COST SHARING ARRANGEMENT DOCUMENTATION ADDENDUM
HALCYON SEMICONDUCTOR INC. (FY 2024)
Supplemental Transfer Pricing Documentation for the Qualified Cost Sharing Arrangement Between Halcyon Semiconductor AG and Halcyon Semiconductor Inc. Pursuant to Treas. Reg. § 1.482-7
Prepared by:
Calderwood & Harkness LLP 599 Lexington Avenue, 38th Floor New York, NY 10022
Matter Number: 1032-00006 Billing Code: HSAG-TP-2025
Date: To be finalized prior to September 30, 2025 documentation deadline
CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGED / TAX ADVICE
This document was prepared by Calderwood & Harkness LLP in its capacity as US tax counsel to Halcyon Semiconductor AG and Halcyon Semiconductor Inc. and contains privileged attorney-client communications and confidential tax advice. This document is not intended for distribution to any person or entity other than the addressees and their authorized representatives. Unauthorized disclosure, copying, or distribution of this document or any portion thereof is strictly prohibited.
Principal Authors:
Leila Nazari, Senior Associate, Tax Robert Jansen, Associate, Tax
Under the supervision of Leonard Cross, Partner, Tax
Economic Analysis Support:
Meridian Economics GmbH Leopoldstraße 145, 80804 Munich, Germany
Dr. Annika Breitner, Managing Director Maximilian Voss, Senior Analyst
Right-click to update Table of Contents
I. EXECUTIVE SUMMARY
This Cost Sharing Arrangement Documentation Addendum (this "Addendum") constitutes supplemental contemporaneous transfer pricing documentation specific to the Qualified Cost Sharing Arrangement (the "CSA") entered into between Halcyon Semiconductor AG ("HSAG") and Halcyon Semiconductor Inc. ("HSI," and together with HSAG, the "Participants") on July 15, 2018. This Addendum is intended to be read in conjunction with the United States Local Files prepared for fiscal years 2022, 2023, and 2024, which address the full range of intercompany transactions between HSAG and HSI, including tangible goods transfers (wafer and die sales), royalties paid under the IP License Agreement, and cost-sharing contributions under the CSA. The US Local Files are separately maintained and cross-referenced herein as appropriate.
The CSA was executed on July 15, 2018, between HSAG, a German Aktiengesellschaft and the ultimate parent of the Halcyon Semiconductor group, and HSI, a Delaware C-corporation and wholly owned subsidiary of HSAG. The CSA governs joint research and development activities directed at the development of next-generation semiconductor process technology at the 2-nanometer ("2nm") and sub-2nm nodes. At inception, HSI made a Platform Contribution Transaction ("PCT") buy-in payment to HSAG in the amount of $312,500,000, reflecting the arm's-length value of HSI's right to use and build upon HSAG's pre-existing intangible property — including proprietary semiconductor process technology, design libraries, fabrication know-how, and an extensive patent portfolio — in the context of the CSA for purposes of exploiting CSA-developed intangibles in North America (United States, Canada, and Mexico).
HSI's anticipated benefit share under the CSA is 22.5%, reflecting the reasonably anticipated benefits from North American exploitation rights as determined under the income method prescribed by Treas. Reg. § 1.482-7(e)(2)(ii). HSAG's corresponding anticipated benefit share is 77.5%, reflecting the reasonably anticipated benefits from exploitation rights in all territories outside North America. The benefit shares were established at CSA inception in 2018 based on detailed market projections for the global semiconductor industry across the automotive, industrial IoT, and data-center application segments, and have been confirmed through the triennial review process most recently completed in July 2024.
For FY 2024, total qualified R&D costs subject to the CSA amounted to €998,200,000. HSI's 22.5% share of these costs totaled €224,600,000 (approximately $231,300,000 at the blended EUR/USD rate for FY 2024). HSAG's 77.5% share totaled €773,605,000. HSI's cost-sharing contribution represents a significant component of its operating expenses and, when combined with its other intercompany obligations (tangible goods purchases and royalty payments), results in an operating margin of 4.80%, which falls within the interquartile range of 2.8% to 6.1% (median 4.4%) established by the comparable profits method / transactional net margin method benchmarking study of seventeen comparable North American semiconductor distributors.
This Addendum is prepared to address the requirements of Treas. Reg. § 1.482-7 and the related provisions of the Internal Revenue Code and Treasury Regulations governing cost sharing arrangements and controlled transactions involving intangible property. In addition, this Addendum supports the bilateral Advance Pricing Agreement ("APA") application filed by HSAG and HSI with the Internal Revenue Service Advance Pricing and Mutual Agreement Program ("IRS APMA") and coordinated with the German Bundeszentralamt für Steuern ("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 "US-Germany Income Tax Treaty").
The proposed APA seeks to cover the CSA transaction on a prospective basis for the five-year period from January 1, 2025 through December 31, 2029, with a rollback to the three-year period from January 1, 2022 through December 31, 2024, resulting in a total covered period of eight tax years (2022–2029). The CSA transaction constitutes one of three covered transactions in the bilateral APA application, alongside the tangible goods / wafer-die sales transaction (priced on a transactional net margin method / comparable profits method basis) and the royalty transaction under the IP License Agreement (priced on the comparable uncontrolled transaction method basis).
The applicable legal framework for this Addendum encompasses: (i) IRC § 482 and the Treasury Regulations thereunder, including Treas. Reg. §§ 1.482-1 through 1.482-9 and, most particularly, Treas. Reg. § 1.482-7; (ii) the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (2022 edition), particularly Chapter VIII (Cost Contribution Arrangements); (iii) the German foreign tax provisions under § 1 of the Außensteuergesetz ("AStG"); (iv) the German procedural tax code provisions under §§ 90(3) and 162(3)–(4) of the Abgabenordnung ("AO"); and (v) the German Gewinnabgrenzungsaufzeichnungsverordnung ("GAufzV").
