PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT — DRAFT FOR DISCUSSION PURPOSES ONLY
AMENDED AND RESTATED MASTER INTERCOMPANY SUPPLY AGREEMENT
DRAFT — Subject to Completion of Bilateral Advance Pricing Agreement
by and between
HALCYON SEMICONDUCTOR AG ("HSAG" or "Seller")
and
HALCYON SEMICONDUCTOR INC. ("HSI" or "Buyer")
This Agreement amends and restates in its entirety the Master Intercompany Supply Agreement originally effective January 1, 2019, as amended July 1, 2022.
Prepared by:
Calderwood & Harkness LLP 599 Lexington Avenue, 38th Floor New York, NY 10022
Matter Number: 1032-00006
Draft Date: [●], 2025
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AMENDED AND RESTATED MASTER INTERCOMPANY SUPPLY AGREEMENT
THIS AMENDED AND RESTATED MASTER INTERCOMPANY SUPPLY AGREEMENT (this "Agreement") is entered into as of [●], 2025 (the "Execution Date"), by and between:
HALCYON SEMICONDUCTOR AG, 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 (German Tax ID (Steuernummer): 203/118/04527; VAT Identification Number (USt-IdNr.): DE 814 723 956; ISIN: DE000HSA0017; WKN: HSA001) (hereinafter referred to as "HSAG" or the "Seller"),
and
HALCYON SEMICONDUCTOR INC., a corporation organized and existing under the laws of the State of Delaware, United States of America, with its principal office at 8700 Parmer Lane, Building 4, Austin, TX 78729, United States (EIN: 84-2917630; Delaware File Number: 7341825) (hereinafter referred to as "HSI" or the "Buyer").
HSAG and HSI are sometimes referred to herein individually as a "Party" and collectively as the "Parties." HSI is a wholly owned subsidiary of HSAG.
This Agreement shall become effective upon the date of its execution, which shall occur upon the conclusion of the bilateral Advance Pricing Agreement described herein, with application to intercompany transactions from the APA effective date forward. The prospective APA term is January 1, 2025 through December 31, 2029. Rollback provisions for the period January 1, 2022 through December 31, 2024 are addressed separately in Article 5 and Article 6 of this Agreement.
RECITALS
WHEREAS, HSAG and HSI entered into a Master Intercompany Supply Agreement effective as of January 1, 2019 (the "Original Agreement"), governing the sale of semiconductor wafers and related products from HSAG to HSI, which Original Agreement was subsequently amended pursuant to a First Amendment effective as of July 1, 2022 (the "First Amendment" and, together with the Original Agreement, the "Prior Agreement");
WHEREAS, HSAG designs and manufactures advanced-node semiconductor wafers utilizing 7nm, 5nm, and 3nm process technologies at its fabrication facilities located in Dresden, Germany (designated as Fab 1 and Fab 2, located at Industriepark Klotzsche, Zur Wetterwarte 50, 01109 Dresden) and Chemnitz, Germany (designated as Fab 3, located at Technologiepark Chemnitz, Annaberger Straße 240, 09125 Chemnitz), serving the automotive, industrial Internet of Things ("IoT"), and data-center application markets;
WHEREAS, HSI serves as the exclusive United States and North American distribution, marketing, and design-support entity for Halcyon-branded semiconductor products, maintaining operations in Austin, Texas (corporate headquarters at 8700 Parmer Lane, Building 4), Santa Clara, California (design center at 2455 Augustine Drive, Suite 300), Southfield, Michigan (regional sales office), and Beaverton, Oregon (regional sales office);
WHEREAS, HSAG and HSI, through their respective legal counsel—Calderwood & Harkness LLP (New York, New York) for HSI and Kettner Pflüger Rechtsanwälte (Frankfurt am Main, Germany) for HSAG—have jointly applied for a bilateral Advance Pricing Agreement between the Internal Revenue Service of the United States (the "IRS") and the German Bundeszentralamt für Steuern (the "BZSt") under Article 25 of the Convention between the United States of America and the Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital and to Certain Other Taxes, signed June 29, 2006 (the "Treaty"), and in accordance with the procedures set forth in Revenue Procedure 2015-41;
WHEREAS, the bilateral APA, upon its execution, is expected to establish, among other things, a transfer pricing methodology based on the Transactional Net Margin Method ("TNMM") as described in Chapter II of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (2022 edition) (the "OECD Guidelines"), which is equivalent to the Comparable Profits Method ("CPM") as described in Treasury Regulation § 1.482-5, for the sale of tangible goods from HSAG to HSI, with HSI designated as the tested party;
WHEREAS, the Parties desire to amend and restate the Prior Agreement in its entirety to incorporate pricing mechanisms and compensating adjustment provisions consistent with the terms of the bilateral APA, including the establishment of a target operating margin for HSI within the agreed arm's-length interquartile range, year-end true-up provisions, and compensating adjustment mechanisms designed to ensure that intercompany pricing remains within the arm's-length standard at all times;
WHEREAS, this Agreement operates in conjunction with, and is to be read together with, the intellectual Property License Agreement between HSAG and HSI (effective January 1, 2019, as amended) (the "IP License Agreement") and the Qualified Cost Sharing Arrangement between HSAG and HSI (effective July 15, 2018) (the "CSA"), each of which governs a separate category of intercompany transactions between the Parties; and
WHEREAS, the Parties acknowledge that this Agreement, together with the IP License Agreement and the CSA, collectively constitute the intercompany legal framework governing the principal categories of controlled transactions subject to the bilateral APA;
NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows:
ARTICLE 1 — DEFINITIONS AND INTERPRETATION
Section 1.1 — Definitions
As used in this Agreement, the following terms shall have the meanings set forth below:
"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 possession, directly or indirectly, of the power 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, HSAG, HSI, Halcyon Semiconductor Japan K.K., and Halcyon Semiconductor (Shanghai) Co., Ltd. are each Affiliates of one another.
