DRAFT — Subject to Finalization Upon Conclusion of Bilateral APA
Prepared by
Calderwood & Harkness LLP 599 Lexington Avenue, 38th Floor New York, New York 10022
C&H Matter Number: 1032-00006 Billing Code: HSAG-TP-2025
Draft Date: July 2025
This draft has been prepared for discussion purposes and is intended to be executed upon the conclusion of the bilateral Advance Pricing Agreement between the Internal Revenue Service of the United States of America and the Bundeszentralamt für Steuern of the Federal Republic of Germany. This document is subject to attorney-client privilege and work product protection. Distribution is limited to authorized recipients.
AMENDED AND RESTATED INTELLECTUAL PROPERTY LICENSE AGREEMENT
This AMENDED AND RESTATED INTELLECTUAL PROPERTY LICENSE AGREEMENT (this "Agreement") is entered into by and between:
(1) HALCYON SEMICONDUCTOR AG ("HSAG" or the "Licensor"), an Aktiengesellschaft organized and existing under the laws of the Federal Republic of Germany, with its registered office at Halcyon-Allee 12, 01099 Dresden, Saxony, Germany (Steuernummer: 203/118/04527; VAT Identification Number (USt-IdNr.): DE 814 723 956; ISIN: DE000HSA0017; WKN: HSA001);
and
(2) HALCYON SEMICONDUCTOR INC. ("HSI" or the "Licensee"), a corporation organized and existing under the laws of the State of Delaware, United States of America (Employer Identification Number (EIN): 84-2917630; Delaware File Number: 7341825), with its principal office at 8700 Parmer Lane, Building 4, Austin, Texas 78729, and its registered agent at c/o Capitol Registered Agents LLC, 1209 Orange Street, Wilmington, Delaware 19801.
HSAG and HSI are each referred to individually as a "Party" and collectively as the "Parties."
This Agreement amends and restates in its entirety the intellectual Property License Agreement originally effective as of January 1, 2019, between HSAG and HSI (the "Original License Agreement"). The Original License Agreement is hereby superseded and replaced in all respects by the terms and conditions set forth herein.
RECITALS
WHEREAS, HSAG is the sole shareholder of HSI, and HSI is a wholly owned subsidiary of HSAG, organized and operated as the primary North American distribution, design-support, and customer service entity within the Halcyon Semiconductor group of companies;
WHEREAS, HSAG is the sole and exclusive owner of certain proprietary semiconductor process technologies and design libraries (collectively, the "Licensed Intangibles," as further defined herein) that are critical to the manufacture, distribution, and commercialization of advanced semiconductor products;
WHEREAS, HSAG and HSI are parties to a Master Intercompany Supply Agreement, originally effective as of January 1, 2019, and subsequently amended as of July 1, 2022 (the "Supply Agreement"), which governs the purchase and sale of semiconductor wafers and die between HSAG and HSI on arm's-length terms;
WHEREAS, HSAG and HSI are parties to a Qualified Cost Sharing Arrangement, effective as of July 15, 2018 (the "CSA"), governed by Treasury Regulations § 1.482-7, pursuant to which the Parties share the costs and risks of developing next-generation 2nm and sub-2nm semiconductor process technologies;
WHEREAS, HSAG and HSI have jointly applied for a bilateral Advance Pricing Agreement (the "APA") between the Internal Revenue Service of the United States of America (the "IRS") and the German Bundeszentralamt für Steuern (the "BZSt") under Article 25 (Mutual Agreement Procedure) of the Convention between the United States of America and the Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital and to Certain Other Taxes, signed June 29, 2006 (the "Treaty"), and in accordance with Revenue Procedure 2015-41;
WHEREAS, the purpose of this Amended and Restated Agreement is to align the intellectual property licensing terms between HSAG and HSI with the transfer pricing methodology proposed in the APA application, which is supported by a Comparable Uncontrolled Transaction ("CUT") analysis identifying eight comparable uncontrolled license agreements from the Clearpoint Royalty Database and publicly available SEC filings;
WHEREAS, the Parties intend for this Agreement to become effective upon execution, which is anticipated to occur upon the conclusion of the bilateral APA, with retroactive application to the Rollback Period (January 1, 2022 through December 31, 2024) if rollback is granted by both the IRS and BZSt, and prospective application for the APA Term (January 1, 2025 through December 31, 2029);
NOW, THEREFORE, in consideration of the mutual covenants, agreements, representations, and warranties contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows:
Right-click to update Table of Contents
ARTICLE I — DEFINITIONS
Section 1.1 — Defined Terms
As used in this Agreement, the following terms shall have the meanings set forth below. Capitalized terms used but not defined in this Article I shall have the meanings ascribed to them elsewhere in this Agreement.