II. BACKGROUND AND PARTIES TO THE CSA
II.A. Halcyon Semiconductor AG (HSAG) — CSA Participant and IP Principal
Halcyon Semiconductor AG ("HSAG") is the primary participant in the CSA and the principal owner of the Halcyon Semiconductor group's intellectual property portfolio. HSAG is an Aktiengesellschaft organized and existing under the laws of the Federal Republic of Germany. The company is publicly listed on the Frankfurt Stock Exchange (XETRA trading platform) under the securities identification codes ISIN DE000HSA0017 and WKN HSA001. HSAG's registered office is located at Halcyon-Allee 12, 01099 Dresden, Saxony, Germany. For German tax purposes, HSAG is identified by Steuernummer 203/118/04527 and Umsatzsteuer-Identifikationsnummer (USt-IdNr.) DE 814 723 956.
HSAG is engaged in the design and manufacture of advanced-node semiconductor wafers, with principal fabrication facilities located in the German states of Saxony. Specifically, HSAG operates three fabrication plants: Fab 1 and Fab 2, both located at Industriepark Klotzsche, Zur Wetterwarte 50, 01109 Dresden; and Fab 3, located at Technologiepark Chemnitz, Annaberger Straße 240, 09125 Chemnitz. These fabrication facilities are equipped with state-of-the-art extreme ultraviolet (EUV) lithography systems and advanced clean-room environments capable of manufacturing semiconductor wafers at the 7nm, 5nm, and 3nm process nodes. HSAG's products serve three primary end-market segments: automotive semiconductors (including power management, ADAS sensor processing, and in-vehicle networking), industrial Internet of Things (IoT) applications (including edge computing, sensor fusion, and factory automation), and data-center applications (including high-performance computing, AI accelerator interconnects, and networking infrastructure).
For FY 2024, HSAG reported consolidated revenue of €8,740,000,000, EBITDA of €2,620,000,000 (representing an EBITDA margin of 30.0%), and EBIT of €1,570,000,000 (representing an EBIT margin of 18.0%). HSAG's total research and development expenditure for FY 2024 was €1,420,000,000, of which €998,200,000 (approximately 70.2%) constituted qualified R&D costs subject to the CSA. The remaining €421,800,000 of R&D expenditure related to activities outside the scope of the CSA, including sustaining engineering for existing 7nm, 5nm, and 3nm production nodes, customer-specific design services, and other non-qualifying research activities.
HSAG employs approximately 22,400 people globally, of whom approximately 14,600 are based in Germany, primarily at the Dresden and Chemnitz fabrication and R&D facilities. The company's senior management team includes Dr. Klaus-Dieter Wehrheim (Chief Executive Officer), Margarethe Stein (Chief Financial Officer), Dr. Hendrik Möller (Chief Technology Officer), and Dr. Erwin Fassbinder (Senior Vice President, Group Tax). Dr. Möller, in his capacity as CTO, oversees the technical direction of all CSA-covered R&D activities, ensuring alignment between the joint development program and the group's long-term technology roadmap.
Within the CSA, HSAG serves as the primary contributor of pre-existing semiconductor process technology intellectual property, fabrication know-how, and design libraries. HSAG is the majority funder of joint R&D activities, bearing 77.5% of qualified R&D costs in accordance with its anticipated benefit share. HSAG retains exclusive exploitation rights for CSA-developed intangibles in all territories outside North America — that is, HSAG holds worldwide exploitation rights excluding the United States, Canada, and Mexico. These exploitation rights encompass the right to use, manufacture with, sell products incorporating, and sublicense CSA-developed intangible property in HSAG's assigned territory.
HSAG's independent auditor is Gresham Whitfield LLP, with the lead audit partner being Simon Cardwell, based in the firm's London office. Gresham Whitfield's audit encompasses, among other things, review and certification of the qualified R&D cost pool used for purposes of the CSA.
II.B. Halcyon Semiconductor Inc. (HSI) — CSA Participant and US Exploitation Party
Halcyon Semiconductor Inc. ("HSI") is a C-corporation incorporated in the State of Delaware under File Number 7341825 and holding Employer Identification Number (EIN) 84-2917630. HSI's registered agent in Delaware is Capitol Registered Agents LLC, located at 1209 Orange Street, Wilmington, Delaware 19801. HSI's principal office and headquarters are located at 8700 Parmer Lane, Building 4, Austin, Texas 78729, which serves as the administrative and operational hub for the company's North American business activities.
In addition to its Austin headquarters, HSI operates a design center at 2455 Augustine Drive, Suite 300, Santa Clara, California 95054, which serves as the locus for HSI's design-support and application-engineering research and development activities under the CSA. HSI also maintains regional sales offices at 1100 Town Center Drive, Suite 420, Southfield, Michigan 48075 (serving the Detroit metropolitan area and the North American automotive OEM customer base) and at 9600 SW Nimbus Avenue, Suite 210, Beaverton, Oregon 97008 (serving the Pacific Northwest technology corridor and data-center customers in the region).
HSI is a wholly owned subsidiary of HSAG and functions as the exclusive distribution, marketing, and design-support entity for Halcyon Semiconductor products in North America (United States, Canada, and Mexico). HSI purchases finished semiconductor wafers and die from HSAG under the Master Intercompany Supply Agreement (effective January 1, 2019; amended July 1, 2022) and resells those products to third-party customers in the North American market. HSI also provides design-support services, application engineering, and field application engineering to North American customers, assisting those customers in integrating Halcyon semiconductor products into their end-use applications.
For FY 2024, HSI reported net revenue from third-party US sales of $4,120,000,000. Cost of goods sold was $3,380,000,000, which includes intercompany purchases of tangible goods (wafers and die) from HSAG in the amount of approximately $1,076,000,000. HSI's resulting gross profit was $740,000,000, representing a gross margin of 17.96%. After deducting operating expenses of $542,200,000 (which include, among other items, the R&D cost-sharing contributions to HSAG and royalty payments under the IP License Agreement), HSI reported operating income of $197,800,000, representing an operating margin of 4.80%.
HSI employs approximately 2,850 people across its Austin, Santa Clara, Southfield, and Beaverton locations. The company's management team includes Victor Almeida (President and General Manager), Priya Raghavan (Vice President, Tax), and Thomas Kuroda (Vice President, Supply Chain Operations). Mr. Almeida reports to the HSAG Management Board and has primary responsibility for HSI's commercial operations in North America. Ms. Raghavan, in her capacity as VP Tax, serves as the principal HSI point of contact for all transfer pricing, APA, and tax compliance matters related to the CSA and other intercompany transactions.
