PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT This memorandum was prepared by Calderwood & Harkness LLP at the direction of counsel and is protected by the attorney-client privilege, the work product doctrine, and any other applicable protections. This memorandum is not to be disclosed to any third party without the prior written consent of Calderwood & Harkness LLP.
CALDERWOOD & HARKNESS LLP 599 Lexington Avenue, 38th Floor New York, NY 10022
MEMORANDUM
TO: Leonard Cross, Partner, Tax; Sylvia Hartwell, Partner, Tax
FROM: Leila Nazari, Senior Associate, Tax; Robert Jansen, Associate, Tax
DATE: April 14, 2025
RE: Functional Analysis — Halcyon Semiconductor AG (Manufacturing & IP Owner/Developer)
MATTER NO.: 1032-00006
BILLING CODE: HSAG-TP-2025
PURPOSE
This memorandum sets forth the functional analysis of Halcyon Semiconductor AG ("HSAG"), the German parent and principal entity in the Halcyon group's US-Germany intercompany supply chain, for purposes of the bilateral Advance Pricing Agreement ("APA") application under Rev. Proc. 2015-41 and contemporaneous transfer pricing documentation under Internal Revenue Code ("IRC") § 482 and Treasury Regulations ("Treas. Reg.") §§ 1.482-1 through 1.482-9, as well as the Organisation for Economic Co-operation and Development Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (2022 edition) (the "OECD Guidelines") and German requirements under § 1 of the Außensteuergesetz ("AStG"), §§ 90(3), 162(3)–(4) of the Abgabenordnung ("AO"), and the Gewinnabgrenzungsaufzeichnungsverordnung ("GAufzV"). This analysis covers fiscal year 2024 (ended December 31, 2024) ("FY 2024") and is also applicable to the proposed APA rollback period (January 1, 2022 through December 31, 2024) and the prospective APA term (January 1, 2025 through December 31, 2029).
This memorandum is intended to be read in conjunction with the companion Functional Analysis Memorandum prepared for Halcyon Semiconductor Inc. ("HSI"), the US subsidiary and tested party, as well as the benchmarking studies prepared by Meridian Economics GmbH under the direction of Calderwood & Harkness LLP. Together, these documents form a core component of the contemporaneous transfer pricing documentation and the APA submission package.
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I. Executive Summary
Halcyon Semiconductor AG ("HSAG") is an Aktiengesellschaft organized under the laws of the Federal Republic of Germany. HSAG is publicly listed on the Frankfurt Stock Exchange (XETRA; ISIN DE000HSA0017, WKN HSA001), with its registered office at Halcyon-Allee 12, 01099 Dresden, Saxony, Germany. HSAG was originally incorporated as a Gesellschaft mit beschränkter Haftung (GmbH) and was subsequently converted to an Aktiengesellschaft in connection with its initial public offering.
HSAG is the ultimate parent of the Halcyon group, a vertically integrated semiconductor enterprise with operations spanning advanced-node semiconductor design, fabrication, and distribution. The Halcyon group includes the following wholly owned subsidiaries:
• Halcyon Semiconductor Inc. ("HSI") — a Delaware C-corporation with its principal office in Austin, Texas, United States, performing US distribution, marketing, and design support functions;
• Halcyon Semiconductor Japan K.K. ("HSJ") — a Kabushiki Kaisha organized under the laws of Japan with its registered office in Tokyo, Japan; and
• Halcyon Semiconductor (Shanghai) Co., Ltd. ("HSC") — a wholly foreign-owned enterprise ("WFOE") organized under the laws of the People's Republic of China with its registered office in Shanghai, China.
HSAG designs and manufactures advanced-node semiconductor wafers employing 7-nanometer ("7nm"), 5-nanometer ("5nm"), and 3-nanometer ("3nm") process technologies, serving end markets in the automotive, industrial Internet of Things ("IoT"), and data-center application segments. HSAG is also pursuing the development of next-generation 2-nanometer ("2nm") and sub-2nm process technologies, which are expected to define the competitive frontier of the semiconductor industry in the coming years.
For purposes of the transfer pricing analysis, HSAG is characterized as the complex, IP-rich principal entity in the intercompany supply chain. HSAG owns and develops virtually all valuable intangible property within the Halcyon group, undertakes the vast majority of research and development ("R&D") activity, performs all semiconductor fabrication, bears manufacturing and technology risk, and exercises strategic decision-making authority over the operations of all group entities, including HSI. This characterization is supported by the detailed analysis of functions performed, assets employed, and risks assumed set forth in Sections IV through VI of this memorandum, and is consistent with the OECD Guidelines, the IRC § 482 regulations, and the German transfer pricing framework.
For FY 2024, HSAG reported consolidated revenue of €8,740,000,000, earnings before interest, taxes, depreciation, and amortization ("EBITDA") of €2,620,000,000 (representing an EBITDA margin of 30.0%), and earnings before interest and taxes ("EBIT") of €1,570,000,000 (representing an EBIT margin of 18.0%). Total R&D expenditure for FY 2024 was €1,420,000,000, representing approximately 16.2% of consolidated revenue. These financial results reflect HSAG's position as a leading advanced-node semiconductor manufacturer and its significant investment in process technology development.
HSAG employs approximately 22,400 people globally, of whom approximately 14,600 — approximately 65% of the total workforce — are based in Germany. The German workforce includes process and product engineers, fabrication technicians, R&D scientists, quality assurance personnel, supply chain managers, and corporate function staff. This concentration of human capital in Germany underscores the centrality of HSAG's German operations to the value creation activities of the Halcyon group.
The senior management of HSAG consists of:
• Dr. Klaus-Dieter Wehrheim, Chief Executive Officer ("CEO"), responsible for overall strategic direction of the Halcyon group;
• Margarethe Stein, Chief Financial Officer ("CFO"), responsible for financial oversight, treasury, and capital allocation;
• Dr. Hendrik Möller, Chief Technology Officer ("CTO"), responsible for R&D strategy, technology roadmap, and fabrication process development; and
• Dr. Erwin Fassbinder, Senior Vice President, Group Tax ("SVP, Group Tax"), responsible for group tax policy, transfer pricing oversight, and liaison with external advisors.