"Affiliate" means, with respect to any Person, any other Person that directly or indirectly controls, is controlled by, or is under common control with such Person. For purposes of this definition, "control" means the direct or indirect ownership of more than fifty percent (50%) of the voting securities or equity interests of a Person, or the right to direct or cause the direction of the management and policies of a Person, whether through ownership of voting securities, by contract, or otherwise. Without limiting the generality of the foregoing, the following entities are currently Affiliates of HSAG: (a) Halcyon Semiconductor Inc. (HSI), Austin, Texas, United States; (b) Halcyon Semiconductor Japan K.K. ("HSJ"), having its registered office in Chiyoda-ku, Tokyo, Japan; and (c) Halcyon Semiconductor (Shanghai) Co., Ltd. ("HSC"), having its registered office in Pudong New Area, Shanghai, People's Republic of China. HSJ and HSC are outside the scope of the APA but are members of the overall Halcyon Semiconductor group.
"Agreement" means this Amended and Restated intellectual Property License Agreement, including all Appendices attached hereto, as the same may be amended, supplemented, or modified from time to time in accordance with Section 12.2.
"APA" means the bilateral Advance Pricing Agreement sought by the Parties between the IRS and the BZSt, covering the APA Term and, if rollback is granted, the Rollback Period, and addressing the arm's-length royalty rate and methodology for the license of the Licensed Intangibles from HSAG to HSI.
"APA Term" means the period beginning January 1, 2025 and ending December 31, 2029, comprising five (5) prospective tax years; and, if rollback is granted by both the IRS and BZSt, also including the Rollback Period of January 1, 2022 through December 31, 2024, comprising three (3) prior tax years, for a total covered period of eight (8) tax years (Fiscal Years 2022 through 2029, inclusive).
"Arm's-Length Royalty Rate" means the royalty rate of 6.0% of IP-Attributable Revenues, as determined by the CUT Analysis and consistent with the transfer pricing methodology proposed in the APA application. The Arm's-Length Royalty Rate has been further corroborated by a residual profit split analysis and is intended to satisfy the arm's-length standard under applicable transfer pricing regulations.
"BZSt" means the Bundeszentralamt für Steuern (Federal Central Tax Office) of the Federal Republic of Germany.
"Clearpoint Royalty Database" means the proprietary database of uncontrolled license and royalty agreements maintained by Clearpoint Analytics, Inc., used in the preparation of the CUT Analysis.
"CSA" or "Qualified Cost Sharing Arrangement" means the cost sharing arrangement between HSAG and HSI, effective July 15, 2018, governed by Treasury Regulations § 1.482-7, pursuant to which the Parties share the costs and risks of developing next-generation 2nm and sub-2nm semiconductor process technologies and related intangible property.
"CUT Analysis" means the Comparable Uncontrolled Transaction analysis prepared in connection with the APA application, identifying eight (8) comparable uncontrolled license agreements for semiconductor intellectual property sourced from the Clearpoint Royalty Database and publicly available filings with the United States Securities and Exchange Commission. The CUT Analysis yielded an interquartile range ("IQR") of royalty rates from 3.5% to 8.2%, with a median royalty rate of 5.6%. The 6.0% Arm's-Length Royalty Rate falls within the IQR and above the median.
"Design Libraries" means HSAG's proprietary semiconductor design libraries, including but not limited to standard cell libraries (in multiple voltage, speed, and density variants), input/output ("I/O") cell libraries, memory compilers (including SRAM and ROM compilers), analog intellectual property blocks, and related electronic design automation ("EDA") content, simulation models, and characterization data, in each case as developed, maintained, and owned by HSAG.
"Fiscal Year" means the calendar year commencing on January 1 and ending on December 31 of the same calendar year. Both HSAG and HSI maintain a Fiscal Year ending December 31.
"IFRS" means International Financial Reporting Standards as issued by the International Accounting Standards Board, as in effect from time to time.
"IP-Attributable Revenues" means the portion of Licensee's Net US Revenues that is attributable to the exploitation of the Licensed Intangibles, determined in accordance with Article IV and Appendix B of this Agreement. For Fiscal Year 2024, IP-Attributable Revenues represent 18.1% of HSI's Net US Revenues (the "IP-Attributable Share"), yielding IP-Attributable Revenues of approximately $745,720,000 (seven hundred forty-five million seven hundred twenty thousand United States Dollars).
"IP-Attributable Share" means the percentage of HSI's Net US Revenues that constitutes IP-Attributable Revenues for a given Fiscal Year, as determined pursuant to Section 4.2 and subject to triennial review. For Fiscal Year 2024, the IP-Attributable Share is 18.1%.