"APA" means the bilateral Advance Pricing Agreement between the IRS and BZSt covering the intercompany transactions described herein, as executed pursuant to the mutual agreement procedure under Article 25 of the Treaty and in accordance with Revenue Procedure 2015-41.
"APA Term" means the period commencing on January 1, 2025 and ending on December 31, 2029 (five prospective tax years), subject to any extension or renewal thereof agreed upon by the competent authorities of the United States and Germany.
"Arm's-Length Range" means the interquartile range of operating margins established by the Benchmarking Study, being 2.8% (25th percentile) to 6.1% (75th percentile), with a Median of 4.4%, based on 17 comparable North American semiconductor distributors for fiscal years 2020 through 2024, as further described in Section 5.2 of this Agreement.
"Benchmarking Study" means the economic analysis prepared by Meridian Economics GmbH (Munich, Germany) under the direction of Calderwood & Harkness LLP, identifying the comparable companies, applying appropriate selection criteria and quantitative screening, and computing the Arm's-Length Range for purposes of the CPM/TNMM analysis, as submitted to the IRS and BZSt in connection with the APA application.
"Buyer" means Halcyon Semiconductor Inc., a Delaware corporation, as further identified in the preamble to this Agreement.
"Comparable Profits Method" or "CPM" means the transfer pricing method described in Treasury Regulation § 1.482-5, under which the operating results of the Tested Party are evaluated by reference to the operating results of comparable uncontrolled companies performing similar functions, employing similar assets, and assuming similar risks.
"Compensating Adjustment" means an adjustment made pursuant to Article 6 of this Agreement to bring HSI's Operating Margin within the Arm's-Length Range (or to the Target Operating Margin, as applicable), whether through a debit note or credit note issued by HSAG to HSI.
"Contract Year" means each calendar year during the Term of this Agreement, commencing January 1 and ending December 31.
"Covered Products" means the semiconductor wafers and singulated die manufactured by HSAG at its fabrication facilities in Dresden and Chemnitz, Germany, as further described in Schedule A hereto, including all product categories (automotive-grade, industrial IoT, and data-center application semiconductors) at all applicable process nodes (7nm, 5nm, and 3nm).
"Delivery Point" means the point of delivery for Covered Products as specified in Article 4 of this Agreement, being, unless otherwise specified in the applicable purchase order, HSAG's designated fabrication facility (Fab 1 or Fab 2 in Dresden, or Fab 3 in Chemnitz), on an Ex Works (EXW Incoterms® 2020) basis.
"Fiscal Year" means, with respect to each Party, a calendar year commencing January 1 and ending December 31. For the avoidance of doubt, both HSAG and HSI maintain a December 31 fiscal year-end.
"Gross Profit" means HSI's Net Revenue minus its Cost of Goods Sold, as determined in accordance with U.S. generally accepted accounting principles ("US GAAP") consistently applied.
"HSI Operating Margin" means HSI's Operating Income divided by HSI's Net Revenue, expressed as a percentage, computed on a full-year basis for each Contract Year.
"Intercompany Price" or "Transfer Price" means the price charged by HSAG to HSI for Covered Products sold pursuant to this Agreement, as determined under Article 5 of this Agreement.
"IRC" means the Internal Revenue Code of 1986, as amended, including without limitation IRC §§ 482, 6662(e), and 6662(h). References to specific sections of the IRC shall include any successor provisions thereto.
"Master File" means the group-level transfer pricing master file prepared in accordance with the requirements of the Organisation for Economic Co-operation and Development's Base Erosion and Profit Shifting ("BEPS") Action 13 report, as adopted and implemented under German law and under IRS regulations, as applicable.
"Median" means the median of the Arm's-Length Range, being an operating margin of 4.4%.
"Net Revenue" means HSI's third-party net sales revenue from the resale of Covered Products and packaged semiconductors in North America, net of returns, allowances, and discounts, as determined in accordance with US GAAP consistently applied. For reference, HSI's Net Revenue for FY 2024 was $4,120,000,000.
