penalty-protection-statement-irc-6662e.docx

1032-00006 · Halcyon Semiconductor Inc · TP Documentation

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PRIVILEGED AND CONFIDENTIAL ATTORNEY WORK PRODUCT ATTORNEY-CLIENT COMMUNICATION PREPARED IN ANTICIPATION OF LITIGATION AND FOR THE PURPOSE OF RENDERING LEGAL ADVICE

PENALTY PROTECTION STATEMENT

UNDER IRC §§ 6662(e) AND 6662(h)

HALCYON SEMICONDUCTOR INC.

Fiscal Years Ended December 31, 2022, December 31, 2023, and December 31, 2024

Matter Number: 1032-00006 Billing Code: HSAG-TP-2025

Prepared by:

Calderwood & Harkness LLP 599 Lexington Avenue, 38th Floor New York, NY 10022

Prepared for:

Halcyon Semiconductor Inc. 8700 Parmer Lane, Building 4 Austin, TX 78729 EIN: 84-2917630

Tax Years Covered: Fiscal years ended December 31, 2022, December 31, 2023, and December 31, 2024

Date of Preparation: September 30, 2025 (contemporaneous documentation deadline for FY 2024)

Attorney Contacts:

This Statement is to be attached as an exhibit to the US Local Files for Halcyon Semiconductor Inc. for FY 2022, FY 2023, and FY 2024.

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I. PURPOSE AND SCOPE OF THIS STATEMENT

This Penalty Protection Statement (the "Statement") is prepared by Calderwood & Harkness LLP ("Calderwood & Harkness" or "Counsel") on behalf of Halcyon Semiconductor Inc. ("HSI"), a Delaware corporation and wholly owned subsidiary of Halcyon Semiconductor AG ("HSAG"), a German Aktiengesellschaft organized under the laws of the Federal Republic of Germany with its registered office at Halcyon-Allee 12, 01099 Dresden, Saxony, Germany. HSI is the exclusive US distribution, marketing, and design-support entity for the Halcyon semiconductor product portfolio in the North American market. This Statement has been prepared for the purpose of establishing that HSI has satisfied the requirements for reasonable cause and good faith under Section 6662(e) of the Internal Revenue Code of 1986, as amended (the "Code" or "IRC"), regarding substantial valuation misstatements, and Section 6662(h) of the Code, regarding gross valuation misstatements, with respect to the determination of prices charged or paid in controlled transactions between HSI and HSAG and related controlled entities for the fiscal years ended December 31, 2022, December 31, 2023, and December 31, 2024 (collectively, the "Covered Tax Years").

The purpose of this Statement is threefold. First, it asserts that HSI has reasonably concluded that the transfer pricing methods applied to its intercompany transactions with HSAG represent the "best method" within the meaning of Treasury Regulation Section 1.482-1(c) for each category of controlled transaction. Second, it documents that contemporaneous transfer pricing documentation was prepared and maintained by HSI in accordance with the requirements of Treasury Regulation Section 1.6662-6(d), including all required principal documents and background documents. Third, it sets forth the factual and legal basis for the position that, in the event the Internal Revenue Service (the "IRS" or the "Service") were to propose a transfer pricing adjustment under Section 482 of the Code with respect to any of the Covered Tax Years, the penalties imposed under Sections 6662(e) and 6662(h) should not apply.

This Statement covers all three categories of controlled transactions in which HSI participates:

(1) Tangible Goods — Semiconductor wafer and die sales from HSAG to HSI under the Master Intercompany Supply Agreement;

(2) Royalties — Intellectual property license payments from HSI to HSAG under the IP License Agreement; and

(3) Cost-Sharing Contributions — Payments from HSI to HSAG under the parties' Qualified Cost Sharing Arrangement for next-generation research and development.

The aggregate annual intercompany flows between HSI and HSAG for FY 2024 totaled approximately €1,280,600,000 (approximately €1.28 billion), comprising €987,600,000 in tangible goods transfers, €68,400,000 in royalty payments, and €224,600,000 in cost-sharing contributions. The volume and complexity of these intercompany transactions underscore the importance of rigorous transfer pricing analysis and comprehensive contemporaneous documentation, both of which HSI has undertaken in good faith.

