the license, the economic circumstances of the parties, and the business strategies of the parties. The OECD Guidelines emphasize that comparability adjustments should be made for material differences between the controlled and uncontrolled transactions where such adjustments can be reliably quantified.
Chapter II — CUP Method. Chapter II of the OECD Guidelines identifies the CUP method as the most direct and reliable transfer pricing method when a reliable comparable can be identified. The CUT/CUP method is preferred over less direct methods such as profit-based methods, subject to the availability of sufficiently comparable uncontrolled transactions.
3.3 US-Germany Income Tax Treaty
The US-Germany Income Tax Treaty, signed on June 29, 2006, and entered into force on December 28, 2007, governs the bilateral tax treatment of the intercompany transactions between HSAG and HSI. The following provisions are relevant to this analysis:
Article 9 — Associated Enterprises. Article 9 of the Treaty incorporates the arm's-length principle by providing that where conditions are imposed between associated enterprises in their commercial or financial relations that differ from those that would have been made between independent enterprises, the profits that would have accrued to one of the enterprises but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly. Article 9 further provides for corresponding adjustments by the other Contracting State to avoid double taxation.
Article 12 — Royalties. Article 12 of the Treaty addresses the sourcing and taxation of royalty payments between residents of the two Contracting States. Under Article 12, royalties arising in the United States and paid to a resident of Germany may be taxed in Germany. The term "royalties" as used in the Treaty includes payments of any kind received as consideration for the use of, or the right to use, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial, or scientific experience.
Article 25 — Mutual Agreement Procedure. Article 25 provides for a mutual agreement procedure ("MAP") through which the competent authorities of the United States and Germany may consult to resolve cases of taxation not in accordance with the provisions of the Treaty. The MAP provision is the treaty basis for the bilateral APA process, under which the IRS APMA and BZSt will negotiate and agree upon the transfer pricing methodology and arm's-length results for the intercompany royalty and other covered transactions.
3.4 German Transfer Pricing Law
HSAG, as a German Aktiengesellschaft and the licensor under the IP License Agreement, is subject to German transfer pricing rules. The relevant provisions of German law are summarized below.
Section 1 AStG — Arm's-Length Principle. Section 1 of the German Foreign Tax Act (Außensteuergesetz, or "AStG") sets forth the arm's-length principle for cross-border transactions between related parties. Under Section 1 AStG, income from a foreign business relationship must be determined based on the conditions that would have been agreed between unrelated parties acting at arm's length. Section 1 AStG also provides for the use of comparable uncontrolled transactions and other recognized transfer pricing methods consistent with the OECD Guidelines.
Sections 90(3) and 162(3)–(4) AO — Documentation Requirements. Sections 90(3) and 162(3)–(4) of the German Abgabenordnung ("AO," the German Fiscal Code) impose documentation requirements on taxpayers engaged in cross-border related-party transactions. Taxpayers are required to maintain contemporaneous documentation supporting the arm's-length nature of their intercompany pricing, including a description of the transaction, a functional analysis, a method selection analysis, and a comparables search.
GAufzV — Documentation Standards. The Gewinnabgrenzungsaufzeichnungsverordnung ("GAufzV"), the German regulation on profit delineation documentation, specifies the detailed requirements for transfer pricing documentation that must be maintained by German taxpayers. The GAufzV requirements are broadly consistent with the documentation standards set forth in Chapter V of the OECD Guidelines (transfer pricing documentation and country-by-country reporting).
This CUT analysis has been prepared to satisfy both US documentation requirements under Treasury Regulations and German documentation requirements under the AStG, AO, and GAufzV. The analysis will be incorporated into both the US APA application and the corresponding German APA application to be filed by HSAG's German tax counsel.
3.5 Penalty Protection
This study is intended to provide penalty protection under IRC Section 6662(e) and (h), which impose accuracy-related penalties on substantial and gross valuation misstatements attributable to transfer pricing adjustments. Treasury Regulations Section 1.6662-6 provides that a taxpayer may avoid the imposition of transfer pricing penalties by maintaining contemporaneous documentation establishing that the taxpayer's transfer pricing method and its application were reasonable, and that the taxpayer maintained that documentation contemporaneously.
The contemporaneous documentation must include, among other things: (i) a description of the controlled transaction; (ii) a description of the method selected and the reasons for selecting that method; (iii) a description of the comparables used, how comparability was evaluated, and what adjustments were made; (iv) a description of the data and economic analyses performed; and (v) an explanation of the arm's-length result. This study is prepared to satisfy these requirements and forms part of the Halcyon Group's contemporaneous transfer pricing documentation for the fiscal years covered by this analysis. The documentation is intended to establish a reasonable cause and good faith defense against any accuracy-related penalty that might be asserted in connection with the intercompany royalty transaction.