"OECD Guidelines" means the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (2022 edition), including any supplements, updates, or successor publications adopted by the OECD Council.
"Operating Expenses" means HSI's selling, general, and administrative expenses, and other operating costs, as determined in accordance with US GAAP consistently applied, excluding intercompany royalties paid to HSAG under the IP License Agreement (which are governed by the separate IP License Agreement and are not included in the operating expense base for purposes of the PLI computation under this Agreement).
"Operating Income" means HSI's Net Revenue minus Cost of Goods Sold minus Operating Expenses, as determined in accordance with US GAAP consistently applied. For reference, HSI's Operating Income for FY 2024 was $197,800,000, representing an operating margin of 4.80%.
"Person" means any individual, corporation, partnership, limited liability company, joint venture, association, trust, unincorporated organization, governmental authority, or other entity.
"Prior Agreement" means the Master Intercompany Supply Agreement between HSAG and HSI, effective as of January 1, 2019, as amended by the First Amendment effective July 1, 2022.
"Profit Level Indicator" or "PLI" means the operating margin on net resales, being the ratio of Operating Income to Net Revenue, as used for the CPM/TNMM analysis under this Agreement and the APA.
"Qualified Cost Sharing Arrangement" or "CSA" means the cost sharing arrangement between HSAG and HSI effective as of July 15, 2018, governed by Treasury Regulation § 1.482-7, as amended from time to time.
"Rollback Period" means the period from January 1, 2022 through December 31, 2024, to which the APA methodology is to be applied retroactively, subject to competent authority agreement under Article 25 of the Treaty.
"Seller" means Halcyon Semiconductor AG, a German Aktiengesellschaft, as further identified in the preamble to this Agreement.
"Target Operating Margin" means [●]%, being the specific point within the Arm's-Length Range agreed upon by the competent authorities in the APA. The initial proposal submitted by the Parties to the competent authorities is the Median of 4.4%. The Target Operating Margin may alternatively be expressed as a narrower target range (e.g., 3.8% to 5.0%) if so agreed in the APA.
"Tested Party" means HSI, as the least complex entity in the controlled transaction and the entity whose operating results are evaluated for purposes of the CPM/TNMM analysis.
"TNMM" means the Transactional Net Margin Method, as described in Chapter II of the OECD Guidelines, under which the net profit margin realized by a tested party in a controlled transaction is compared to the net profit margins realized by comparable uncontrolled enterprises in comparable transactions.
"Treasury Regulations" means the regulations promulgated under the IRC by the United States Department of the Treasury, including without limitation Treasury Regulation §§ 1.482-1 through 1.482-9 and Treasury Regulation § 1.6662-6. References to specific sections of the Treasury Regulations shall include any successor provisions thereto.
"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, and the Protocol thereto, including any amendments or successor instruments.
"True-Up Payment" means a year-end payment made pursuant to Article 6 of this Agreement to adjust intercompany pricing so that HSI's actual Operating Margin for a Contract Year falls within the Arm's-Length Range or at the Target Operating Margin, as applicable. The term "Year-End Adjustment" shall have the same meaning as True-Up Payment.
"Year-End Adjustment" has the meaning ascribed to True-Up Payment.
Section 1.2 — Interpretation
(a) The headings and titles of Articles, Sections, and Schedules in this Agreement are for convenience of reference only and shall not affect the meaning or interpretation of this Agreement.
(b) Unless the context otherwise requires, references in this Agreement to Articles, Sections, and Schedules are references to the Articles, Sections, and Schedules of this Agreement.
(c) All references to currency in this Agreement shall be to Euros ("EUR" or "€") with respect to HSAG and to United States Dollars ("USD" or "$") with respect to HSI, unless otherwise expressly stated. Where conversion between EUR and USD is required for purposes of computing intercompany pricing, true-up adjustments, or reconciliation, the applicable exchange rate shall be:
(i) for revenue, Cost of Goods Sold, and operating expense computations on a full-year basis, the average annual EUR/USD exchange rate as published by the European Central Bank (ECB) for the applicable Contract Year (by way of reference, the average annual EUR/USD exchange rate for FY 2024 was 1.0896); and
(ii) for specific transaction-level reconciliation or payment-date calculations, the weighted average payment-date rate, as applicable (by way of reference, the weighted average payment-date rate used for royalty payments in FY 2024 was 1.0307).
(d) References in this Agreement to any statute, regulation, guideline, or other legal authority shall be deemed to include such statute, regulation, guideline, or authority as amended, supplemented, restated, or replaced from time to time, including any successor provisions thereto.
(e) Terms defined in the APA shall, unless otherwise defined herein, have the same meanings when used in this Agreement.
(f) In the event of any conflict or inconsistency between the terms of this Agreement and the terms of the APA, the terms of the APA shall control in all respects.
(g) Words importing the singular include the plural and vice versa. Words importing one gender include all genders. The words "include," "includes," and "including" shall be deemed to be followed by the phrase "without limitation."