Within the CSA, HSI serves as a co-participant, contributing 22.5% of qualified R&D costs in proportion to its anticipated benefit share. HSI holds exclusive North American exploitation rights for CSA-developed intangibles, which include the right to use, sell products incorporating, and sublicense CSA-developed process technology within the United States, Canada, and Mexico. HSI's direct contribution to the CSA's intangible development activities consists of design-support and application-engineering R&D activities conducted at its Santa Clara design center, where approximately 180 engineers focus on adapting CSA-developed process technology to the specific requirements of North American customers, including customization of standard cell libraries, development of application-specific design rules, and integration testing with customer EDA tool flows.
HSI's US engagement audit partner is Janet Okonkwo of Gresham Whitfield LLP (Houston), located at 811 Main Street, Suite 3400, Houston, Texas 77002. Ms. Okonkwo leads the US component of the Halcyon Semiconductor group audit and coordinates with the London-based lead audit partner, Simon Cardwell, on matters related to intercompany transactions and the CSA cost pool verification.
II.C. Affiliated Entities Not Party to the CSA
The Halcyon Semiconductor group includes additional affiliated entities that are not participants in the CSA and do not hold CSA exploitation rights. These entities are identified below for completeness and context.
Halcyon Semiconductor Japan K.K. ("HSJ") is a Kabushiki Kaisha organized under the laws of Japan, with its registered office in Tokyo, Japan. HSJ serves as the distribution and sales support entity for Halcyon Semiconductor products in the Japanese market. HSJ is not a participant in the CSA. HSJ's rights to exploit intangible property developed by HSAG (including both pre-existing intangibles and CSA-developed intangibles) are governed by a separate license agreement between HSAG and HSJ, the terms and conditions of which are outside the scope of this Addendum and the bilateral APA application.
Halcyon Semiconductor (Shanghai) Co., Ltd. ("HSC") is a wholly foreign-owned enterprise (WFOE) organized under the laws of the People's Republic of China, with its registered office in Shanghai, China. HSC provides distribution, customer support, and limited design-support services for Halcyon Semiconductor products in the Chinese market. HSC is not a participant in the CSA. HSC's rights to exploit intangible property developed by HSAG are governed by a separate license agreement between HSAG and HSC, the terms and conditions of which are similarly outside the scope of this Addendum and the bilateral APA application.
Neither HSJ nor HSC contributes to the qualified R&D cost pool under the CSA, nor does either entity share in the costs or risks of the CSA's intangible development activities. The intercompany transactions between HSAG and HSJ, and between HSAG and HSC, are documented in separate transfer pricing documentation prepared in accordance with the applicable local country requirements (Japan and China, respectively) and are not addressed further in this Addendum.
II.D. Advisors and Third Parties
The following advisors and third parties have been engaged in connection with the CSA, the PCT valuation, and the preparation of this Addendum and related transfer pricing documentation:
US Tax Counsel: Calderwood & Harkness LLP, 599 Lexington Avenue, 38th Floor, New York, New York 10022. The engagement team comprises Leonard Cross (Partner, Tax) serving as the lead partner and supervisor of all work product; Sylvia Hartwell (Partner, Tax) serving as the billing partner; Leila Nazari (Senior Associate, Tax) serving as the lead associate responsible for drafting this Addendum and the related APA submission materials; and Robert Jansen (Associate, Tax) supporting the preparation of the economic analyses and regulatory compliance sections. Calderwood & Harkness has served as US tax counsel to HSAG and HSI with respect to transfer pricing matters since 2017 and has been continuously engaged in the preparation and maintenance of the CSA documentation since the CSA's execution in July 2018.
German Tax Counsel: Kettner Pflüger Rechtsanwälte, Bockenheimer Landstraße 72, 60323 Frankfurt am Main, Germany. The engagement team comprises Dr. Tobias Kettner (Partner) and Friederike Lang (Associate). Kettner Pflüger advises HSAG on German transfer pricing documentation requirements under § 1 AStG and the GAufzV, coordinates with the BZSt on the German component of the bilateral APA application, and has reviewed this Addendum for consistency with German law requirements.
Transfer Pricing Economist: Meridian Economics GmbH, Leopoldstraße 145, 80804 Munich, Germany. The engagement team comprises Dr. Annika Breitner (Managing Director) and Maximilian Voss (Senior Analyst). Meridian Economics provides independent economic analysis supporting the determination of anticipated benefit shares, the evaluation of periodic adjustments, and the preparation of benchmarking studies. Meridian Economics has been engaged by HSAG as the group's transfer pricing economist since 2016 and has provided economic support for all aspects of the CSA documentation and APA application.
PCT Valuation Firm (2018): Stonebridge Valuation Partners LLC, 200 Park Avenue, Suite 1510, New York, New York 10166. Marcus Reinhardt (Managing Director) led the valuation engagement. Stonebridge Valuation Partners was engaged by HSAG and HSI in early 2018 to perform the income method valuation of HSAG's pre-existing intangible property for purposes of determining the arm's-length PCT buy-in payment at CSA inception. The Stonebridge valuation report, dated July 15, 2018, is maintained as part of the CSA documentation and is summarized in Appendix B to this Addendum.
Principal Lender: Ridgeline National Bank, 401 South Tryon Street, Charlotte, North Carolina 28202. Daniel Furlong serves as the Senior Relationship Manager for the Halcyon Semiconductor account. Ridgeline National Bank is the administrative agent under HSI's $600,000,000 revolving credit facility and is the bank through which HSI's intercompany payments (including CSA cost-sharing contributions) are wire-transferred to HSAG's designated bank account in Germany.
III. DESCRIPTION OF THE COST SHARING ARRANGEMENT
III.A. Effective Date and Term
The CSA became effective on July 15, 2018, upon execution of the Cost Sharing Arrangement Agreement by HSAG and HSI. The PCT was executed simultaneously with the CSA on the same date, with the PCT buy-in payment of $312,500,000 funded and wire-transferred on July 15, 2018. The CSA Agreement was executed by Dr. Klaus-Dieter Wehrheim on behalf of HSAG and by Victor Almeida on behalf of HSI, with signatures witnessed and notarized in accordance with applicable German and US law requirements.