This memorandum is based on information obtained through the following principal sources: (a) in-person and video interviews conducted with Dr. Hendrik Möller (CTO) and Dr. Erwin Fassbinder (SVP, Group Tax) in February and March 2025; (b) supplemental written responses provided by HSAG management; (c) HSAG's audited consolidated financial statements for FY 2022 through FY 2024 (audited by Gresham Whitfield LLP, with group audit partner Simon Cardwell based at the firm's London office); (d) review of HSAG organizational charts, internal management reports, cost center data, headcount allocation schedules, capital expenditure budgets, and R&D project listings; (e) intercompany agreements, including the Master Intercompany Supply Agreement, the IP License Agreement, and the Cost Sharing Arrangement; (f) HSAG's annual report and investor presentations; and (g) input from Meridian Economics GmbH (Dr. Annika Breitner, Managing Director, and Maximilian Voss, Senior Analyst) and Kettner Pflüger Rechtsanwälte (Dr. Tobias Kettner, Partner, and Friederike Lang, Associate) regarding the German statutory framework.
II. Scope of Functional Analysis
A. Covered Intercompany Transactions
The functional analysis set forth in this memorandum addresses HSAG's role in three principal categories of controlled transactions between HSAG and HSI. These transactions are the subject of the bilateral APA application filed with the Internal Revenue Service ("IRS") and the Bundeszentralamt für Steuern ("BZSt"), and are also the focus of the contemporaneous transfer pricing documentation for FY 2024 and the proposed APA rollback period. Each transaction category is summarized below.
1. Tangible Goods (Wafer/Die Sales)
HSAG manufactures semiconductor wafers and singulated die at its fabrication facilities in Dresden and Chemnitz, Germany, and sells these products to HSI under the Master Intercompany Supply Agreement (effective January 1, 2019; amended July 1, 2022) (the "Supply Agreement"). HSI, in turn, resells the products — in some cases after additional packaging, testing, or customer-specific labeling performed by third-party contractors — to unrelated customers in the North American market. For FY 2024, intercompany goods transferred from HSAG to HSI totaled €987,600,000 (approximately $1,076,000,000 at the average 2024 EUR/USD exchange rate of 1.0896). The transfer prices for these transactions are determined on a cost-plus basis, with the cost base and markup calibrated to produce a result consistent with arm's-length principles as determined by the transactional net margin method ("TNMM") / comparable profits method ("CPM") benchmarking study, under which HSI is the tested party.
2. Royalties (IP License)
HSI pays HSAG a running royalty of 6.0% on IP-attributable revenues for the right to use HSAG's proprietary semiconductor process technology, design libraries, and related intangibles under the IP License Agreement (effective January 1, 2019) (the "License Agreement"). The royalty compensates HSAG for the use of its valuable intangible property by HSI in connection with HSI's US distribution, marketing, and design-support activities. For FY 2024, royalty payments from HSI to HSAG totaled €68,400,000 (approximately $70,500,000 at the payment-date weighted average EUR/USD exchange rate of 1.0307). The arm's-length character of the 6.0% royalty rate has been benchmarked under the comparable uncontrolled transaction ("CUT") method against eight comparable uncontrolled license agreements, and has been corroborated by residual profit split analysis, as set forth in the separate benchmarking study.
3. Cost-Sharing Contributions (R&D CSA)
HSAG and HSI are parties to a Qualified Cost Sharing Arrangement (effective July 15, 2018) (the "CSA") for next-generation 2nm and sub-2nm process technology R&D. Under the CSA, HSAG and HSI share qualified R&D costs in proportion to their anticipated benefit shares: HSAG's cost-sharing percentage is 77.5%, and HSI's cost-sharing percentage is 22.5%, reflecting HSI's anticipated benefit from North American exploitation rights in the developed intangible property. For FY 2024, total qualified R&D costs subject to the CSA were €998,200,000, and HSI's share was €224,600,000 (approximately $231,300,000 at the applicable blended exchange rate). The CSA also involved a platform contribution transaction ("PCT") buy-in payment of $312,500,000 from HSI to HSAG at the inception of the arrangement in 2018.
The aggregate annual intercompany flows between HSAG and HSI for FY 2024 are as follows:
€987,600,000 (Wafer/Die Sales) + €68,400,000 (Royalties) + €224,600,000 (R&D Cost Sharing) = €1,280,600,000
These intercompany flows represent a significant portion of the Halcyon group's total consolidated revenue and underscore the economic significance of the US-Germany supply chain for purposes of the APA and transfer pricing documentation.
B. Sources of Information
The functional analysis presented in this memorandum is based on a comprehensive review of the following sources of information, which were obtained and evaluated during the period from January through April 2025:
1. Management Interviews
Two principal interviews were conducted with members of HSAG's senior management, as follows:
• Dr. Hendrik Möller, Chief Technology Officer — Interview conducted on February 11, 2025, at HSAG's headquarters in Dresden, Germany, with a follow-up video conference on March 5, 2025. Total interview duration was approximately four and one-half hours. Topics covered included: HSAG's R&D strategy and technology roadmap; the organization and staffing of the process technology development and product design functions; the capabilities and operational status of Fab 1, Fab 2, and Fab 3; the scope and objectives of the CSA-funded next-generation process R&D program; HSAG's IP portfolio and the significance of process technology know-how and design libraries; HSAG's interaction with HSI's Santa Clara design center; and the competitive landscape for advanced-node semiconductor manufacturing. Dr. Möller also provided clarification on the role of proprietary yield management algorithms in HSAG's manufacturing process and the importance of process control intellectual property.