(h) References to "days" mean calendar days unless otherwise specified as "business days." References to "business days" mean days on which commercial banks are open for business in both New York, New York, United States, and Frankfurt am Main, Germany.
Section 1.3 — Schedules
The following Schedules are attached hereto and incorporated herein by reference:
• Schedule A — Covered Products (description of semiconductor wafers and die by process node, product codes, and specifications)
• Schedule B — Pricing Mechanism and Illustrative Calculations
• Schedule C — Year-End True-Up Computation Template
• Schedule D — Critical Assumptions
• Schedule E — Delivery Terms and Logistics
• Schedule F — Quality Standards
Each Schedule forms an integral part of this Agreement. In the event of any conflict between the body of this Agreement and a Schedule, the body of this Agreement shall control, unless the Schedule expressly states otherwise.
ARTICLE 2 — SCOPE AND COVERED PRODUCTS
Section 2.1 — Scope of Agreement
This Agreement governs the sale and purchase of Covered Products from HSAG to HSI, constituting the tangible goods component of the controlled transactions between the Parties that are subject to the APA. The transactions covered by this Agreement relate exclusively to the intercompany sale of semiconductor wafers and singulated die manufactured by HSAG and resold by HSI to third-party customers in North America.
The tangible goods transactions covered by this Agreement constitute one of three categories of controlled transactions addressed in the bilateral APA, alongside: (i) royalty payments from HSI to HSAG under the IP License Agreement, and (ii) cost-sharing contributions under the CSA. Each such category is governed by its own separate intercompany agreement, and this Agreement does not address or supersede the terms of the IP License Agreement or the CSA.
For reference, the aggregate value of intercompany tangible goods sales from HSAG to HSI for FY 2024 was €987,600,000 (approximately $1,076,000,000 at the average FY 2024 EUR/USD exchange rate of 1.0896). The aggregate annual intercompany flows across all three transaction categories for FY 2024 were approximately €1,280,600,000, comprised of: (a) €987,600,000 in tangible goods sales under this Agreement; (b) €68,400,000 in royalty payments under the IP License Agreement; and (c) €224,600,000 in cost-sharing contributions under the CSA.
Section 2.2 — Covered Products
The Covered Products subject to this Agreement consist of:
(a) Semiconductor wafers manufactured by HSAG at its fabrication facilities, including Fab 1 and Fab 2 in Dresden, Germany, and Fab 3 in Chemnitz, Germany, utilizing advanced-node process technologies (7nm, 5nm, and 3nm nodes);
(b) Singulated die derived from such manufactured wafers; and
(c) All product categories manufactured by HSAG, including automotive-grade semiconductors, industrial IoT semiconductors, and data-center application semiconductors.
The Covered Products are described in further detail in Schedule A hereto, which sets forth product codes, descriptions, specifications, and process node classifications for each product category. Schedule A may be updated by mutual written agreement of the Parties from time to time to reflect new product introductions, the discontinuation of existing products, or the addition of new process nodes or fabrication facilities.
Section 2.3 — Exclusivity
HSI serves as the exclusive distribution, marketing, and design-support entity for Halcyon-branded semiconductor products in North America, including the United States and Canada. During the Term of this Agreement, HSAG shall not sell Covered Products directly to unrelated customers in the United States or Canada, or appoint any other entity as a distributor of Covered Products in such territories, except as otherwise agreed in writing by the Parties.
Nothing in this Section 2.3 shall restrict HSAG from selling semiconductor products to unrelated customers outside of North America, including through HSAG's other Affiliates (such as Halcyon Semiconductor Japan K.K. or Halcyon Semiconductor (Shanghai) Co., Ltd.) in their respective territories.
Section 2.4 — Excluded Transactions
The following categories of transactions are expressly excluded from the scope of this Agreement and are not governed by its terms:
(a) Sales of semiconductor products by HSAG to other Affiliates, including Halcyon Semiconductor Japan K.K. ("HSJ"), with its registered office in Tokyo, Japan, and Halcyon Semiconductor (Shanghai) Co., Ltd. ("HSC"), with its registered office in Shanghai, China, which transactions are governed by separate intercompany supply agreements between HSAG and the applicable Affiliate;
(b) Royalty payments from HSI to HSAG for the license of intellectual property rights, which are governed exclusively by the IP License Agreement between HSAG and HSI (effective January 1, 2019, as amended);
(c) Cost-sharing contributions by HSI under the Qualified Cost Sharing Arrangement between HSAG and HSI (effective July 15, 2018), which are governed exclusively by the CSA; and
(d) Any intercompany services transactions between the Parties, to the extent not otherwise addressed in this Agreement or in the IP License Agreement or CSA.
ARTICLE 3 — PURCHASE ORDERS AND FORECASTING
Section 3.1 — Purchase Orders
(a) HSI shall submit purchase orders to HSAG from time to time during the Term, specifying: (i) the product type and applicable process node; (ii) the quantity of wafers or singulated die ordered; (iii) the requested delivery date; (iv) the designated destination for delivery; and (v) any special packaging, labeling, or handling requirements.