The CSA is structured as an evergreen arrangement with no fixed termination date. The CSA Agreement provides for continuation of the arrangement in perpetuity, subject to the termination rights set forth in Article XII of the CSA Agreement. Under Article XII, either Participant may terminate the CSA upon not less than twenty-four (24) months' prior written notice to the other Participant, provided that termination shall not become effective until the end of a fiscal year occurring no earlier than twenty-four months after the date of the termination notice. In addition, the CSA Agreement provides for automatic termination upon the occurrence of certain specified events, including (i) a change of control of either Participant, (ii) a bankruptcy or insolvency filing by either Participant, (iii) a material and uncured breach of the CSA Agreement by either Participant, or (iv) a disposition of all or substantially all of either Participant's exploitation rights under the CSA. Any termination of the CSA would require appropriate buy-out or make-whole payments as specified in the CSA Agreement, calculated in accordance with the arm's-length standard under Treas. Reg. § 1.482-7(h).
Since its inception in July 2018, the CSA has governed the ongoing joint development of next-generation semiconductor process technology, initially focused on 3nm node development and subsequently expanded (through amendment effective January 1, 2021) to encompass 2nm and sub-2nm node development as those technology nodes entered the active R&D phase. As of the date of this Addendum, the CSA remains in full force and effect, and neither Participant has issued or received a termination notice.
III.B. Scope of the CSA — Intangible Development Activities
The CSA encompasses a defined scope of intangible development activities ("IDAs") directed at the development of advanced semiconductor process technology at the 2nm and sub-2nm nodes. The IDAs represent the core joint R&D effort funded and shared under the CSA and are described in detail below.
The IDAs covered by the CSA include, but are not limited to, the following categories of research and development activities:
Process Recipe Development and Optimization. This category encompasses R&D activities directed at developing and optimizing the process recipes — the detailed sequences of chemical, thermal, and physical processing steps — used to fabricate semiconductor wafers at the 2nm and sub-2nm nodes. Process recipe development involves extensive experimentation with deposition, etching, annealing, and cleaning steps, as well as optimization of process parameters (temperature, pressure, gas flow rates, timing, and sequence) to achieve target device characteristics (transistor performance, power consumption, and leakage current specifications).
Extreme Ultraviolet (EUV) Lithography Integration. This category encompasses R&D activities related to the integration of extreme ultraviolet lithography technology — using light with a wavelength of 13.5 nanometers — into the 2nm and sub-2nm process flows. EUV lithography integration involves development of high-NA (numerical aperture) EUV exposure recipes, photoresist optimization, mask design and fabrication, overlay control and alignment methodologies, and defect inspection and repair techniques specific to EUV-patterned layers.
Advanced Materials Research (Gate-All-Around Transistor Architectures). This category encompasses R&D activities directed at the development and characterization of novel transistor architectures — in particular, gate-all-around ("GAA") nanosheet and nanowire transistor structures — that are expected to replace the FinFET architecture at the 2nm node and below. Materials research within this category includes development of high-mobility channel materials, gate dielectric engineering, source/drain epitaxy optimization, and interconnect metallization for advanced device geometries.
Design Library Development and Electronic Design Automation (EDA) Tool Integration. This category encompasses R&D activities related to the development of standard cell libraries, memory compilers, I/O cell libraries, and design rule files for the 2nm and sub-2nm process nodes, as well as integration of these design assets with commercially available EDA tool suites from providers such as Ridgeline Data Systems, Cobalt Ridge Health IT, and Pemberton Enterprises. These activities ensure that customers can design integrated circuits targeting the 2nm/sub-2nm nodes using industry-standard design flows.
Yield Engineering and Defect Reduction Methodologies. This category encompasses R&D activities focused on improving manufacturing yield — the percentage of functional die per wafer — for the 2nm and sub-2nm nodes. Yield engineering involves systematic identification and elimination of yield-limiting defect mechanisms, development of in-line metrology and process control techniques, implementation of statistical process control methodologies, and root-cause analysis of yield excursion events.
Test and Characterization Protocols for Next-Generation Nodes. This category encompasses R&D activities directed at developing electrical test structures, characterization methodologies, and reliability test protocols specifically tailored to the device characteristics and failure modes of 2nm and sub-2nm technology. These activities include development of parametric test programs, wafer-level reliability testing protocols, and electromigration and hot-carrier degradation characterization methods.
The R&D activities described above are principally conducted at HSAG's fabrication and R&D facilities in Dresden and Chemnitz, Germany, where HSAG maintains the advanced clean-room environments, lithography tools, metrology equipment, and materials characterization laboratories necessary for process technology R&D at leading-edge nodes. Supporting design-engineering contributions are made by HSI's Santa Clara design center, where HSI engineers perform design library development, EDA tool integration, and application-specific design rule customization activities under the general technical direction of HSAG's CTO, Dr. Hendrik Möller. Dr. Möller oversees the technical direction of all CSA-covered R&D and chairs the joint R&D Steering Committee established under the CSA Agreement.
III.C. Cost Sharing Percentages and Reasonably Anticipated Benefits
The costs of the CSA's intangible development activities are shared between HSAG and HSI in proportion to each Participant's reasonably anticipated benefits ("RABs") from exploitation of CSA-developed intangibles in its respective territory. The cost-sharing percentages applicable to the CSA are as follows:
• HSI's cost-sharing percentage: 22.5%
• HSAG's cost-sharing percentage: 77.5%
The basis for this allocation is the income method prescribed by Treas. Reg. § 1.482-7(e)(2)(ii), which measures each Participant's share of RABs by reference to the present value of each Participant's projected incremental income from the use of CSA-developed intangibles in its assigned territory:
• HSI holds exclusive exploitation rights for North America (United States, Canada, and Mexico) and therefore benefits from incremental income generated by sales of 2nm/sub-2nm products to customers in those territories.
• HSAG holds exclusive exploitation rights for the rest of the world (all territories outside North America) and therefore benefits from incremental income generated by sales of 2nm/sub-2nm products to customers in those territories.