• Dr. Erwin Fassbinder, Senior Vice President, Group Tax — Interview conducted on February 12, 2025, at HSAG's headquarters in Dresden, Germany, with a follow-up telephone call on March 12, 2025. Total interview duration was approximately three hours. Topics covered included: the structure and economic substance of the intercompany transactions between HSAG and HSI; the history and rationale of the CSA and the PCT buy-in payment; HSAG's group tax policy and transfer pricing governance framework; the roles and responsibilities of HSAG and HSI personnel in managing the intercompany supply chain; HSAG's approach to risk management and capital allocation; and HSAG's interaction with the BZSt and IRS in connection with prior tax audits and the APA process.
2. Supplemental Written Responses
Following the interviews, HSAG management provided supplemental written responses to detailed follow-up questionnaires prepared by Calderwood & Harkness LLP. These responses addressed, among other things, specific cost center allocations, headcount breakdowns by function, details of R&D project portfolios, and clarifications regarding certain provisions of the intercompany agreements.
3. Audited Financial Statements
HSAG's audited consolidated financial statements for FY 2022, FY 2023, and FY 2024 were reviewed. These financial statements were prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union and were audited by Gresham Whitfield LLP. The group audit partner is Simon Cardwell, based at the firm's London office at 25 Old Broad Street, London EC2N 1HQ. The US engagement partner is Janet Okonkwo, based at the firm's Houston office at 811 Main Street, Suite 3400, Houston, TX 77002.
4. Internal Management Reports
A range of internal management reports were reviewed, including cost center data, departmental headcount allocation reports, capital expenditure schedules and forecasts, R&D project listings and milestone reports, capacity utilization data for Fabs 1, 2, and 3, and intercompany pricing schedules.
5. Intercompany Agreements
The following intercompany agreements were reviewed in their entirety, including all amendments and schedules:
• Master Intercompany Supply Agreement (effective January 1, 2019; amended July 1, 2022);
• IP License Agreement (effective January 1, 2019); and
• Cost Sharing Arrangement (effective July 15, 2018).
6. HSAG Annual Report and Investor Presentations
HSAG's FY 2024 annual report (including management discussion and analysis and corporate governance report) and investor presentations from the 2024 fiscal year were reviewed for supplemental background information regarding HSAG's business strategy, competitive positioning, and financial performance.
7. Input from External Advisors
The functional analysis also incorporates input from the following external advisors:
• Meridian Economics GmbH — Dr. Annika Breitner, Managing Director, and Maximilian Voss, Senior Analyst, provided economic analysis and benchmarking support, including the identification and screening of comparable companies and comparable uncontrolled license agreements.
• Kettner Pflüger Rechtsanwälte — Dr. Tobias Kettner, Partner, and Friederike Lang, Associate, provided guidance on the German statutory framework for transfer pricing documentation, including the requirements of § 1 AStG, §§ 90(3), 162(3)–(4) AO, and the GAufzV, as well as the procedural aspects of the bilateral APA process under German law.
III. Corporate Overview and Organizational Structure
A. Entity Information
The following table sets forth the key identifying information for HSAG:
HSAG was originally organized as Halcyon Halbleitertechnologie GmbH and subsequently converted to an Aktiengesellschaft in connection with its initial public offering on the Frankfurt Stock Exchange. The entity has maintained its registered office in Dresden since its founding, reflecting the concentration of its fabrication and R&D activities in the Saxony region, which has emerged as one of Europe's leading semiconductor manufacturing clusters. HSAG is registered with the Amtsgericht Dresden under the applicable commercial register entry.
HSAG's fiscal year-end coincides with the calendar year, ending December 31. All financial data presented in this memorandum relates to the fiscal year ended December 31, 2024, unless otherwise indicated.
B. Group Structure
HSAG is the ultimate parent entity of the Halcyon group. HSAG directly holds 100% of the equity interests in each of its three wholly owned subsidiaries. The group structure is as follows:
Halcyon Semiconductor Inc. ("HSI")
HSI is a C-corporation organized under the laws of the State of Delaware, with its principal office located in Austin, Texas. HSI performs US distribution, marketing, and design support functions for the Halcyon group. HSI maintains a design center at 2455 Augustine Drive, Suite 300, Santa Clara, California 95054, as well as regional sales offices in Southfield, Michigan and Beaverton, Oregon. HSI employs approximately 2,850 people in the United States. HSI is the counterparty to all three categories of covered intercompany transactions with HSAG and is the subject of the bilateral APA application. A detailed functional analysis of HSI is set forth in the companion memorandum.
Halcyon Semiconductor Japan K.K. ("HSJ")
HSJ is a Kabushiki Kaisha organized under the laws of Japan, with its registered office in Tokyo. HSJ performs distribution and sales support functions for the Japanese market. HSJ is not within the scope of the bilateral APA application and is not a party to the covered intercompany transactions addressed in this memorandum. HSJ's intercompany transactions with HSAG are addressed in separate transfer pricing documentation prepared under Japanese law.
Halcyon Semiconductor (Shanghai) Co., Ltd. ("HSC")
HSC is a wholly foreign-owned enterprise organized under the laws of the People's Republic of China, with its registered office in Shanghai. HSC provides limited sales support and customer liaison services in the Chinese market. HSC is not within the scope of the bilateral APA application and is not a party to the covered intercompany transactions addressed in this memorandum. HSC's intercompany transactions with HSAG are addressed in separate transfer pricing documentation prepared under Chinese law.
The organizational chart of the Halcyon group is set forth in Exhibit A to this memorandum. The chart depicts the direct equity ownership relationships between HSAG and each of its subsidiaries, as well as the reporting lines from the management of each subsidiary to the HSAG Vorstand (Management Board). All material strategic, operational, and financial decisions affecting the subsidiaries are made or approved by the HSAG Vorstand, with the subsidiaries functioning as implementors of group-level directives within their respective markets.
C. Management and Governance
HSAG's management structure consists of the Vorstand (Management Board) and the Aufsichtsrat (Supervisory Board), in accordance with the two-tier governance model mandated by German corporate law for Aktiengesellschaften.