"IQR" means the interquartile range (i.e., the range between the 25th percentile and the 75th percentile) of a given set of data.
"IRC" means the United States Internal Revenue Code of 1986, as amended.
"IRS" means the Internal Revenue Service of the United States of America.
"Licensed Intangibles" means, collectively, the Process Technology and the Design Libraries, as further described in Article II and Appendix A of this Agreement. For the avoidance of doubt, Licensed Intangibles do not include intangible property developed under the CSA.
"Licensed Territory" means the United States of America, including all fifty states and the District of Columbia, as well as all territories and possessions of the United States (including Puerto Rico, the U.S. Virgin Islands, Guam, American Samoa, and the Northern Mariana Islands). The Licensed Territory corresponds to the North American distribution and design-support territory assigned to HSI within the Halcyon Semiconductor group.
"Licensee" means Halcyon Semiconductor Inc. (HSI).
"Licensor" means Halcyon Semiconductor AG (HSAG).
"Net US Revenues" means HSI's net revenues from third-party sales to unrelated customers located in or shipping to addresses within the Licensed Territory, as reported in HSI's audited financial statements prepared in accordance with US GAAP. Net US Revenues are calculated after deducting returns, allowances, trade discounts, and rebates. For Fiscal Year 2024, HSI's Net US Revenues were $4,120,000,000 (four billion one hundred twenty million United States Dollars).
"OECD Transfer Pricing Guidelines" means the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, as published by the Organisation for Economic Co-operation and Development, 2022 edition (or the most recent edition in effect from time to time).
"Original License Agreement" means the intellectual Property License Agreement effective January 1, 2019, between HSAG and HSI, which this Agreement amends and restates in its entirety.
"Party" and "Parties" have the meanings set forth in the preamble to this Agreement.
"Person" means any natural person, corporation, partnership, limited liability company, trust, association, governmental authority, or other entity of any kind.
"Platform Contribution Transaction" or "PCT" means the buy-in payment made by HSI to HSAG in connection with the CSA, as required by Treasury Regulations § 1.482-7(c), reflecting compensation for the reasonably anticipated benefits from the pre-existing intangible property and resources contributed by HSAG to the CSA.
"Process Technology" means HSAG's proprietary semiconductor fabrication process technology, including but not limited to: (a) the 7nm process node technology (including all sub-variants and derivatives thereof); (b) the 5nm process node technology; and (c) the 3nm process node technology; together with all associated manufacturing know-how, fabrication recipes, process design kits ("PDKs"), technology files, characterization data, yield enhancement methodologies, defect reduction techniques, and process control specifications, in each case as developed, maintained, and owned by HSAG.
"Rollback Period" means the period from January 1, 2022 through December 31, 2024 (Fiscal Years 2022, 2023, and 2024), to which the terms of this Agreement shall apply retroactively if rollback is granted by both the IRS and BZSt in connection with the APA.
"Royalty" means the running royalty payment computed and payable by HSI to HSAG in accordance with Article IV of this Agreement.
"Supply Agreement" or "Master Intercompany Supply Agreement" means the Master Intercompany Supply Agreement between HSAG and HSI, originally effective as of January 1, 2019, and amended as of July 1, 2022, governing the purchase and sale of semiconductor wafers and die between HSAG and HSI.
"Treaty" means 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, including any protocols, amendments, and technical explanations thereto.
"US GAAP" means United States generally accepted accounting principles as in effect from time to time.
Section 1.2 — Interpretation
(a) Unless the context otherwise requires, references to Articles, Sections, and Appendices are references to Articles and Sections of, and Appendices to, this Agreement.
(b) The headings and captions contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement.
(c) References to any statute, regulation, rule, or order include all amendments, modifications, supplements, consolidations, replacements, and re-enactments thereof, together with all rules and regulations promulgated thereunder.
(d) References to any agreement or document include all amendments, supplements, and modifications thereto, unless the context expressly provides otherwise.
(e) The words "include," "includes," and "including" shall be deemed to be followed by the phrase "without limitation."
(f) The words "herein," "hereof," "hereunder," and words of similar import refer to this Agreement as a whole and not to any particular provision of this Agreement.
(g) Unless otherwise specified, all monetary amounts expressed in this Agreement are denominated in Euros ("EUR" or "€") for purposes of contractual obligations, with United States Dollar ("USD" or "$") equivalents provided for illustrative purposes only. Where conversion between USD and EUR is required, the applicable exchange rate methodology is set forth in Section 4.4.
(h) References to "days" shall mean calendar days unless otherwise specified as "business days."