HSI's 22.5% anticipated benefit share reflects North America's projected share of global semiconductor revenue derived from 2nm and sub-2nm process technology, as determined at CSA inception in 2018. The determination was based on detailed market projections prepared by HSAG's strategic planning department and corroborated by independent third-party market research from leading semiconductor industry analysts. The projections took into account the anticipated demand trajectories for advanced-node semiconductors across the three primary end-market segments: automotive (particularly next-generation electric vehicle and autonomous driving platforms), industrial IoT (including edge computing and factory automation), and data centers (including hyperscaler AI infrastructure and high-performance computing).
The CSA Agreement provides for triennial review and adjustment of anticipated benefit shares, to be conducted every three years from the CSA's effective date. The triennial review mechanism ensures that the cost-sharing percentages remain aligned with the Participants' evolving RABs as market conditions, technology timelines, and competitive dynamics change over time. The most recent triennial review was conducted as of July 15, 2024, covering the period beginning January 1, 2025 (aligned with the start of the prospective APA term). The results of that review are discussed in Section VI.D of this Addendum.
III.D. Qualified R&D Costs — Definition and Scope
"Qualified R&D Costs" under the CSA are defined in Article V of the CSA Agreement as the costs of intangible development activities that are directly related to the development of 2nm and sub-2nm semiconductor process technology. The definition encompasses the following cost categories:
Direct personnel costs include salaries, wages, bonuses, benefits (including health insurance, pension contributions, and social insurance contributions), and stock-based compensation expense for R&D personnel who devote a significant portion of their working time to CSA-covered IDAs. Personnel costs are allocated based on time records maintained by HSAG and HSI, reflecting the portion of each employee's time devoted to CSA-covered activities versus non-CSA activities.
Materials and supplies consumed in R&D include the cost of semiconductor wafers, chemicals, gases, photoresists, and other consumable materials used in the course of R&D experimentation and process development. These costs are tracked through dedicated cost centers in HSAG's and HSI's respective accounting systems and are attributed to the CSA cost pool based on the specific R&D projects and activities in which they are consumed.
Depreciation on R&D equipment and clean-room facilities dedicated to CSA activities includes depreciation expense calculated on a straight-line basis over the useful lives of fabrication equipment, lithography tools, metrology instruments, clean-room infrastructure, and other capital assets that are dedicated to or substantially used in CSA-covered R&D activities. Where equipment is shared between CSA and non-CSA activities, depreciation is allocated to the CSA cost pool based on documented utilization rates.
Third-party contractor costs for R&D services include fees paid to external research institutions, universities, equipment vendors, and other third-party service providers for R&D services directly related to CSA-covered IDAs. These costs are incurred primarily by HSAG and are attributed to the CSA cost pool on the basis of the specific contractual scope of the third-party engagement.
Allocated overhead costs include facility costs (rent, property taxes, insurance, and maintenance for R&D facilities), IT infrastructure costs, and utilities (electricity, water, and HVAC systems) attributable to R&D activities. Overhead costs are allocated to the CSA cost pool using allocation keys that reflect the proportion of facility space, IT resources, and utility consumption attributable to CSA-covered R&D personnel and activities.
Certain categories of costs are specifically excluded from the definition of Qualified R&D Costs. These exclusions include: (i) general corporate overhead expenses not directly attributable to R&D activities; (ii) selling and marketing expenses; (iii) costs of pre-existing intangible property, which were addressed through the PCT buy-in payment at CSA inception; and (iv) R&D activities not related to 2nm and sub-2nm process technology development, including sustaining engineering for existing production nodes (7nm, 5nm, and 3nm), customer-specific design services not within the scope of the CSA's IDAs, and other non-qualifying research activities.
The distinction between HSAG's total R&D expenditure and the qualified CSA R&D cost pool is significant. For FY 2024, HSAG's total R&D expenditure was €1,420,000,000, of which €998,200,000 (approximately 70.2%) constituted Qualified R&D Costs subject to the CSA. The difference of €421,800,000 represents R&D costs incurred by HSAG that fall outside the CSA's scope, including approximately €230,000,000 for sustaining engineering and process optimization for existing 7nm, 5nm, and 3nm production nodes; approximately €105,000,000 for customer-specific design services provided to key automotive and data-center customers under separate services agreements; and approximately €86,800,000 for exploratory research activities in areas not directly related to 2nm/sub-2nm process technology (such as advanced packaging and chiplet integration research, which may be brought within the CSA's scope in a future amendment if they become sufficiently developed to constitute defined IDAs).
III.E. Division of Exploitation Rights
The CSA establishes a clear territorial division of exploitation rights between the Participants. Under Article IV of the CSA Agreement, the division of exploitation rights is as follows:
HSI holds exclusive rights to exploit CSA-developed intangibles in North America, defined as the United States of America, Canada, and Mexico. These exploitation rights encompass the right to use CSA-developed process technology and related intangibles for purposes of manufacturing (or having manufactured), selling, distributing, and supporting semiconductor products in the North American territory, as well as the right to sublicense CSA-developed intangibles to third parties operating within North America.
HSAG retains exclusive rights to exploit CSA-developed intangibles in all territories worldwide other than North America — that is, HSAG's exploitation territory encompasses all countries and jurisdictions outside the United States, Canada, and Mexico. HSAG's exploitation rights are correspondingly broad and encompass manufacturing, selling, distributing, and supporting semiconductor products incorporating CSA-developed technology in the rest-of-world territory, as well as the right to sublicense CSA-developed intangibles to third parties and affiliated entities (including HSJ and HSC) operating outside North America.
The CSA Agreement does not provide for cross-licensing rights between the Participants. Each Participant's exploitation rights are strictly territory-specific, and neither Participant may exploit CSA-developed intangibles in the other Participant's territory without obtaining a separate license on arm's-length terms. In the event that HSI licenses or sublicenses CSA-developed intangibles to third parties within North America, any royalty or license fee income arising from such licensing arrangements accrues to HSI and is treated as HSI's income for US federal income tax purposes.