Vorstand (Management Board)
The Vorstand is responsible for the day-to-day management and strategic direction of HSAG and the Halcyon group. The members of the Vorstand relevant to this analysis are:
• Dr. Klaus-Dieter Wehrheim, Chief Executive Officer (Vorstandsvorsitzender): Dr. Wehrheim provides overall strategic direction for the Halcyon group, including decisions regarding product roadmap, market expansion, capital allocation, and mergers and acquisitions. Dr. Wehrheim has served as CEO since 2016 and has over 25 years of experience in the semiconductor industry, including prior leadership roles at major European and Asian semiconductor manufacturers. Dr. Wehrheim reports to the Aufsichtsrat and chairs the regular meetings of the Vorstand.
• Margarethe Stein, Chief Financial Officer (Finanzvorstand): Ms. Stein oversees all financial functions for the Halcyon group, including financial reporting, treasury, tax, investor relations, and capital allocation. Ms. Stein has served as CFO since 2019 and previously held senior financial positions at major German industrial conglomerates. Ms. Stein has ultimate responsibility for the group's intercompany financial arrangements, including the terms of intercompany supply agreements and the group's cash pooling structure.
• Dr. Hendrik Möller, Chief Technology Officer (Technikvorstand): Dr. Möller is responsible for R&D strategy, the technology roadmap, fabrication process development, and the management of the Halcyon group's IP portfolio. Dr. Möller joined HSAG in 2009 and was appointed to the Vorstand in 2017. He holds a doctorate in semiconductor physics from the Technische Universität Dresden and has been instrumental in HSAG's transition from mature-node to advanced-node fabrication. Dr. Möller oversees all process technology development, product design, and engineering activities across the group.
In addition to the Vorstand members, the following senior executive plays a key role in transfer pricing governance:
• Dr. Erwin Fassbinder, Senior Vice President, Group Tax: Dr. Fassbinder is responsible for group tax policy, transfer pricing oversight, and liaison with external advisors, tax authorities, and legal counsel. Dr. Fassbinder reports to the CFO and coordinates with the Vorstand on all matters relating to the group's intercompany pricing, APA processes, and tax audit defense. Dr. Fassbinder has served in his current role since 2020 and previously held senior tax positions at major European multinationals and a Big Four accounting firm.
Aufsichtsrat (Supervisory Board)
The Aufsichtsrat supervises the Vorstand and is composed of both shareholder-elected and employee-elected members, in accordance with the requirements of the German Mitbestimmungsgesetz (Codetermination Act) and the German Corporate Governance Code. The Aufsichtsrat approves major capital investments, executive compensation, and significant strategic transactions. The current chairperson of the Aufsichtsrat is Prof. Dr. Ulrike Brandes-Sievert, who has served in that capacity since 2021. The Aufsichtsrat meets quarterly and maintains audit, compensation, and technology committees. For purposes of this memorandum, the governance structure is relevant insofar as it confirms that HSAG's Vorstand — located and operating in Germany — exercises decision-making authority over all material aspects of the Halcyon group's operations, consistent with HSAG's characterization as the entrepreneurial principal entity.
IV. Functions Performed
This section describes the functions performed by HSAG, organized by functional category. The analysis of HSAG's functions, when combined with the analysis of assets employed (Section V) and risks assumed (Section VI), provides the factual foundation for the characterization of HSAG as the complex, IP-rich principal entity in the Halcyon group's intercompany supply chain.
A. Semiconductor Design and Engineering
1. Process Technology Development
HSAG maintains the central process technology development capability for the entire Halcyon group. Process technology development is the core competence that defines HSAG's competitive position in the global semiconductor industry and is the primary source of HSAG's valuable intangible property.
HSAG's process technology development function encompasses the design, characterization, optimization, and qualification of semiconductor fabrication processes at successive technology nodes. Currently, HSAG has three generations of process technology in production: the 7nm node (deployed primarily for automotive-grade semiconductors), the 5nm node (deployed for industrial IoT and data-center products), and the 3nm node (deployed for high-performance data-center and select automotive applications). In addition, HSAG is actively developing next-generation 2nm and sub-2nm process technologies, which are the subject of the CSA with HSI. These next-generation processes are expected to enter pilot production in the 2027–2028 timeframe and full-volume manufacturing by 2029–2030.
Process engineering teams responsible for technology development are located at HSAG's Dresden campus, comprising specialized engineers in the following disciplines:
• Lithography: Development and optimization of extreme ultraviolet ("EUV") and deep ultraviolet ("DUV") lithography processes, including patterning, overlay control, and resist processing. HSAG's EUV lithography capability is a critical differentiator, as the number of semiconductor manufacturers with in-house EUV production capability remains limited globally.
• Etch: Design and qualification of plasma etch processes for advanced pattern transfer, including high-aspect-ratio etch, selective etch, and atomic-layer etch techniques.
• Deposition: Development of chemical vapor deposition ("CVD"), physical vapor deposition ("PVD"), and atomic-layer deposition ("ALD") processes for gate stacks, interconnects, and barrier layers.
• Metrology: Development and deployment of in-line and off-line measurement and inspection techniques, including critical dimension scanning electron microscopy ("CD-SEM"), optical critical dimension ("OCD") metrology, and defect inspection.
• Integration: Overall process integration of the individual process modules into a complete fabrication flow, including optimization of process sequences, thermal budgets, and inter-module interactions. Integration engineers are responsible for ensuring that the complete process achieves target device performance, yield, and reliability specifications.
The process technology development function is highly capital-intensive and knowledge-intensive. It requires sustained multi-year investment, deep domain expertise, and access to advanced fabrication equipment. HSAG has invested hundreds of millions of euros annually in process technology development over the past decade, reflecting the competitive imperative to maintain leadership at each successive technology node.
Critically, HSAG performs all process technology development activities within the Halcyon group. HSI's design center in Santa Clara, California provides limited design-support services — primarily application engineering and design adaptation for US customers — but does not engage in process technology development. HSI does not employ process engineers or maintain fabrication pilot lines. All decisions regarding the direction, scope, and allocation of resources for process technology development are made by Dr. Möller and his team in Dresden, subject to the approval of the Vorstand.