(i) The use of "or" is not intended to be exclusive.
(j) References to "written" or "in writing" include communications by electronic mail, provided such communications are addressed to the persons and addresses specified in Section 12.4.
ARTICLE II — GRANT OF LICENSE
Section 2.1 — License Grant
Subject to the terms and conditions of this Agreement, HSAG hereby grants to HSI, and HSI hereby accepts, a non-exclusive, non-transferable (except as expressly provided in Section 2.3), royalty-bearing license to use the Licensed Intangibles (comprising the Process Technology and the Design Libraries, as further described in Section 2.2 and Appendix A) in connection with HSI's distribution, marketing, design support, application engineering, and customer service activities within the Licensed Territory.
The license granted under this Section 2.1 extends to the following specific uses of the Licensed Intangibles:
(a) Distribution and Resale. HSI is authorized to use the Licensed Intangibles in connection with the distribution, marketing, promotion, and resale of semiconductor wafers, die, and finished semiconductor products manufactured by HSAG at its Dresden Fab 1, Dresden Fab 2, and Chemnitz Fab 3 fabrication facilities to third-party customers located in the Licensed Territory.
(b) Technical Design Support and Application Engineering. HSI is authorized to use the Licensed Intangibles, including Process Design Kits, characterization data, simulation models, and Design Libraries, to provide technical design support, application engineering services, and design-in assistance to customers and potential customers within the Licensed Territory. Such activities include assisting customers with the integration of HSAG-manufactured semiconductors into their systems, products, and applications.
(c) Marketing Activities. HSI is authorized to use the Licensed Intangibles, including HSAG's technology specifications, performance data, process node capabilities, and intellectual property descriptions, in connection with marketing, advertising, trade show participation, and promotional activities directed at customers and potential customers within the Licensed Territory.
For the avoidance of doubt, the license granted under this Section 2.1 does not include the right to manufacture semiconductor wafers, die, or any other semiconductor products. Manufacturing of semiconductor products is exclusively HSAG's function, and such manufacturing activities are conducted solely at HSAG's fabrication facilities, including Dresden Fab 1, Dresden Fab 2, and Chemnitz Fab 3, all located in Saxony, Germany. HSI shall not use the Licensed Intangibles to engage in, or facilitate the engagement of any third party in, semiconductor manufacturing.
Section 2.2 — Scope of Licensed Intangibles
The Licensed Intangibles consist of the following categories of proprietary intellectual property owned by HSAG:
(a) Process Technology. HSAG's proprietary semiconductor fabrication process technology, including:
(i) the 7nm process node technology, encompassing all sub-variants, derivatives, and enhancements thereof (including low-power, high-performance, and ultra-low-leakage variants);
(ii) the 5nm process node technology, including all associated manufacturing techniques, device architectures, and process integrations;
(iii) the 3nm process node technology, including gate-all-around (GAA) transistor structures and related innovations;
(iv) all associated manufacturing know-how, fabrication recipes, process flows, and integration schemes;
(v) yield enhancement methodologies, defect reduction techniques, and statistical process control protocols;
(vi) Process Design Kits (PDKs), technology files, design rule manuals, and SPICE model parameters for each process node; and
(vii) characterization data, reliability data, and qualification reports associated with each process node.
(b) Design Libraries. HSAG's proprietary semiconductor design libraries, including:
(i) standard cell libraries in multiple voltage, threshold voltage, speed, and density variants optimized for each licensed process node;
(ii) I/O cell libraries, including general-purpose I/O, high-speed serial I/O, and application-specific I/O cells;
(iii) memory compilers, including SRAM compilers and ROM compilers, with configurable word depth, bit width, and performance parameters;
(iv) analog IP blocks, including phase-locked loops (PLLs), voltage regulators, bandgap references, analog-to-digital converters (ADCs), and digital-to-analog converters (DACs);
(v) EDA content, including synthesis libraries, timing libraries, power libraries, and physical verification rule decks; and
(vi) simulation models, behavioral models, and IBIS models for signal integrity analysis.
A detailed description of the Licensed Intangibles is set forth in Appendix A to this Agreement.
Exclusions. The Licensed Intangibles expressly do not include any intangible property developed under the CSA. Intangible property relating to next-generation 2nm and sub-2nm semiconductor process technologies, and any related design libraries, PDKs, or know-how arising from the CSA R&D program, are governed exclusively by the Qualified Cost Sharing Arrangement effective July 15, 2018. Under the CSA, HSI holds a 22.5% anticipated benefit share attributable to HSI's North American exploitation rights. The allocation of costs, risks, and benefits under the CSA is determined separately from, and independently of, the Royalty obligations under this Agreement.