IV. PLATFORM CONTRIBUTION TRANSACTION (PCT) — BUY-IN PAYMENT
IV.A. Overview of the PCT
At CSA inception on July 15, 2018, HSAG contributed pre-existing intangible property to the CSA, consisting of a comprehensive portfolio of semiconductor process technology intellectual property that served as the foundation or "platform" upon which the CSA's intangible development activities would be conducted. The pre-existing intangible property contributed by HSAG included the following categories of intellectual property:
Proprietary Semiconductor Process Technology. HSAG contributed its proprietary process technology for the 7nm and 5nm semiconductor nodes, which represented the most advanced production-ready process nodes in HSAG's technology portfolio as of the CSA's effective date. This technology encompassed the complete set of process recipes, process integration schemes, and process flow documentation necessary to fabricate semiconductor wafers at these nodes, as well as the accumulated process engineering knowledge and optimization data generated through years of development and volume manufacturing experience.
Design Libraries and EDA Tool Configurations. HSAG contributed its standard cell libraries, memory compilers, I/O cell libraries, and electronic design automation (EDA) tool configurations for the 7nm and 5nm nodes. These design assets represent a significant body of intellectual property that enables customers to design integrated circuits targeting HSAG's process technology using industry-standard EDA tools. The design libraries and EDA tool configurations also serve as the starting point for development of corresponding design assets for the next-generation 2nm and sub-2nm nodes under the CSA.
Accumulated Fabrication Know-How and Trade Secrets. HSAG contributed its accumulated body of fabrication know-how and trade secrets related to advanced-node semiconductor manufacturing. This know-how encompasses decades of manufacturing experience in areas such as clean-room operation and contamination control, equipment maintenance and optimization, yield management, defect analysis and resolution, and process control methodologies. While difficult to quantify individually, this accumulated know-how constitutes a critical platform intangible that significantly accelerates the development timeline for next-generation process technology.
Patent Portfolio Related to Advanced-Node Semiconductor Manufacturing. HSAG contributed its patent portfolio related to advanced-node semiconductor manufacturing, comprising approximately 3,200 active patents and pending patent applications as of the CSA's effective date. The patent portfolio covers innovations in areas such as transistor architecture, lithography techniques, deposition and etching processes, materials science, and interconnect technology. The patent portfolio provides both freedom-to-operate protection and potential licensing revenue for the Participants in their respective exploitation territories.
In consideration of the right to use and build upon HSAG's pre-existing intangible property in the CSA context for purposes of exploiting CSA-developed intangibles in North America, HSI made a lump-sum PCT buy-in payment to HSAG of $312,500,000 on July 15, 2018. The payment was funded from HSI's available cash resources and was wire-transferred from HSI's account with Ridgeline National Bank to HSAG's designated bank account in Germany on the CSA's effective date.
IV.B. Valuation Methodology
The PCT was valued using the income method in accordance with Treas. Reg. § 1.482-7(g)(4). The income method was selected as the most reliable method for determining the arm's-length value of the PCT, given the unique and non-routine nature of HSAG's pre-existing semiconductor process technology intellectual property and the absence of comparable uncontrolled transactions for platform contributions of comparable scope, value, and specificity. The income method values a PCT payment by reference to the present value of the income that the pre-existing intangible property is expected to generate for the PCT recipient (HSI) in its exploitation territory (North America).
The valuation was performed by Stonebridge Valuation Partners LLC, an independent valuation firm specializing in intellectual property and technology valuations. The engagement was led by Marcus Reinhardt, Managing Director, at Stonebridge Valuation Partners' offices at 200 Park Avenue, Suite 1510, New York, New York 10166. Stonebridge Valuation Partners was engaged jointly by HSAG and HSI in early 2018 to prepare the PCT valuation on an independent and objective basis, and the resulting valuation report was delivered contemporaneously with the execution of the CSA and PCT in July 2018.
The key parameters and assumptions of the income method valuation are described below:
discount Rate: 11.8%. The discount rate applied to the projected income stream was 11.8%, derived from the weighted average cost of capital ("WACC") for the Halcyon Semiconductor group, adjusted upward by a technology-specific risk premium of approximately 200 basis points to reflect the elevated uncertainty inherent in next-generation semiconductor process technology development. The WACC was computed using the capital asset pricing model ("CAPM") for the cost of equity and the after-tax cost of debt, weighted by the group's target capital structure. The technology-specific risk premium reflected the commercial and technical risks associated with the development of 2nm and sub-2nm process technology, including execution risk, competitive dynamics, and market adoption uncertainty.
Projection Period: 15 Years (July 2018 – June 2033). The projected income stream was modeled over a fifteen-year period, reflecting the estimated useful economic life of the pre-existing platform intangibles as a foundation for next-generation technology development. This useful life estimate was informed by historical patterns of semiconductor technology succession, in which each process node generation typically remains commercially relevant for eight to twelve years, with the platform knowledge and accumulated know-how contributing to successive generations of technology over a longer horizon.
Income Stream: Projected Incremental Cash Flows to HSI. The income stream used in the valuation consisted of HSI's projected incremental cash flows from North American exploitation of CSA-developed intangibles, net of routine returns attributable to HSI's tangible assets, working capital, and routine distribution and design-support functions. The incremental cash flows represent the portion of HSI's future income that is attributable specifically to the pre-existing platform intangibles contributed by HSAG — that is, the income that HSI could not generate without access to HSAG's contributed technology platform.
Terminal Value: None. No terminal value was applied at the end of the fifteen-year projection period. The valuation assumed that the income stream attributable to the pre-existing platform intangibles would decline to zero by the end of the projection period, reflecting the expected obsolescence and supersession of the 2018-era platform technology as successive generations of process technology (at 2nm, sub-2nm, and beyond) are developed and commercialized. This conservative assumption avoids overstating the PCT value by not attributing perpetual income to a technologically time-limited platform contribution.
Revenue Growth Assumptions. Revenue growth rates were based on 2018 market forecasts for North American semiconductor demand across the automotive, industrial IoT, and data-center application segments. The projections incorporated segment-specific growth rates reflecting the anticipated adoption curves for advanced-node semiconductor products in each segment, as well as assumptions regarding HSAG's and HSI's market share in North America. Revenue growth assumptions were informed by independent market research from industry analysts and were consistent with HSAG's internal strategic planning forecasts as of the valuation date.