2. Product Design
In addition to process technology development, HSAG performs the product design function for the Halcyon group. HSAG's product design teams develop the semiconductor product architectures and circuit layouts for the group's three principal end-market segments: automotive, industrial IoT, and data center.
Product design activities include:
• Architecture Definition: Specification of the overall product architecture, including the selection of functional blocks, the floorplan, and the system-level partitioning.
• Circuit Design: Detailed transistor-level and gate-level design of analog, digital, and mixed-signal circuit blocks.
• Design Verification: Comprehensive verification of the circuit design against functional, timing, and power specifications, using both simulation and formal verification methodologies.
• Physical Design: Placement and routing of the circuit layout, design rule checking ("DRC"), layout versus schematic ("LVS") checking, and parasitic extraction.
• Tape-Out: Preparation of the final design data for mask fabrication, including optical proximity correction ("OPC") and mask data preparation.
All design verification, simulation, and tape-out activities are conducted at HSAG's Dresden facilities using HSAG's proprietary design libraries, standard cell libraries, I/O libraries, and memory compilers, as well as HSAG's internally developed electronic design automation ("EDA") tools and process simulation software. HSAG's design libraries are tightly coupled to its process technology and are developed concurrently with each new process node, ensuring that the product design function benefits from the latest process capabilities and that design-technology co-optimization is achieved.
HSI's design center in Santa Clara provides customer-facing application engineering and design adaptation support. This function involves working with US customers to understand their specific product requirements, adapting HSAG's standard product platforms to meet customer specifications, and providing technical support during the customer's product development cycle. However, HSI's design center operates under HSAG's direction and within the framework of HSAG's technology platform. HSI does not develop new product architectures or circuit designs independently; rather, it adapts and customizes HSAG's existing designs for the US market. All significant design decisions — including the selection of design IP blocks, the allocation of design resources, and the approval of tape-out data — are made or approved by HSAG management in Dresden.
3. R&D Expenditure
HSAG's R&D expenditure reflects its role as the group's principal developer of semiconductor process technology and product designs. For FY 2024, HSAG's total R&D expenditure was €1,420,000,000, representing approximately 16.2% of consolidated revenue of €8,740,000,000. This R&D intensity is consistent with the levels observed at leading integrated device manufacturers and pure-play foundries in the global semiconductor industry, where sustained high levels of R&D investment are essential to maintaining technological competitiveness.
HSAG's total R&D expenditure may be disaggregated into two categories for transfer pricing purposes:
• Qualified CSA R&D Costs: €998,200,000 of HSAG's total R&D expenditure relates to the next-generation 2nm and sub-2nm process technology R&D program that is the subject of the CSA with HSI. This category includes direct personnel costs, materials and supplies, equipment depreciation, facility costs, and allocated overhead attributable to the CSA-funded R&D activities. Under the CSA, HSI bears 22.5% of these costs (€224,600,000), and HSAG bears 77.5% (€773,600,000).
• Non-CSA R&D Costs: The remaining €421,800,000 (i.e., €1,420,000,000 minus €998,200,000) relates to sustaining engineering for current-generation process technologies (7nm, 5nm, 3nm), product design activities, and other R&D not within the scope of the CSA. These costs are borne entirely by HSAG and are not shared with HSI.
The majority of HSAG's approximately 14,600 German employees are engaged in R&D, fabrication, and engineering roles. While a precise R&D headcount breakdown is subject to classification methodologies (as certain personnel split their time between R&D and production-support activities), HSAG estimates that in excess of 5,000 R&D engineers are employed at its German facilities. These engineers possess highly specialized expertise in semiconductor physics, materials science, electrical engineering, and related disciplines, and represent a critical component of HSAG's assembled workforce intangible.
HSAG's R&D facilities are concentrated at the Dresden campus, encompassing the Halcyon-Allee 12 headquarters complex and the Industriepark Klotzsche facility at Zur Wetterwarte 50, 01109 Dresden. The Industriepark Klotzsche location houses the primary R&D cleanrooms, pilot fabrication lines, characterization laboratories, and advanced metrology suites. HSAG also maintains smaller R&D support operations at its Chemnitz facility (Fab 3), focused on process development activities related to the specialized industrial IoT and data-center product lines fabricated at that location.
B. Semiconductor Manufacturing (Fabrication)
1. Fabrication Facilities
HSAG operates three semiconductor fabrication facilities ("fabs") in Germany, which together represent the group's entire manufacturing capacity. Each facility is described below.
Fab 1 — Industriepark Klotzsche, Zur Wetterwarte 50, 01109 Dresden, Germany
Fab 1 is HSAG's mature-node production facility, dedicated to high-volume manufacturing of semiconductor wafers and die using the 7nm process technology. Fab 1 has been operational since 2015 and is equipped with DUV immersion lithography systems and supporting process tools optimized for the 7nm node. Fab 1's primary output consists of automotive-grade semiconductors, which are subject to stringent quality and reliability requirements, including compliance with the AEC-Q100 automotive qualification standard and the IATF 16949 automotive quality management system. Fab 1 operates on a 24/7 shift schedule and achieves high capacity utilization rates, reflecting the sustained demand for automotive-grade semiconductors. Fab 1 employs approximately 3,200 fabrication technicians, process engineers, and support personnel.
Fab 2 — Industriepark Klotzsche, Zur Wetterwarte 50, 01109 Dresden, Germany
Fab 2 is HSAG's advanced-node production facility, co-located with Fab 1 at the Industriepark Klotzsche campus. Fab 2 was commissioned in 2020 and is equipped with state-of-the-art EUV lithography systems, advanced etch and deposition tools, and next-generation metrology and inspection equipment. Fab 2 produces semiconductor wafers and die using the 5nm and 3nm process technologies, serving the industrial IoT and data-center application segments. The introduction of EUV lithography at Fab 2 represented a capital investment of approximately €3.2 billion over a multi-year construction and ramp-up period, reflecting the extraordinary capital intensity of advanced-node semiconductor manufacturing. Fab 2 employs approximately 4,100 fabrication technicians, process engineers, and support personnel.