(b) Each purchase order shall be submitted in writing (including by electronic means) to HSAG's designated order management contact, with a copy to HSI's VP, Supply Chain Operations, Thomas Kuroda.
(c) Minimum order quantities and applicable lead times for each product category shall be as set forth in Schedule A or as otherwise communicated by HSAG to HSI in writing from time to time. HSAG shall use commercially reasonable efforts to maintain lead times that are competitive with industry norms for advanced-node semiconductor fabrication.
(d) HSAG shall accept or reject each purchase order within [●] business days of receipt. In the event that HSAG is unable to fulfill a purchase order in whole or in part, HSAG shall promptly notify HSI in writing, specifying the reason for such inability and proposing alternative delivery quantities or dates, as applicable.
(e) Nothing in this Agreement shall obligate HSI to place any minimum annual purchase commitments, except as may be agreed upon from time to time in connection with the demand forecasting process described in Section 3.2 below.
Section 3.2 — Demand Forecasting
(a) HSI shall provide HSAG with rolling twelve-month demand forecasts for Covered Products, broken down by product category, process node, and application type, updated on a quarterly basis. Each forecast shall be delivered to HSAG no later than the fifteenth (15th) day of the first month of each calendar quarter (i.e., January 15, April 15, July 15, and October 15).
(b) Demand forecasts provided by HSI are non-binding estimates provided in good faith to assist HSAG in production planning and capacity allocation. HSI shall use commercially reasonable efforts to ensure that its forecasts are based on the best available information regarding customer demand, market conditions, and historical purchasing patterns.
(c) HSAG shall use commercially reasonable efforts to maintain sufficient manufacturing capacity and inventory to fulfill the forecasted demand provided by HSI. HSAG shall promptly notify HSI if HSAG reasonably determines that it will be unable to meet a material portion of HSI's forecasted demand for any product category.
(d) The Parties shall hold quarterly forecast review meetings, to be coordinated between Thomas Kuroda (VP, Supply Chain Operations, HSI) and HSAG's designated supply chain management representative, for the purpose of reviewing demand forecasts, discussing capacity planning, and addressing any anticipated supply-demand imbalances.
Section 3.3 — Order Acceptance and Confirmation
(a) Upon acceptance of a purchase order by HSAG, HSAG shall issue an order acknowledgment to HSI confirming the product type, quantity, delivery date, and applicable provisional transfer price. The order acknowledgment shall constitute a binding commitment by HSAG to deliver the confirmed quantity of Covered Products by the confirmed delivery date, subject to the provisions of this Agreement (including the force majeure provisions of Section 17.7).
(b) In the event that HSAG experiences capacity constraints that prevent it from fulfilling all outstanding purchase orders in full, HSAG shall allocate available capacity among its customers (including HSI and other Affiliates) on a fair and equitable basis, taking into account the relative volume of orders, contractual commitments, and strategic importance of each customer relationship. HSAG shall promptly notify HSI of any allocation decisions and the anticipated impact on delivery schedules.
(c) HSI may request amendments to accepted purchase orders (including changes to delivery dates, quantities, or product specifications) by submitting a written amendment request to HSAG. HSAG shall use commercially reasonable efforts to accommodate such amendments, but shall not be obligated to accept any amendment that would require HSAG to incur material additional costs or disrupt its production schedule.
(d) HSI may cancel an accepted purchase order, in whole or in part, upon written notice to HSAG; provided, however, that if such cancellation occurs after HSAG has commenced production of the applicable Covered Products or has procured raw materials specifically for such order, HSI shall reimburse HSAG for HSAG's reasonable, documented, out-of-pocket costs incurred in connection with the cancelled portion of the order, up to the invoiced value of the cancelled products.
ARTICLE 4 — DELIVERY, TITLE, AND RISK OF LOSS
Section 4.1 — Delivery Terms
(a) Unless otherwise specified in the applicable purchase order, delivery of Covered Products shall be made Ex Works (EXW Incoterms® 2020) at HSAG's designated fabrication facility. The applicable fabrication facility for each order shall be as follows:
(i) For products manufactured at Fab 1 or Fab 2: Industriepark Klotzsche, Zur Wetterwarte 50, 01109 Dresden, Saxony, Germany; and
(ii) For products manufactured at Fab 3: Technologiepark Chemnitz, Annaberger Straße 240, 09125 Chemnitz, Saxony, Germany.
(b) The Parties may agree, on an order-by-order basis, to alternative delivery terms, including without limitation CIF (Cost, Insurance, and Freight) or DDP (Delivered Duty Paid) to HSI's headquarters at 8700 Parmer Lane, Building 4, Austin, TX 78729, or to such other location in the United States as may be designated by HSI in the applicable purchase order. Any such alternative delivery terms shall be specified in writing in the purchase order and confirmed in HSAG's order acknowledgment.