Routine Return Deductions. Returns attributable to HSI's tangible assets (including its design center facilities, IT infrastructure, and other physical assets), working capital (including accounts receivable, inventory, and accounts payable), and routine intangible property (including HSI's assembled workforce, customer relationships, and distribution network) were deducted from the projected income stream before calculating the residual income attributable to the pre-existing platform intangibles. Routine returns were computed using market-derived rates of return for comparable asset categories, ensuring that only the super-normal or residual income — the income attributable to the unique pre-existing platform intangibles — was captured in the PCT valuation.
The resulting present value of HSI's anticipated benefit stream from the pre-existing platform intangibles was $312,500,000. The PCT buy-in payment was made as a single lump-sum payment on July 15, 2018. No installment payment structure, contingent payment mechanism, or royalty-based payment arrangement was employed; the full arm's-length consideration was paid at inception.
IV.C. Arm's-Length Standard and Regulatory Compliance
The PCT valuation complies with Treas. Reg. § 1.482-7(g)(1), which provides that each PCT payment must be consistent with the arm's-length standard as defined in Treas. Reg. § 1.482-1(b). The arm's-length standard requires that the results of a controlled transaction be consistent with the results that would have been realized if uncontrolled taxpayers had engaged in the same transaction under the same circumstances.
The income method was selected as the best method under the best method rule of Treas. Reg. § 1.482-1(c), which requires the use of the method that, given the facts and circumstances, provides the most reliable measure of an arm's-length result. The income method was determined to be the most reliable method for the following reasons:
First, the unique and non-routine nature of HSAG's pre-existing semiconductor process technology — encompassing proprietary process recipes, design libraries, fabrication know-how, and a broad patent portfolio — makes it exceedingly difficult, if not impossible, to identify comparable uncontrolled transactions involving platform contributions of similar scope, value, and technological specificity. The absence of reliable comparable transactions precludes the use of the comparable uncontrolled transaction method or the comparable uncontrolled price method for the PCT valuation.
Second, the income method directly measures the economic value of the pre-existing platform intangibles to the PCT recipient (HSI) by reference to the incremental income that those intangibles are expected to generate in HSI's exploitation territory. This approach is conceptually sound and well-suited to the valuation of unique intangible property in the context of cost sharing arrangements.
Third, the income method was applied with detailed and reliable projections, informed by independent market research and supported by the Halcyon Semiconductor group's internal strategic planning data. The key assumptions and inputs to the valuation (Discount rate, projection period, revenue growth rates, and routine return deductions) were documented and supported by contemporaneous evidence.
The valuation was prepared contemporaneously with the execution of the CSA and PCT in July 2018, ensuring that the analysis reflects the information, assumptions, and expectations that were available and relevant as of the valuation date, consistent with the requirement for contemporaneous documentation under Treas. Reg. § 1.482-7(k).
IV.D. Consistency with OECD Guidelines
The PCT valuation approach is consistent with Chapter VIII of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (2022 edition), which addresses cost contribution arrangements ("CCAs"). Chapter VIII of the OECD Guidelines provides that when a participant in a CCA makes a contribution of pre-existing assets or rights (a "balancing payment" in OECD terminology), the value of that contribution should be determined in accordance with the arm's-length principle, having regard to the value of the pre-existing contributions at the time of entry into the arrangement.
The lump-sum buy-in payment of $312,500,000 reflects the value of HSAG's pre-existing contributions at the time of entry into the CSA, determined by reference to the income that the pre-existing contributions are expected to generate for HSI in its North American exploitation territory. This approach is consistent with the OECD's guidance that balancing payments should reflect the value that the pre-existing contributions provide to the recipient participant, taking into account the expected benefits from those contributions. The OECD Guidelines further note that the income approach (analogous to the income method under the US Treasury Regulations) may be an appropriate method for valuing contributions of unique intangible property, particularly when comparable transactions are not available. The PCT valuation therefore satisfies both the US regulatory requirements and the OECD's guidance on CCA contributions.
V. FY 2024 COST SHARING — COMPUTATION AND ALLOCATION
V.A. Total Qualified R&D Costs (FY 2024)
Total Qualified R&D Costs incurred by the CSA Participants in FY 2024 amounted to €998,200,000. This figure represents the aggregate cost of intangible development activities conducted during the twelve-month period from January 1, 2024 through December 31, 2024, determined in accordance with the cost pool definition set forth in Article V of the CSA Agreement and described in Section III.D of this Addendum.
The vast majority of qualified R&D costs were incurred by HSAG, reflecting the fact that R&D activities under the CSA are principally conducted at HSAG's fabrication and R&D facilities in Dresden and Chemnitz, Germany. HSAG's facilities house the advanced clean-room environments, EUV lithography systems, and materials characterization laboratories necessary for leading-edge process technology R&D, and the majority of the R&D engineering personnel working on CSA-covered activities are employed by HSAG at those locations.
HSI incurred a limited amount of qualified R&D costs during FY 2024, reflecting design-engineering and application-engineering activities performed at its Santa Clara, California design center. These costs primarily comprise personnel costs for the approximately 180 engineers at the Santa Clara center, together with associated materials, equipment depreciation, and allocated facility costs.
For reference, HSAG's total R&D expenditure for FY 2024 was €1,420,000,000. The qualified CSA R&D cost pool of €998,200,000 represents approximately 70.2% of HSAG's total R&D expenditure. The remaining €421,800,000 (29.8%) relates to non-CSA R&D activities, as described in Section III.D of this Addendum.
The total qualified R&D costs and the allocation thereof between CSA and non-CSA activities were reviewed and certified by Gresham Whitfield LLP as part of the annual group audit process for FY 2024. The cost pool was subject to audit procedures including testing of cost center classifications, review of time allocation records for R&D personnel, verification of equipment utilization rates, and reconciliation of third-party contractor invoices to the CSA cost pool.
V.B. Cost Allocation — HSI's Share
HSI's cost-sharing percentage under the CSA is 22.5%, as determined by the anticipated benefit share analysis described in Section VI of this Addendum. Applying this percentage to the total FY 2024 qualified R&D cost pool yields the following cost allocation:
The USD equivalent of HSI's cost-sharing contribution was approximately $231,300,000, calculated at the blended EUR/USD exchange rate applicable to HSI's quarterly payments and year-end true-up during FY 2024.