Fab 3 — Technologiepark Chemnitz, Annaberger Straße 240, 09125 Chemnitz, Germany
Fab 3 was established by HSAG to provide additional manufacturing capacity and to serve as the primary production site for specialized industrial IoT and data-center products. Fab 3 is currently ramping up 5nm node production and is expected to reach full capacity utilization by the end of FY 2026. Fab 3 was constructed with support from federal and state economic development incentives, consistent with the German government's broader strategy to strengthen domestic semiconductor manufacturing capacity. Fab 3 employs approximately 1,800 fabrication technicians, process engineers, and support personnel, with headcount expected to increase as production volumes ramp.
Capital Intensity
Semiconductor fabrication is among the most capital-intensive manufacturing activities in any industry. The construction and equipping of a single advanced-node fab requires multi-billion euro investments in cleanroom infrastructure, lithography equipment (a single EUV lithography system costs in excess of €150 million), etch and deposition tools, metrology and inspection systems, and supporting utilities and environmental controls. HSAG's three fabrication facilities represent an aggregate investment of approximately €8.5 billion in historical capital expenditure, and HSAG expects to invest an additional €2.0 billion to €2.5 billion in capital expenditure over the prospective APA term (FY 2025 through FY 2029) to maintain, upgrade, and expand its fabrication capabilities. This level of capital investment is borne entirely by HSAG and is a defining characteristic of its role as the manufacturing principal in the intercompany supply chain.
2. Manufacturing Process
HSAG performs the complete semiconductor wafer fabrication process, encompassing both front-end-of-line ("FEOL") and back-end-of-line ("BEOL") processing, wafer-level testing, and die singulation:
• Front-End-of-Line (FEOL): Fabrication of the active transistor structures and local interconnects on the silicon wafer. FEOL processing includes well formation, gate patterning, source/drain implantation, and contact formation. For advanced-node technologies (5nm and 3nm), FEOL processing involves gate-all-around ("GAA") nanosheet transistor architectures, which represent a significant advancement over the fin field-effect transistor ("FinFET") architecture used at larger nodes.
• Back-End-of-Line (BEOL): Fabrication of the multi-layer metal interconnect structure above the transistor level. BEOL processing includes dielectric deposition, via and trench patterning, copper or cobalt metallization, and chemical mechanical polishing ("CMP"). BEOL processing at advanced nodes involves an increasing number of metal layers and tighter pitch requirements, driving complexity and manufacturing cost.
• Wafer-Level Testing: Electrical testing of each die on the wafer to identify functional and parametric defects. Wafer-level testing is performed using automated probe stations and HSAG's proprietary test programs.
• Die Singulation: Separation of individual die from the processed wafer, either by mechanical dicing, laser dicing, or stealth dicing, depending on the product and process technology.
HSAG's manufacturing operations are governed by rigorous quality management systems. All three fabrication facilities are certified under ISO 9001 (Quality Management Systems) and IATF 16949 (Automotive Quality Management System). HSAG also maintains ISO 14001 (Environmental Management Systems) and ISO 45001 (Occupational Health and Safety Management Systems) certifications for its manufacturing operations.
A critical element of HSAG's manufacturing process is its proprietary yield management and process control capability. HSAG has developed advanced statistical process control ("SPC") algorithms, machine learning-based defect classification models, and real-time process monitoring systems that enable it to achieve and maintain high manufacturing yields — a key competitive advantage in the semiconductor industry, where yield directly impacts unit economics and profitability. These yield management and process control capabilities constitute valuable process technology intangibles owned by HSAG.
The output of HSAG's manufacturing operations — semiconductor wafers and singulated die — is sold to HSI under the Supply Agreement for distribution to unrelated customers in the North American market. HSAG also sells directly to unrelated customers in the European, Japanese, and Chinese markets, either through its own sales organization or through HSJ and HSC.
3. Supply Chain and Procurement
HSAG manages all procurement and supply chain activities related to semiconductor fabrication. This function encompasses the sourcing, qualification, and management of relationships with third-party suppliers of raw materials, process chemicals, gases, and capital equipment.
Key categories of procurement managed by HSAG include:
• Silicon Wafers: HSAG procures blank silicon wafers (200mm and 300mm diameter) from a small number of qualified suppliers. Silicon wafer procurement involves long-term supply agreements, quality qualification processes, and ongoing supplier monitoring.
• Photoresist and Lithography Materials: HSAG procures specialized photoresist materials, anti-reflective coatings, and pellicles required for lithographic patterning. These materials are highly specialized and sourced from a limited number of global suppliers.
• Specialty Chemicals and Gases: HSAG procures a wide range of process chemicals (etchants, cleaning solutions, CMP slurries) and process gases (deposition precursors, etch gases, purge gases) from qualified suppliers.
• Capital Equipment: HSAG procures lithography systems, etch tools, deposition systems, metrology and inspection equipment, and other process tools from equipment manufacturers. Capital equipment procurement involves multi-year lead times, significant capital outlays, and detailed technical evaluation and qualification processes.
HSAG negotiates all supplier contracts, establishes incoming quality specifications, and manages vendor performance. Inventory management of raw materials, work-in-process, and finished goods at the fabrication level is performed by HSAG. Upon sale of finished semiconductor wafers and die to HSI under the Supply Agreement, title and risk of loss transfer to HSI at the point of delivery specified in the agreement (currently, Ex Works (EXW) HSAG's designated shipping point in Germany, with certain modifications for logistics and insurance as set forth in the agreement's terms of trade appendix).
C. Intellectual Property Ownership and Management
1. IP Portfolio
HSAG is the legal and economic owner of substantially all intangible property in the Halcyon group. HSAG's IP portfolio is the foundation of the group's competitive position and represents the most valuable category of assets in the intercompany supply chain. The principal components of HSAG's IP portfolio are as follows:
• Proprietary Semiconductor Process Technology: HSAG's fabrication recipes, process integration know-how, and process parameters for each technology node (7nm, 5nm, 3nm, and the in-development 2nm and sub-2nm nodes) constitute the core of HSAG's intangible property. This process technology embodies decades of cumulative R&D investment and represents the group's most competitively significant intangible.