(c) Logistics coordination for the shipment of Covered Products shall be managed by HSI's VP, Supply Chain Operations, Thomas Kuroda, or his designee, in coordination with HSAG's designated logistics contact. Further details regarding delivery terms and logistics arrangements are set forth in Schedule E hereto.
Section 4.2 — Title and Risk of Loss
(a) Title to Covered Products shall pass from HSAG to HSI at the Delivery Point, as specified in Section 4.1 above or as otherwise agreed in the applicable purchase order.
(b) Risk of loss or damage to Covered Products shall transfer from HSAG to HSI at the Delivery Point. From and after the transfer of risk, HSI shall bear all risk of loss or damage to the Covered Products during transit, storage, and subsequent handling.
(c) HSI shall be responsible for obtaining and maintaining adequate insurance coverage for Covered Products during transit from the Delivery Point to HSI's designated receiving facilities in the United States. HSI shall name HSAG as an additional insured or loss payee under such insurance policies, to the extent of HSAG's insurable interest (if any) during transit.
Section 4.3 — Shipping and Customs
(a) HSAG shall be responsible for preparing and providing all export documentation required for the export of Covered Products from Germany, including but not limited to commercial invoices, packing lists, certificates of origin, and export declarations, in compliance with applicable German and European Union export control laws and regulations.
(b) HSI shall be responsible for all aspects of United States import clearance, including the filing of customs entry documents, the payment of applicable customs duties, tariffs, and import taxes, and compliance with all applicable United States customs laws and regulations, including those administered by U.S. Customs and Border Protection.
(c) The customs valuation of Covered Products imported into the United States shall be consistent with the Transfer Price determined under this Agreement. The Parties shall cooperate to ensure that customs declarations accurately reflect the applicable Transfer Price and that any year-end true-up adjustments are communicated to U.S. Customs and Border Protection as required by applicable law.
Section 4.4 — Inspection and Acceptance
(a) HSI shall have the right to inspect Covered Products within [●] days of receipt at HSI's receiving facility. Such inspection shall be conducted in accordance with the quality standards and testing protocols set forth in Schedule F hereto.
(b) If HSI determines upon inspection that any Covered Products do not conform to the specifications set forth in Schedule F or are otherwise defective, HSI shall promptly notify HSAG in writing, specifying the nature and extent of the non-conformity or defect. Non-conforming or defective products shall be held by HSI pending HSAG's instructions regarding disposition.
(c) Upon confirmation of non-conformity by HSAG (or, in the event of a dispute, by an independent testing laboratory mutually agreed upon by the Parties), HSAG shall, at HSAG's option: (i) replace the non-conforming products at HSAG's cost and expense; (ii) issue a credit note to HSI in the amount of the invoiced price of the non-conforming products; or (iii) repair or rework the non-conforming products, if commercially feasible, at HSAG's cost and expense.
(d) If HSI does not notify HSAG of any non-conformity within the inspection period specified in Section 4.4(a), the applicable Covered Products shall be deemed accepted by HSI.
ARTICLE 5 — TRANSFER PRICING METHODOLOGY AND PRICING
Section 5.1 — Transfer Pricing Method
(a) The Intercompany Price for Covered Products sold by HSAG to HSI under this Agreement shall be determined using the Comparable Profits Method ("CPM") as described in Treasury Regulation § 1.482-5, which is equivalent to the Transactional Net Margin Method ("TNMM") as described in Chapter II of the OECD Guidelines, as specified in the APA.
(b) HSI is designated as the Tested Party for purposes of the CPM/TNMM analysis. The selection of HSI as the Tested Party reflects its role as the least complex entity in the controlled transaction, functioning as a limited-risk distributor that performs distribution, marketing, and design-support functions in North America, but does not own significant intangible assets or bear significant entrepreneurial risks. HSAG, as the manufacturer, IP owner, and R&D principal, is the more complex entity and is therefore not selected as the Tested Party.
(c) The Profit Level Indicator ("PLI") used for purposes of the CPM/TNMM analysis is the operating margin on net resales (i.e., the ratio of Operating Income to Net Revenue), which is the most appropriate PLI given HSI's functional profile and the nature of the controlled transactions.
(d) The selection of the CPM/TNMM as the transfer pricing method for the tangible goods transactions covered by this Agreement is consistent with the "best method" rule under Treasury Regulation § 1.482-1(c) and the guidance set forth in the OECD Guidelines, as detailed in the APA Application Legal Analysis Memorandum prepared by Calderwood & Harkness LLP and submitted to the IRS and BZSt as part of the APA application package. The Parties have determined that the CPM/TNMM provides the most reliable measure of an arm's-length result for these transactions, given the availability of comparable companies, the reliability of the PLI, and the comparability of the functional analysis.