4. Functional Analysis Summary — The IP License Transaction
4.1 HSAG as Licensor (Functions, Assets, Risks)
HSAG is the licensor of the semiconductor process technology, design libraries, and related intangible property under the IP License Agreement. As the IP-rich principal entity within the Halcyon Group, HSAG performs the central functions of development, enhancement, maintenance, protection, and exploitation ("DEMPE") with respect to the Licensed IP. HSAG's functional profile as licensor is summarized below.
Functions.
Development. HSAG conducts the full range of research and development activities necessary to develop and advance its semiconductor process technologies from initial concept through commercial production readiness. This includes fundamental materials science research, transistor architecture design, lithography and patterning process development, back-end-of-line ("BEOL") interconnect technology, and yield optimization. HSAG's FY 2024 R&D expenditure of €1,420,000,000 (representing 16.2% of consolidated revenues) reflects the scale and intensity of these development activities. HSAG employs approximately 5,200 R&D engineers and scientists at its Dresden and Chemnitz facilities, representing a critical mass of semiconductor process technology expertise that has been assembled over more than two decades of continuous investment.
Enhancement. HSAG continuously enhances its existing process technologies by developing incremental improvements to manufacturing yields, power efficiency, transistor density, and reliability characteristics. Enhancement activities are particularly critical in the semiconductor industry, where competitive advantage is maintained through continuous optimization of existing production capabilities alongside the development of next-generation nodes.
Maintenance. HSAG maintains the Licensed IP by updating design libraries, process design kits, and EDA tool customizations to reflect the latest process enhancements and to ensure compatibility with evolving industry-standard EDA software platforms. Maintenance also includes the curation and organization of proprietary manufacturing recipes and process integration know-how.
Protection. HSAG manages a portfolio of semiconductor process technology patents and trade secrets through active patent prosecution, portfolio management, and enforcement activities. HSAG's in-house intellectual property counsel, working with external patent prosecution firms, manages a portfolio of over 4,800 granted patents and pending applications across major jurisdictions (United States, European Patent Office, Japan, China, South Korea, and Taiwan). HSAG also implements comprehensive trade secret protection programs at its fabrication facilities, including physical security, information security, and employee confidentiality obligations.
Exploitation. HSAG exploits the Licensed IP both directly (through its own manufacturing and sales activities) and indirectly (through licensing to affiliated entities, including HSI). The IP License Agreement with HSI represents the indirect exploitation channel for the North American market.
Assets.
HSAG's intangible assets relevant to the IP License Agreement include:
• A portfolio of proprietary semiconductor process technologies covering the 7nm, 5nm, and 3nm nodes, embodied in manufacturing recipes, process integration specifications, and yield optimization techniques;
• Design libraries comprising standard cell libraries, I/O libraries, and memory compilers specifically tailored to HSAG's process nodes;
• EDA tool customizations, including proprietary design rule files and process design kits;
• Accumulated know-how derived from decades of semiconductor fabrication experience, including tacit knowledge held by HSAG's engineering workforce; and
• A highly skilled workforce of approximately 14,600 Germany-based employees, including approximately 5,200 R&D engineers and scientists, who collectively embody HSAG's institutional expertise in semiconductor process technology.
HSAG's tangible assets supporting its DEMPE functions include three fabrication facilities with a combined replacement cost in excess of €12,000,000,000, equipped with state-of-the-art semiconductor manufacturing equipment including extreme ultraviolet ("EUV") lithography systems, chemical vapor deposition tools, etch systems, and metrology equipment.
Risks.
HSAG bears the following risks in connection with the Licensed IP:
• Technology obsolescence risk: The semiconductor industry is characterized by rapid technological change and intense competition, with process technology advancing to smaller nodes at intervals of approximately 2–3 years. HSAG bears the risk that its process technologies may become obsolete if competitors achieve superior performance, lower costs, or faster time-to-market at comparable or more advanced nodes.
• R&D failure risk: The development of advanced-node semiconductor process technology is inherently uncertain. HSAG bears the risk that significant R&D investments may not yield commercially viable process technologies, particularly at the leading edge (e.g., 3nm and future sub-3nm nodes).
• IP infringement and litigation risk: HSAG bears the risk of third-party claims alleging infringement of their intellectual property rights, as well as the cost and uncertainty of enforcing HSAG's own IP rights against competitors.
• Market risk related to semiconductor demand cycles: The semiconductor industry is subject to pronounced cyclical fluctuations in demand. HSAG, as the principal entity with significant fixed-cost manufacturing infrastructure, bears the volumetric risk associated with demand cycles.
In summary, HSAG is the complex, IP-rich principal entity within the Halcyon Group that performs the DEMPE functions with respect to the Licensed IP and bears the associated technological, financial, and commercial risks. HSAG's functional profile is consistent with its entitlement to the premium returns attributable to the Licensed IP, of which the 6.0% royalty is a component.
4.2 HSI as Licensee (Functions, Assets, Risks)
HSI is the licensee under the IP License Agreement and operates as a limited-risk distributor and design-support entity in the North American market. HSI's functional profile as licensee is summarized below.