• Design Libraries: HSAG owns and maintains standard cell libraries, I/O cell libraries, memory compilers, and other design IP blocks that are used across the group's product portfolio. These design libraries are developed in conjunction with each process technology node and are essential for the efficient design and manufacture of semiconductor products.
• Patents: HSAG holds an extensive patent portfolio covering process technology innovations, circuit design techniques, and advanced packaging solutions. As of December 31, 2024, HSAG held approximately 4,200 active patent families, with coverage in major jurisdictions including Germany, the United States, Japan, China, South Korea, and Taiwan. Key patent families cover EUV lithography process techniques, GAA nanosheet transistor structures, advanced interconnect metallization, and 3D integration technologies.
• Trade Secrets: HSAG maintains a substantial body of trade secret information, including detailed process parameters, equipment configuration specifications, yield optimization data, defect classification models, and proprietary algorithms for statistical process control and machine learning-based process monitoring. This trade secret information is not disclosed outside HSAG and is protected by comprehensive confidentiality protocols.
• Software Tools: HSAG has developed internally a suite of proprietary EDA tools and process simulation software used in the design, verification, and manufacture of its semiconductor products. These tools include circuit simulation engines, lithography simulation software, process modeling tools, and yield prediction algorithms. HSAG's internally developed EDA tools complement commercially licensed EDA tools from third-party providers and provide HSAG with differentiated capabilities.
• Trademarks and Trade Names: HSAG owns the "Halcyon" and "Halcyon Semiconductor" trademarks and trade names, which are recognized in the global semiconductor market as indicators of advanced-node process technology leadership, product quality, and reliability.
HSI does not independently own or develop significant intangible property. HSI's activities under the License Agreement are conducted under HSAG's direction and subject to HSAG's strategic control. Under the CSA, any intangible property developed through the joint R&D program is allocated between the parties in accordance with their respective anticipated benefit shares: HSAG retains rights to exploit the developed intangibles in all territories outside North America (77.5% share), and HSI acquires rights to exploit the developed intangibles in North America (22.5% share). However, HSAG retains overall strategic control over the R&D program, including the direction of research activities, the selection of technology targets, and the allocation of R&D personnel and resources.
2. IP License to HSI
Under the License Agreement (effective January 1, 2019), HSAG grants HSI a non-exclusive license to use HSAG's process technology, design libraries, and related intangibles in connection with HSI's US distribution, marketing, and design-support activities. The License Agreement was entered into on arm's-length terms following a comprehensive transfer pricing analysis conducted by Calderwood & Harkness LLP and Meridian Economics GmbH at the time of the agreement's execution.
The key terms of the License Agreement are as follows:
• Scope of License: The license covers HSAG's proprietary semiconductor process technology, design libraries, and related intangible property, as defined in the agreement. The license entitles HSI to use the licensed IP in connection with the marketing, distribution, and sale of HSAG's semiconductor products in the North American market, and in connection with HSI's design adaptation and application engineering activities at its Santa Clara design center.
• Royalty Rate: HSI pays HSAG a running royalty of 6.0% of HSI's net US revenues attributable to the licensed IP. Net revenues are defined in the agreement to exclude returns, allowances, and certain specified deductions. The royalty is calculated quarterly and settled in EUR within 30 days of the end of each calendar quarter.
• Exclusivity: The license is non-exclusive. HSAG retains the right to grant licenses to other parties and to exploit the licensed IP directly in any territory.
• Transferability: The license is non-transferable. HSI may not sublicense, assign, or otherwise transfer any of its rights under the License Agreement without HSAG's prior written consent.
• Revocability: HSAG retains the right to terminate the License Agreement upon the occurrence of specified events, including a material breach by HSI, a change of control of HSI, or HSAG's determination (in its sole discretion) to restructure the group's intercompany arrangements.
• Ownership: HSAG retains all ownership rights in the licensed IP. Nothing in the License Agreement is intended to convey ownership of any intangible property to HSI.
For FY 2024, royalty payments from HSI to HSAG under the License Agreement totaled €68,400,000 (approximately $70,500,000 at the payment-date weighted average EUR/USD exchange rate of 1.0307).
3. IP Development and Enhancement
HSAG continuously develops and enhances its IP portfolio through ongoing R&D activities, as described in Section IV.A.3 above. The total R&D expenditure of €1,420,000,000 in FY 2024 reflects HSAG's commitment to maintaining and extending its technological leadership. HSAG bears the cost, risk, and decision-making authority for all IP development activities outside the scope of the CSA — that is, for sustaining engineering, current-generation process improvements, and product design (totaling €421,800,000 in FY 2024).
Under the CSA (effective July 15, 2018), HSAG and HSI jointly fund the next-generation 2nm and sub-2nm process technology R&D program. The CSA is structured as a Qualified Cost Sharing Arrangement under Treas. Reg. § 1.482-7 and is intended to reflect the anticipated benefits that each party expects to derive from the exploitation of the developed intangible property. The key terms of the CSA are as follows:
• Scope: The CSA covers R&D activities directed at the development of 2nm and sub-2nm semiconductor fabrication process technologies, including the associated design libraries, process control algorithms, and related intangible property.
• Cost-Sharing Percentages: HSAG's cost-sharing percentage is 77.5%, and HSI's cost-sharing percentage is 22.5%. These percentages are based on the anticipated benefit shares of each party, as determined by the reasonably anticipated benefit ("RAB") analysis conducted at the inception of the CSA. HSAG's 77.5% share reflects its anticipated benefit from the exploitation of the developed intangibles in all territories outside North America, while HSI's 22.5% share reflects its anticipated benefit from the exploitation of the developed intangibles in North America.