Section 5.2 — Arm's-Length Range
(a) The Arm's-Length Range for purposes of this Agreement is the interquartile range of operating margins derived from the Benchmarking Study prepared by Meridian Economics GmbH:
(b) The Arm's-Length Range is based on a benchmark set of 17 comparable North American semiconductor distributors, selected through a systematic search and screening process from publicly available financial databases. The comparables were screened for functional similarity to HSI (limited-risk distribution, no significant IP ownership, no manufacturing), size comparability, geographic comparability, and industry classification. The benchmark set reflects five-year weighted average operating margins for fiscal years 2020 through 2024, in order to smooth cyclical effects inherent in the semiconductor industry.
(c) The Arm's-Length Range is subject to periodic updating as provided in Section 5.5 below.
Section 5.3 — Target Operating Margin
(a) The Parties shall set the Intercompany Price for each Contract Year such that HSI's anticipated HSI Operating Margin falls at or near the Target Operating Margin of [●]%. The initial proposal submitted to the competent authorities is the Median of 4.4%, which the Parties believe represents the most appropriate arm's-length result for HSI's limited-risk distributor functions.
(b) The Target Operating Margin may be expressed as a specific point (e.g., 4.4%) or as a narrower target range (e.g., 3.8% to 5.0%), as agreed upon by the competent authorities in the APA. If the APA specifies a narrower target range rather than a specific point, the year-end true-up mechanism described in Article 6 shall operate to adjust HSI's actual Operating Margin to the midpoint of such narrower range, unless the APA specifies a different adjustment protocol.
(c) The Target Operating Margin is intended to reflect the arm's-length compensation that HSI would earn as a limited-risk distributor in comparable uncontrolled transactions, taking into account HSI's functions performed, assets employed, and risks assumed, as documented in the functional analysis prepared in connection with the APA application.
Section 5.4 — Provisional Pricing
(a) For each Contract Year, HSAG shall invoice HSI for Covered Products using provisional transfer prices established at the beginning of such Contract Year (or, for partial years, at the beginning of the applicable period). Provisional transfer prices shall be designed to yield an anticipated HSI Operating Margin at or near the Target Operating Margin, based on:
(i) HSI's budgeted financial results for the applicable Contract Year, including budgeted Net Revenue, Cost of Goods Sold, and Operating Expenses; and
(ii) HSI's actual financial results for the immediately preceding Contract Year, adjusted for known or anticipated changes in market conditions, product mix, and operating cost structure.
(b) Provisional transfer prices shall be denominated in EUR and converted to USD at the applicable exchange rate for invoicing and payment purposes.
(c) Provisional transfer prices may be adjusted on a quarterly basis if HSI's actual results deviate materially from budget during the course of a Contract Year. For purposes of this Section 5.4(c), a "material" deviation shall mean a year-to-date deviation of more than [●] basis points from the Target Operating Margin. In the event of a material deviation, the Parties shall consult in good faith and, if appropriate, agree upon an interim adjustment to provisional transfer prices for the remainder of the Contract Year to bring HSI's anticipated full-year Operating Margin closer to the Target Operating Margin.
(d) Any interim adjustments to provisional transfer prices under this Section 5.4 shall be documented in writing (including by electronic correspondence between the designated contacts for each Party) and shall be reflected in subsequent invoices issued by HSAG for the applicable Contract Year.
Section 5.5 — Benchmarking Updates
(a) The Benchmarking Study shall be refreshed by Meridian Economics GmbH (or a successor economic consulting firm mutually agreed upon by the Parties) at least once during the APA Term, as required by the APA or as agreed between the competent authorities of the United States and Germany. If the APA prescribes specific intervals for benchmarking refreshes (e.g., triennially), those prescribed intervals shall control.
(b) Any update to the Arm's-Length Range resulting from a refreshed Benchmarking Study shall be incorporated into the pricing mechanism under this Article 5 prospectively, commencing with the Contract Year following the completion of the updated study and approval by the competent authorities (if such approval is required under the APA).
(c) In connection with any benchmarking refresh, the Parties shall cooperate with Meridian Economics GmbH and with their respective tax counsel to ensure that the updated study is consistent with the methodology originally accepted by the competent authorities and that any changes to the benchmark set or search methodology are documented and justified.
Section 5.6 — Intercompany Pricing for Rollback Period
(a) For the Rollback Period (January 1, 2022 through December 31, 2024), the transfer pricing methodology described in this Article 5 shall be applied retroactively to the intercompany tangible goods transactions between HSAG and HSI for each of the three Rollback Period years, subject to competent authority agreement under the APA.
(b) Any compensating adjustments required to bring HSI's actual Operating Margin for each Rollback Period year within the Arm's-Length Range (or to the Target Operating Margin) shall be computed in accordance with Article 6 and effectuated as described in Section 6.4 of this Agreement.
(c) The application of the APA methodology to the Rollback Period is contingent upon the agreement of both the IRS and the BZSt, as reflected in the final terms of the bilateral APA. To the extent that the competent authorities do not agree to a rollback, the Rollback Period shall not be subject to this Agreement, and the Prior Agreement shall continue to govern intercompany pricing for the Rollback Period years.