Section 2.3 — Restrictions on Sublicensing and Transfer
HSI shall not sublicense, assign, pledge, encumber, or otherwise transfer the Licensed Intangibles, or any rights therein or thereto, to any third party or Affiliate without the prior written consent of HSAG. Notwithstanding the foregoing, HSI may sublicense the Licensed Intangibles to any wholly owned subsidiary of HSI organized under the laws of a state of the United States, provided that:
(a) HSI shall obtain HSAG's prior written consent to any such sublicense, which consent shall not be unreasonably withheld, conditioned, or delayed;
(b) any such sublicensee shall be bound by the same terms and conditions applicable to HSI under this Agreement; and
(c) HSI shall remain primarily liable to HSAG for all obligations under this Agreement, including without limitation the payment of Royalties.
Any attempted sublicense, assignment, or transfer in violation of this Section 2.3 shall be null and void and of no force or effect.
Section 2.4 — Retained Rights
HSAG retains all rights, title, and interest in and to the Licensed Intangibles, including without limitation all patent rights, copyrights, trade secret rights, and other intellectual property rights embodied therein. Nothing in this Agreement shall be construed as a transfer or assignment of ownership of any intangible property from HSAG to HSI.
HSAG expressly retains the right to:
(a) license the Licensed Intangibles to other Affiliates, including Halcyon Semiconductor Japan K.K. (HSJ) and Halcyon Semiconductor (Shanghai) Co., Ltd. (HSC), on such terms as HSAG may determine;
(b) license the Licensed Intangibles to unrelated third parties on arm's-length terms;
(c) use the Licensed Intangibles for its own manufacturing, research, development, and commercial purposes; and
(d) modify, enhance, update, replace, or discontinue any Licensed Intangible at any time, in its sole discretion, subject to the obligation to provide HSI with reasonable access to updates and enhancements of the Licensed Intangibles during the term of this Agreement.
ARTICLE III — TERM
Section 3.1 — Original Effective Date
The Original License Agreement was effective as of January 1, 2019, and governed the licensing of the Licensed Intangibles from HSAG to HSI from that date until superseded by this Agreement.
Section 3.2 — Amended and Restated Effective Date
This Amended and Restated Agreement shall become effective upon execution by both Parties (the "Effective Date"), which execution is anticipated to occur upon conclusion of the bilateral APA between the IRS and the BZSt. Upon execution, this Agreement shall supersede and replace the Original License Agreement in its entirety.
Retroactive Application. The amended Royalty rate and computation mechanics set forth in Article IV of this Agreement shall apply retroactively to the Rollback Period (January 1, 2022 through December 31, 2024) if, and to the extent that, rollback is granted by both the IRS and the BZSt in connection with the APA. Any difference between the Royalty amounts paid by HSI to HSAG under the Original License Agreement during the Rollback Period and the Royalty amounts computed under this Agreement for the same period shall be settled as a compensating adjustment in accordance with Section 4.7 within ninety (90) days following the date on which the APA becomes effective.
Section 3.3 — Term and Renewal
The initial term of this Agreement shall be coterminous with the APA Term, commencing on January 1, 2025 and ending on December 31, 2029 (the "Initial Term"), unless earlier terminated in accordance with Section 3.4.
Upon expiration of the Initial Term, this Agreement shall automatically renew for successive one-year periods (each, a "Renewal Term"), unless either Party provides the other Party with written notice of non-renewal at least one hundred eighty (180) days prior to the expiration of the then-current term.
In the event that the APA is renewed or extended by the competent authorities of the United States and Germany, this Agreement shall be extended correspondingly for the duration of such renewed or extended APA term, and the Parties shall execute such amendments as may be necessary to reflect the renewed or extended APA terms.
This Agreement shall also remain in full force and effect with respect to the Rollback Period (Fiscal Years 2022, 2023, and 2024) to the extent that rollback is accepted and implemented by both the IRS and the BZSt.
Section 3.4 — Early Termination
Either Party may terminate this Agreement upon twelve (12) months' prior written notice to the other Party, delivered in accordance with Section 12.4; provided, however, that termination of this Agreement during the APA Term may constitute a change in critical assumptions under the APA and may trigger reporting obligations to the IRS and BZSt. In the event of any proposed termination during the APA Term, the terminating Party shall:
(a) consult with the other Party regarding the potential implications of such termination under the APA;
(b) provide written notification to the IRS and BZSt of the proposed termination, to the extent required by the terms of the APA or applicable procedures; and
(c) cooperate with the other Party in determining whether any modifications to this Agreement, in lieu of termination, would be appropriate to preserve compliance with the APA.