Functions.
Distribution and Marketing. HSI's primary function is the distribution and sale of Halcyon-branded semiconductor products to third-party customers in the United States. HSI maintains relationships with customers in the automotive, industrial IoT, and data-center segments, manages order fulfillment and logistics, and conducts marketing activities (including participation in industry trade shows, customer seminars, and digital marketing campaigns) to promote Halcyon products in the US market.
Design-Support Services. HSI provides application engineering services to US customers through its Santa Clara design center. These services involve assisting customers in designing HSAG's semiconductor components into their end-products, using HSAG's design libraries, process design kits, and EDA tool customizations. The design-support function is an exploitation activity — HSI applies HSAG's existing IP to support customer adoption — rather than a development activity.
Customer Relationship Management. HSI manages day-to-day customer relationships, including pricing negotiations (within parameters established by HSAG), contract administration, technical support, and post-sales service.
Order Fulfillment and Logistics Coordination. HSI coordinates the fulfillment of customer orders, managing the supply chain from HSAG's fabrication facilities in Germany to customer delivery points in North America. HSI holds limited inventory (primarily safety stock and in-transit inventory) and coordinates logistics through third-party freight forwarders and customs brokers.
Assets.
HSI's assets relevant to the IP License Agreement are limited and include:
• Marketing intangibles: HSI has developed customer relationships and a distribution network in the North American market through its sales and marketing activities. These marketing intangibles, while valuable in the context of HSI's distribution function, are limited in scope relative to HSAG's technology intangibles. HSI does not own or control the Halcyon brand, which is owned by HSAG.
• Working capital: HSI maintains accounts receivable, inventory, and cash balances in the ordinary course of its distribution business.
• Design center: HSI's Santa Clara facility is equipped with computing resources and EDA software licenses (the EDA software licenses are procured from third-party vendors; the proprietary customizations to those tools are provided by HSAG under the IP License Agreement). The design center is an application facility, not a development facility.
Risks.
HSI's risk profile is limited and consistent with its characterization as a limited-risk distributor:
• Limited market risk: HSI does not bear significant market risk because it operates under a guaranteed supply arrangement with HSAG. HSI's product pricing to third-party customers is established within parameters set by HSAG, and HSI does not bear the risk of stranded manufacturing capacity.
• Credit risk on US customer receivables: HSI bears the risk of non-payment by its US customers. HSI manages this risk through credit analysis, credit insurance, and collection procedures.
• Inventory risk (limited): HSI holds limited inventory of semiconductor wafers and die. The majority of HSAG's production for the North American market is manufactured to forecast, and HSI's inventory levels are managed within agreed parameters. HSI bears limited risk of inventory obsolescence.
• HSI does not bear technology obsolescence risk, R&D failure risk, or IP infringement risk; these risks are borne by HSAG as the IP owner and DEMPE entity.
In summary, HSI is characterized as a limited-risk distributor and licensee that exploits HSAG's Licensed IP in the US market. HSI does not perform core DEMPE functions with respect to the Licensed IP and does not independently develop, enhance, or protect the Licensed IP. HSI's limited functional and risk profile is consistent with its entitlement to a routine return on its distribution and design-support activities, with the premium return attributable to the Licensed IP flowing to HSAG through the intercompany royalty.
4.3 Licensed Intangibles Description
The intangible property licensed by HSAG to HSI under the IP License Agreement encompasses the following categories of proprietary semiconductor intellectual property:
Semiconductor Process Technology (7nm, 5nm, and 3nm Nodes). HSAG's process technologies represent the core of the Licensed IP. Each process node comprises a comprehensive set of proprietary manufacturing recipes, process integration specifications, and yield optimization techniques that define how semiconductor devices are fabricated on silicon wafers. The process technology IP includes specifications for front-end-of-line ("FEOL") transistor fabrication (including gate formation, source/drain engineering, and channel mobility enhancement techniques), middle-of-line ("MOL") contact formation, and back-end-of-line ("BEOL") interconnect metallization. HSAG's 3nm process technology incorporates proprietary gate-all-around ("GAA") nanosheet transistor architecture, representing the most advanced node in HSAG's production portfolio. The progressive miniaturization and performance enhancement embodied in these process technologies are the product of decades of cumulative R&D investment and represent HSAG's most competitively differentiated assets.
Design Libraries. HSAG's design libraries include standard cell libraries, I/O libraries, and memory compilers that are specifically optimized for each of HSAG's process nodes. The standard cell libraries provide pre-characterized logic gates and functional blocks that customers use as building blocks for their chip designs. The I/O libraries provide input/output interface cells for signal connection between the chip and external circuitry. The memory compilers generate customized memory blocks (SRAM, ROM, and register files) optimized for HSAG's process technology. These design libraries are developed and maintained by HSAG's library engineering team in Dresden and are continuously updated to reflect process enhancements and customer requirements.