ARTICLE 6 — YEAR-END TRUE-UP AND COMPENSATING ADJUSTMENTS
Section 6.1 — Year-End True-Up Computation
(a) Within ninety (90) days after the end of each Contract Year (i.e., by no later than March 31 of the following calendar year), HSI shall compute its actual HSI Operating Margin for the completed Contract Year based on audited financial statements or, if audited financial statements are not yet available, management-approved financial data that is reasonably expected to be consistent with the audited results.
(b) The year-end true-up computation shall reconcile HSI's actual financial results for the completed Contract Year, including:
(i) Net Revenue;
(ii) Cost of Goods Sold, including intercompany purchases from HSAG at the provisional transfer prices invoiced during the Contract Year, as well as third-party costs of goods sold;
(iii) Operating Expenses (selling, general, and administrative expenses, and other operating costs, excluding intercompany royalties);
(iv) Operating Income (Net Revenue minus Cost of Goods Sold minus Operating Expenses); and
(v) HSI Operating Margin (Operating Income divided by Net Revenue, expressed as a percentage).
(c) The computation shall be prepared on a worksheet substantially in the form of Schedule C hereto and shall be reviewed and approved by HSI's VP, Tax, Priya Raghavan, before submission to HSAG and to the Parties' tax counsel for inclusion in the annual APA compliance report.
(d) By way of illustrative reference for FY 2024: HSI Net Revenue = $4,120,000,000; Cost of Goods Sold = $3,380,000,000; Gross Profit = $740,000,000 (17.96% gross margin); Operating Expenses = $542,200,000; Operating Income = $197,800,000; HSI Operating Margin = 4.80%.
Section 6.2 — Determination of True-Up Payment
(a) If HSI's actual Operating Margin for a Contract Year falls within the Arm's-Length Range of 2.8% to 6.1%, and the APA does not require adjustment to a specific Target Operating Margin, no True-Up Payment shall be required for such Contract Year.
(b) If the APA specifies a Target Operating Margin (or a narrower target range within the Arm's-Length Range), and HSI's actual Operating Margin for a Contract Year deviates from the Target Operating Margin (or falls outside the narrower target range), the following adjustments shall be made:
(i) If HSI's actual Operating Margin exceeds the Target Operating Margin: HSAG shall issue an additional invoice (debit note) to HSI in an amount equal to the difference between HSI's actual Operating Income and the Target Operating Income (being HSI's Net Revenue multiplied by the Target Operating Margin). The effect of such debit note shall be to reduce HSI's Operating Margin for the Contract Year to the Target Operating Margin.
(ii) If HSI's actual Operating Margin falls below the Target Operating Margin: HSAG shall issue a credit note to HSI in an amount equal to the difference between the Target Operating Income and HSI's actual Operating Income. The effect of such credit note shall be to increase HSI's Operating Margin for the Contract Year to the Target Operating Margin.
(c) The True-Up Payment shall be computed to the nearest dollar. The computation shall clearly set forth the derivation of the adjustment amount, including all inputs (Net Revenue, Cost of Goods Sold, Operating Expenses, Operating Income, actual Operating Margin, Target Operating Margin, Target Operating Income, and adjustment amount), and shall be prepared on a worksheet substantially in the form of Schedule C.
(d) For the avoidance of doubt, where the APA permits outcomes anywhere within the full Arm's-Length Range (without specifying a target point or narrower range), no True-Up Payment shall be required so long as HSI's actual Operating Margin falls within the range of 2.8% to 6.1%.
Section 6.3 — Payment Mechanics
(a) True-Up Payments shall be made within thirty (30) days of the issuance of the applicable debit note or credit note by HSAG.
(b) All True-Up Payments shall be made in USD by wire transfer of immediately available funds to the designated bank account of the receiving Party.
(c) HSI's banking relationship for purposes of intercompany payments is maintained with Ridgeline National Bank (administrative agent for HSI's $600,000,000 revolving credit facility; administrative agent contact: Daniel Furlong, Senior Relationship Manager; headquarters: 401 South Tryon Street, Charlotte, NC 28202). Wire transfer instructions for HSI shall be provided separately to HSAG in writing.
(d) Interest shall accrue on any True-Up Payment that is not made within the thirty (30)-day period specified in Section 6.3(a) above, at the applicable federal rate under IRC § 7872, compounded semiannually, from the date on which payment was due until the date on which payment is actually received.
Section 6.4 — Compensating Adjustments for Rollback Period
(a) If the APA includes a rollback for the Rollback Period (January 1, 2022 through December 31, 2024), compensating adjustments for each of the three Rollback Period years shall be computed using the same methodology set forth in Sections 6.1 and 6.2 above, applied retroactively to HSI's actual financial results for each such year.
(b) Rollback compensating adjustments shall be aggregated for all three Rollback Period years and shall be paid within sixty (60) days of the effective date of the APA. Payment shall be made in USD by wire transfer, with interest accruing on late payments as provided in Section 6.3(d).