This Agreement shall terminate automatically, without the need for notice, upon:
(a) the dissolution, liquidation, or winding-up of HSI; or
(b) the transfer of ownership of HSI (whether by sale, merger, or otherwise) to a Person that is not an Affiliate of HSAG at the time of such transfer.
Upon termination of this Agreement for any reason, all rights and licenses granted to HSI under Article II shall immediately cease, and HSI shall promptly return or destroy (at HSAG's election) all copies of the Licensed Intangibles in HSI's possession or control. Termination shall not relieve either Party of any obligations accrued prior to the effective date of termination, including without limitation the obligation to pay all Royalties accrued through the date of termination.
ARTICLE IV — ROYALTY COMPUTATION
Section 4.1 — Royalty Rate
HSI shall pay HSAG a running Royalty equal to six percent (6.0%) of IP-Attributable Revenues for each Fiscal Year (or portion thereof) during the term of this Agreement, including the Rollback Period if rollback is granted.
The 6.0% Royalty rate has been determined to be an arm's-length rate based on the CUT Analysis, which identified eight (8) comparable uncontrolled license agreements for semiconductor intellectual property. The key parameters of the CUT Analysis are as follows:
(a) Source data: Clearpoint Royalty Database and publicly available filings with the United States Securities and Exchange Commission;
(b) Number of comparable agreements: eight (8);
(c) Interquartile range of observed royalty rates: 3.5% to 8.2%;
(d) Median royalty rate: 5.6%; and
(e) Position of the 6.0% rate: within the IQR and above the median.
The 6.0% Royalty rate is further corroborated by a residual profit split analysis, which confirms that the allocation of residual profits between HSAG and HSI is consistent with the relative contributions of each Party's intangible assets and functions. A summary of the CUT Analysis is set forth in Appendix B, Section B.3.
Section 4.2 — Determination of IP-Attributable Revenues
IP-Attributable Revenues for each Fiscal Year shall be determined by applying the IP-Attributable Share to HSI's Net US Revenues for such Fiscal Year.
The IP-Attributable Share represents the portion of HSI's Net US Revenues that is attributable to the Licensed Intangibles, as distinguished from revenues generated through: (a) HSI's own distribution functions, marketing efforts, and customer relationships; (b) intangible property developed under the CSA (for which costs and benefits are allocated separately under the CSA); and (c) routine distribution and service functions that would be compensated under the Supply Agreement pricing methodology.
For Fiscal Year 2024, the IP-Attributable Share has been determined to be 18.1% of HSI's Net US Revenues, yielding IP-Attributable Revenues of:
$4,120,000,000 × 18.1% = $745,720,000 (approximately $745.7 million)
The methodology for determining the IP-Attributable Share takes into account the following factors:
(a) the relative contribution of HSAG's Licensed Intangibles to the value of the semiconductor products sold by HSI in the Licensed Territory, including the premium attributable to HSAG's proprietary process technologies;
(b) the functional analysis of HSI's activities, assets, and risks, distinguishing between value generated through the Licensed Intangibles and value generated through HSI's own distribution, marketing, and design-support functions;
(c) the allocation of revenues between Licensed Intangibles and CSA-developed intangibles, to ensure no double counting of royalty and cost-sharing payments; and
(d) industry benchmarks and comparable data for the semiconductor distribution segment.
The IP-Attributable Share shall be reviewed and, if necessary, adjusted no less frequently than every three (3) years during the APA Term. Any adjustment to the IP-Attributable Share shall be made on a prospective basis for the Fiscal Year in which the review is completed and all subsequent Fiscal Years, unless otherwise required by the APA or agreed by the Parties.
Section 4.3 — Royalty Computation Example (FY 2024 Illustrative)
For illustrative purposes only, the Royalty computation for Fiscal Year 2024 is as follows:
(a) HSI Net US Revenues: $4,120,000,000
(b) IP-Attributable Share: 18.1%
(c) IP-Attributable Revenues: $4,120,000,000 × 18.1% = $745,720,000 (approximately $745.7 million)
(d) Royalty Rate: 6.0%
(e) Annual Royalty (USD equivalent): $745,720,000 × 6.0% = $44,743,200 (approximately $44.7 million)
(f) Contractual denomination (EUR): The Fiscal Year 2024 Royalty payment, denominated in EUR, amounts to €68,400,000, converted using the payment-date weighted average EUR/USD exchange rate of 1.0307 applicable to the quarterly and year-end payments made during and with respect to Fiscal Year 2024.