HSI's share is paid to HSAG quarterly in arrears, based on preliminary cost pool estimates prepared at the end of each fiscal quarter. Within sixty (60) days after the close of each fiscal year (December 31), a year-end true-up is performed to reconcile HSI's quarterly payments against the final, audited qualified R&D cost pool for the year. Any difference between the aggregate quarterly payments and the year-end cost-sharing obligation is settled through a true-up payment from HSI to HSAG (or a refund from HSAG to HSI, as applicable). All CSA cost-sharing payments are denominated in EUR per the terms of the CSA Agreement.
V.C. Reconciliation with HSI Financial Statements
To demonstrate the consistency of the CSA cost-sharing contributions with HSI's overall financial results for FY 2024, the following reconciliation is presented:
HSI's intercompany cost-sharing contributions of approximately $231,300,000 (the USD equivalent of €224,600,000) are included within HSI's operating expenses line. These contributions represent HSI's 22.5% share of the CSA's qualified R&D cost pool and are classified as R&D-related operating expenses in HSI's financial statements.
Separately identified within operating expenses are royalty payments to HSAG under the IP License Agreement in the amount of approximately $70,500,000 (the USD equivalent of €68,400,000 at the weighted average payment-date EUR/USD rate of 1.0307). These royalty payments compensate HSAG for HSI's use of licensed intellectual property (principally trademark rights and certain non-CSA technology licenses) and are governed by the IP License Agreement effective January 1, 2019, which is a separate covered transaction in the bilateral APA application.
HSI's resulting operating margin of 4.80% falls within the interquartile range of 2.8% to 6.1% (with a median of 4.4%) established by the comparable profits method / transactional net margin method ("CPM/TNMM") benchmarking study of seventeen comparable North American semiconductor distributors. This benchmarking study, prepared by Meridian Economics GmbH and included in the US Local File for FY 2024, supports the arm's-length nature of the aggregate intercompany pricing between HSAG and HSI, including the cost-sharing contributions under the CSA. The fact that HSI's operating margin falls within the arm's-length range provides additional confirmation that the cost-sharing arrangement, together with HSI's other intercompany transactions, does not result in an inappropriate shifting of income or costs as between the Participants.
V.D. Aggregate Intercompany Flows — Context
For purposes of providing complete context for the CSA cost-sharing contributions within the broader framework of intercompany transactions between HSAG and HSI, the following summary of FY 2024 aggregate intercompany flows is presented:
The total aggregate intercompany flows between HSAG and HSI in FY 2024 amounted to approximately €1.28 billion, reflecting the substantial economic relationship between the two entities and the significance of the transfer pricing policies governing these transactions. The tangible goods transaction (wafer and die sales) represents the largest single category of intercompany flows, followed by the CSA cost-sharing contributions and the royalty payments. Each of these three transaction categories is subject to the bilateral APA application and is documented in detail in the US Local Files and this Addendum.
The EUR/USD exchange rate used for the tangible goods conversion was the average 2024 EUR/USD rate of approximately 1.0896. The exchange rate used for the royalty conversion was the weighted average payment-date rate of approximately 1.0307. The exchange rate used for the cost-sharing contribution conversion was a blended rate reflecting the quarterly payment dates and year-end true-up.
VI. ANTICIPATED BENEFIT SHARE ANALYSIS
VI.A. Methodology — Income Method Under Treas. Reg. § 1.482-7
HSI's anticipated benefit share of 22.5% is determined using the income method prescribed by Treas. Reg. § 1.482-7(e)(2)(ii). The income method is one of several methods specified in the Treasury Regulations for determining a participant's share of reasonably anticipated benefits in a qualified cost sharing arrangement. Under this method, each participant's share of the reasonably anticipated benefits from exploitation of CSA-developed intangibles is measured by reference to the present value of each participant's projected incremental income from the use of those intangibles in its assigned exploitation territory.
The income method was selected as the most appropriate method for determining the Participants' RAB shares because it directly links each Participant's cost-sharing obligation to the economic benefits that Participant is expected to derive from exploitation of the CSA intangibles. Alternative methods for determining RAB shares, such as the units-used method or other reasonable measures of benefits, were considered but rejected as less reliable in the present circumstances. The units-used method, for example, would not adequately capture the differences in per-unit profitability between the North American and rest-of-world markets, which arise from differences in product mix, pricing, customer concentration, and competitive intensity. The income method, by contrast, incorporates these differences through the use of territory-specific revenue and profitability projections.
The income method valuation for purposes of determining RAB shares was initially performed by Meridian Economics GmbH in 2018, concurrent with the CSA inception, and has been updated at each triennial review. The methodology, key assumptions, and inputs to the RAB share determination are described in the following subsections.
VI.B. Key Assumptions and Inputs
The anticipated benefit share analysis is based on the following key assumptions and inputs:
Geographic Market Allocation. The starting point for the RAB share analysis is the division of the global semiconductor market into two exploitation territories: North America (United States, Canada, and Mexico), assigned to HSI, and the rest of the world (all other territories), assigned to HSAG. Revenue and profitability projections are prepared separately for each territory, reflecting the distinct demand characteristics, customer bases, pricing dynamics, and competitive landscapes in each geographic market.
Revenue Projections. Revenue projections for each territory are based on a combination of internal HSAG and HSI forecasts and independent market research from leading semiconductor industry analysts, including reports from Penmark Consulting Group, Fenmore Consulting Group, SEMI, and Brightmoor Consulting Group. The projections are segment-specific, reflecting the anticipated demand trajectories for advanced-node semiconductor products in the automotive, industrial IoT, and data-center application segments. Revenue projections are expressed on a product-level basis and are aggregated to derive total projected revenue from 2nm and sub-2nm products in each territory over the projection horizon.
Projection Horizon. The projection horizon for the RAB share analysis is consistent with the expected commercial lifecycle of 2nm and sub-2nm semiconductor process technology. The commercial lifecycle encompasses the period from initial production ramp-up through peak volume production and eventual obsolescence as subsequent technology generations are introduced. Based on historical patterns of semiconductor technology succession and the Halcyon group's technology roadmap, the projection horizon extends approximately twelve to fifteen years from the anticipated start of volume production.
discount Rate. The discount rate used to calculate the present value of projected income streams is consistent with the 11.8% rate used in the