• Qualified R&D Costs: The CSA defines the categories of R&D costs that are included in the cost pool, consistent with the requirements of Treas. Reg. § 1.482-7. For FY 2024, total qualified R&D costs were €998,200,000.
• Platform Contribution Transaction (PCT): At the inception of the CSA on July 15, 2018, HSI made a PCT buy-in payment of $312,500,000 to HSAG. This payment compensated HSAG for granting HSI access to HSAG's pre-existing technology platform — including the then-existing process technology, design libraries, patents, trade secrets, and related intangibles — which serves as the foundation for the CSA-funded next-generation R&D program. The PCT payment was valued by Stonebridge Valuation Partners LLC (Managing Director: Marcus Reinhardt; office: 200 Park Avenue, Suite 1510, New York, NY 10166) using the income method, with a discount rate of 11.8% (reflecting the risk profile of the pre-existing technology platform and the anticipated income stream from North American exploitation) and a 15-year projection period. The PCT valuation was reviewed and approved by Calderwood & Harkness LLP and was included in the CSA documentation filed with the IRS.
• Exploitation Rights: HSAG retains the right to exploit the developed intangible property in all territories outside North America. HSI acquires the right to exploit the developed intangible property in North America. Each party bears its own costs of commercialization within its respective territory.
• Strategic Control: HSAG retains strategic control over the CSA-funded R&D program, including the direction of research activities, the selection of technology targets, the allocation of R&D personnel, the approval of project budgets, and the determination of project milestones. HSI participates in periodic review meetings and provides input regarding North American market requirements, but all final decisions regarding the direction and scope of the R&D program are made by HSAG management (specifically, by Dr. Möller and the process technology development leadership team in Dresden).
The CSA structure and the PCT valuation are consistent with the requirements of Treas. Reg. § 1.482-7, the OECD Guidelines (Chapter VIII), and German transfer pricing regulations. The ongoing cost-sharing percentages are subject to periodic review and adjustment based on changes in the anticipated benefit shares, as required by the CSA terms and the applicable regulations.
D. Strategic Management and Entrepreneurial Functions
1. Group Strategy
HSAG's Vorstand sets the overall strategic direction for the Halcyon group. This function encompasses the highest-level decisions that determine the group's competitive positioning, resource allocation, and long-term value creation. Specific strategic management activities performed by the Vorstand include:
• Product Roadmap: HSAG determines the technology roadmap and product mix for the group, including the selection of process technology nodes, the prioritization of end-market segments (automotive, industrial IoT, data center), and the timing of new product introductions.
• Technology Investment: HSAG makes all decisions regarding the allocation of capital to fabrication facility construction, expansion, and upgrade, as well as the allocation of R&D resources to current-generation and next-generation process technology development.
• Market Expansion: HSAG determines the group's market expansion strategy, including the entry into new geographic markets and the development of new customer relationships.
• Mergers and Acquisitions: HSAG evaluates and executes potential acquisitions, divestitures, and strategic partnerships for the group.
• Pricing Strategy: HSAG determines the group's pricing strategy for semiconductor products, including the establishment of list prices, volume discounts, and customer-specific pricing arrangements. While HSI has limited authority to negotiate pricing within pre-approved parameters for US customers, all significant pricing decisions and deviations from standard pricing are made or approved by HSAG management.
• Capital Allocation: HSAG determines the allocation of capital across the group's operations, including the funding of fabrication facilities, R&D programs, subsidiary operations, and working capital requirements.
These strategic management and entrepreneurial functions are performed by HSAG's management team in Germany and represent the exercise of decision-making authority that is central to the characterization of HSAG as the principal entity in the intercompany supply chain.
2. Control Over HSI Operations
HSAG exercises both strategic and operational control over HSI's activities as its sole shareholder and as the principal entity in the intercompany supply chain. HSI operates as a limited-risk distributor under HSAG's direction for North American market access. The specific dimensions of HSAG's control over HSI include:
• Board of Directors: HSAG appoints all members of HSI's board of directors. Key board decisions — including the approval of HSI's annual budget, major capital expenditures, and significant commercial commitments — are made with the participation and approval of HSAG management.
• Product Launches: HSAG determines the timing, scope, and marketing approach for product launches in the North American market. HSI provides input regarding US customer requirements and market conditions, but final product launch decisions are made by HSAG.
• Major Customer Relationships: HSAG maintains direct relationships with the largest global OEMs and hyperscaler customers, many of which have global procurement operations. While HSI manages day-to-day customer interactions in the US, HSAG personnel — including members of the Vorstand — participate in strategic account reviews, major contract negotiations, and technology roadmap discussions with key customers.
• Marketing Investments: Significant marketing expenditures in the US — including trade show participation, advertising campaigns, and co-marketing arrangements — require HSAG approval.
The nature and extent of HSAG's control over HSI is consistent with HSI's characterization as a limited-risk distributor that earns a routine return for its services, while HSAG earns the residual profit as the entrepreneurial principal.
E. Treasury and Financial Functions
HSAG manages the group-wide treasury function, including cash pooling, foreign exchange management, and intercompany financing. HSAG's treasury department, located in Dresden and reporting to the CFO, is responsible for the following activities:
• Cash Pooling: HSAG operates a physical cash pooling structure that sweeps excess cash from subsidiary bank accounts into a central cash pool managed by HSAG. This structure enables the group to optimize its cash position, reduce external borrowing costs, and ensure efficient allocation of liquidity across the group.
• Foreign Exchange Management: HSAG manages the group's exposure to foreign exchange risk, including EUR/USD, EUR/JPY, and EUR/CNY exposures arising from intercompany transactions and third-party sales in foreign currencies. HSAG's treasury department employs forward contracts, options, and natural hedging strategies to manage foreign exchange risk within parameters established by the Vorstand.
• Intercompany Financing: HSAG provides intercompany financing to its subsidiaries as needed, including short-term loans, long-term loans, and equity contributions. Intercompany financing is provided on arm's-length terms, with interest rates benchmarked against comparable third-party borrowing rates.