For reference, the average annual EUR/USD exchange rate for Fiscal Year 2024, as published by the European Central Bank, was 1.0896. The difference between the average annual rate and the payment-date weighted average rate reflects the timing of quarterly Royalty payments as described in Section 4.5.
A detailed step-by-step computation methodology and illustrative calculation are set forth in Appendix B.
Section 4.4 — Currency Denomination and Conversion
All Royalty payments under this Agreement shall be denominated and invoiced in EUR. HSAG shall issue quarterly invoices to HSI in EUR in accordance with the payment schedule set forth in Section 4.5.
For purposes of computing IP-Attributable Revenues (which are initially reported in USD, consistent with HSI's US GAAP financial statements), the conversion from USD to EUR shall be performed using the payment-date weighted average EUR/USD exchange rate. The payment-date weighted average rate shall be calculated as the weighted average of the EUR/USD spot exchange rates in effect on the respective dates on which quarterly Royalty payments are made during or with respect to the applicable Fiscal Year, weighted by the EUR amount of each such payment.
For Fiscal Year 2024, the payment-date weighted average EUR/USD rate was 1.0307.
In the event of any dispute regarding the applicable exchange rate, the Parties shall use the EUR/USD reference rate published by the European Central Bank as of the relevant payment date.
Section 4.5 — Payment Schedule
Royalties shall be payable quarterly in arrears. Within thirty (30) days following the end of each calendar quarter (i.e., April 30, July 30, October 30, and January 30 of the following year), HSI shall pay to HSAG the Royalty amount attributable to such quarter, calculated on the basis of HSI's estimated IP-Attributable Revenues for the quarter as determined in good faith by HSI.
A year-end true-up payment (or credit, as the case may be) shall be computed and settled within ninety (90) days following the end of each Fiscal Year. The year-end true-up shall be based on HSI's actual audited Net US Revenues for the Fiscal Year and the final IP-Attributable Share determined for such Fiscal Year. If the aggregate quarterly payments exceed the annual Royalty as finally determined, HSAG shall credit the overpayment against the Royalty due for the next succeeding quarter. If the aggregate quarterly payments are less than the annual Royalty as finally determined, HSI shall remit the deficiency to HSAG together with the year-end true-up payment.
All payments under this Agreement shall be made by wire transfer of immediately available funds to such bank account as HSAG shall designate in writing from time to time. As of the date of this Agreement, HSAG's designated bank account for Royalty payments is as follows:
Bank: Dunmore Bancorp, Dresden IBAN: DE89 8504 0000 0218 7193 00 BIC/SWIFT: COBADEFFXXX Account Name: Halcyon Semiconductor AG — Royalty Account Reference: HSI IP License — [Quarter/Year]
Section 4.6 — Withholding Tax
To the extent that any Royalty payments under this Agreement are subject to withholding tax imposed by the United States, HSI shall deduct and withhold the applicable withholding tax from such payments and remit the withheld amounts to the appropriate taxing authority in accordance with applicable law.
Provided, however, that in accordance with Article 12 (Royalties) of the Treaty, royalties arising in the United States and paid to a resident of the Federal Republic of Germany may be subject to reduced withholding rates. HSI shall use commercially reasonable efforts to minimize any applicable withholding tax, including by:
(a) applying the reduced withholding rate provided under Article 12 of the Treaty, to the extent HSAG qualifies as a beneficial owner of the Royalty payments and provides the requisite documentation;
(b) timely providing any applicable treaty forms and certifications to the IRS, including maintaining on file a valid and properly completed IRS Form W-8BEN-E from HSAG; and
(c) cooperating with HSAG in seeking refunds of any excess withholding, to the extent permitted by applicable law.
HSAG shall provide HSI with a properly completed IRS Form W-8BEN-E (or any successor form) and such other documentation as may be required by the IRS to claim treaty benefits under the Treaty. HSAG shall promptly notify HSI of any change in circumstances that would affect the validity or accuracy of any such form or documentation.
Section 4.7 — Interaction with APA and Compensating Adjustments
The Parties acknowledge that the Royalty rate and computation mechanics set forth in this Article IV are intended to conform with the transfer pricing methodology proposed in the APA application and to be confirmed by the bilateral APA upon its conclusion.
To the extent that the bilateral APA, as finally executed by the competent authorities of the United States and Germany, specifies a royalty rate, royalty base, or computation methodology that differs from the rate, base, or methodology set forth in Section 4.1 and Section 4.2, the terms of the APA shall govern and this Agreement shall be deemed automatically amended to conform with the APA terms. The Parties shall execute a written amendment to this Agreement reflecting any such changes within sixty (60) days following the conclusion of the APA.
Year-end compensating adjustments, if required by the APA, by application of the arm's-length standard under IRC § 482, or by the corresponding provisions of the German Außensteuergesetz (AStG), shall be computed and settled in accordance with the payment procedures set forth in Section 4.5, with appropriate modifications to reflect the nature and timing of such adjustments. Compensating adjustments for the Rollback Period shall be computed and settled within ninety (90) days following the effective date of the APA.
ARTICLE V — RELATIONSHIP TO OTHER INTERCOMPANY AGREEMENTS
Section 5.1 — Master Intercompany Supply Agreement
HSAG and HSI are parties to the Master Intercompany Supply Agreement (effective January 1, 2019; amended July 1, 2022), which governs the purchase and sale of semiconductor wafers, die, and related tangible goods between HSAG (as manufacturer and seller) and HSI (as distributor and buyer). For Fiscal Year 2024, the intercompany tangible goods purchased by HSI from HSAG under the Supply Agreement totaled approximately €987,600,000 (approximately $1,076,000,000 at the average annual exchange rate).
The transfer prices for tangible goods under the Supply Agreement are determined using the Comparable Profits Method ("CPM") under Treasury Regulations § 1.482-5 (equivalently, the Transactional Net Margin Method ("TNMM") under the OECD Transfer Pricing Guidelines), with HSI designated as the tested party (as the least complex entity in the controlled transaction). The transfer prices are set to target an operating margin for HSI within the interquartile range of 2.8% to 6.1% (median: 4.4%), based on a benchmarking study of seventeen (17) comparable North American semiconductor distributors.
The Royalties payable by HSI to HSAG under this License Agreement are separate from, and in addition to, the transfer prices paid by HSI to HSAG for tangible goods under the Supply Agreement. HSI's operating margin under the CPM/TNMM analysis is computed after deducting both cost of goods sold (including intercompany purchases from HSAG) and Royalty expenses incurred under this Agreement.
For Fiscal Year 2024, HSI's operating margin of 4.80% has been computed after deducting all costs, including intercompany purchases and Royalty expenses, and falls within the interquartile range identified in the CPM/TNMM benchmarking analysis.
Section 5.2 — Qualified Cost Sharing Arrangement
HSAG and HSI are parties to the Qualified Cost Sharing Arrangement effective July 15, 2018, pursuant to which the Parties share the costs and risks of developing next-generation 2nm and sub-2nm semiconductor process technologies and related intangible property.
Under the CSA:
(a) HSI's cost-sharing percentage is 22.5%, corresponding to HSI's reasonably anticipated benefit share from the North American exploitation rights to the intangible property expected to be developed under the CSA;
(b) For Fiscal Year 2024, total qualified R&D costs under the CSA were €998,200,000, of which HSI's share was €224,600,000 (22.5% × €998,200,000);
(c) As part of the CSA, HSI made a Platform Contribution Transaction (PCT) buy-in payment of $312,500,000 to HSAG on July 15, 2018, in consideration for the reasonably anticipated benefits to HSI from HSAG's pre-existing intangible property contributed to the CSA. The PCT buy-in payment was valued using the income method, with an 11.8% discount rate and a fifteen (15)-year projection period. The valuation was performed by Stonebridge Valuation Partners LLC (Marcus Reinhardt, Managing Director, 200 Park Avenue, Suite 1510, New York, New York 10166).
Intangible property developed under the CSA is not included within the Licensed Intangibles under this Agreement and is governed exclusively by the terms of the CSA. The Royalty obligations under this Agreement apply solely to the Licensed Intangibles (Process Technology and Design Libraries) as defined in Article II and Appendix A.
Section 5.3 — No Double Counting
The Parties shall ensure that the Royalty computation under this Agreement does not result in any double counting of cost-sharing payments made under the CSA or transfer prices paid under the Supply Agreement. Specifically:
(a) To the extent that revenues attributable to intangible property developed under the CSA are included within HSI's Net US Revenues, the IP-Attributable Share used in computing IP-Attributable Revenues shall be determined so as to exclude the portion of such revenues that is attributable to CSA-developed intangibles, thereby avoiding any duplication of compensation to HSAG;
(b) The transfer prices paid by HSI to HSAG under the Supply Agreement compensate HSAG for its manufacturing functions, tangible assets, and routine manufacturing-related intangibles; the Royalties under this Agreement compensate HSAG for the non-routine Licensed Intangibles (Process Technology and Design Libraries) that generate value beyond the routine manufacturing return; and
(c) The Parties shall cooperate in good faith to maintain appropriate accounting allocations and documentation to substantiate the absence of double counting, and such documentation shall be made available for review in connection with any APA compliance reporting, transfer pricing audit, or examination by the IRS or BZSt.