This Statement is intended to accompany and be read in conjunction with the US Local Files for HSI for FY 2022, FY 2023, and FY 2024, the Master File prepared for the Halcyon Semiconductor AG group under the OECD BEPS Action 13 framework, and the supporting documentation listed on Exhibit A hereto. Together, these materials constitute a complete and integrated body of contemporaneous transfer pricing documentation for the Covered Tax Years.

II. LEGAL FRAMEWORK

II.A. IRC § 6662(e) — Substantial Valuation Misstatement

Section 6662(a) of the Code imposes an accuracy-related penalty equal to twenty percent (20%) of the portion of an underpayment of tax attributable to, among other things, a "substantial valuation misstatement" as defined in Section 6662(e). In the context of transfer pricing, Section 6662(e)(1)(B) provides that a substantial valuation misstatement exists with respect to any transaction between persons described in Section 482 if the price for any property or services (or for the use of property) claimed on any return is 200% or more (or 50% or less) of the amount determined under Section 482 to be the correct price or amount.

In addition, Section 6662(e)(1)(B)(ii) provides an alternative threshold based on the aggregate magnitude of the transfer pricing adjustment. Specifically, a substantial valuation misstatement exists if the net Section 482 transfer price adjustment for the taxable year exceeds the lesser of $5,000,000 or 10% of the taxpayer's gross receipts. Given HSI's FY 2024 net revenues of approximately $4.12 billion, the 10% threshold would equal approximately $412 million, making the $5 million threshold the operative test. Where the underpayment is attributable to a substantial valuation misstatement, the 20% penalty applies to the entire underpayment resulting from such misstatement.

The substantial valuation misstatement provisions of Section 6662(e) are directly applicable to the intercompany transactions between HSI and HSAG because HSI and HSAG are controlled taxpayers within the meaning of Section 482 — HSAG owns 100% of the outstanding shares of HSI, and the two entities engage in intercompany transactions involving the sale of tangible property, the licensing of intangible property, and cost-sharing contributions.

II.B. IRC § 6662(h) — Gross Valuation Misstatement

Section 6662(h) of the Code imposes a heightened penalty of forty percent (40%) of the portion of an underpayment of tax attributable to a "gross valuation misstatement." In the transfer pricing context, a gross valuation misstatement exists if the price for any property or services (or for the use of property) claimed on any return is 400% or more (or 25% or less) of the amount determined under Section 482 to be the correct price or amount. Alternatively, a gross valuation misstatement exists if the net Section 482 transfer price adjustment for the taxable year exceeds $20,000,000.

The gross valuation misstatement penalty represents a more severe sanction than the substantial valuation misstatement penalty and is intended to deter extreme mispricing of intercompany transactions. Both the 40% penalty under Section 6662(h) and the 20% penalty under Section 6662(e) are subject to the reasonable cause and good faith defense described in Section II.C below, and it is the specific purpose of this Statement to establish HSI's entitlement to that defense.

II.C. Reasonable Cause Exception — Treas. Reg. § 1.6662-6

Section 6664(c)(1) of the Code provides that no penalty shall be imposed under Section 6662 with respect to any portion of an underpayment if it is shown that there was "reasonable cause" for such portion and that the taxpayer acted in "good faith" with respect to such portion. In the specific context of transfer pricing penalties under Sections 6662(e) and 6662(h), the reasonable cause and good faith defense is further elaborated in Treasury Regulation Section 1.6662-6(d).

Treasury Regulation Section 1.6662-6(d) sets forth a two-pronged test for the reasonable cause and good faith defense:

Prong 1 — Reasonable Conclusion as to Best Method. The taxpayer must have reasonably concluded that its method of pricing (the "specified method") provided the most reliable measure of an arm's-length result under the principles of the best method rule set forth in Treasury Regulation Section 1.482-1(c). This requires that the taxpayer considered alternative methods and made a reasonable determination that the method selected was superior to the alternatives in terms of the reliability of the arm's-length result.

Prong 2 — Contemporaneous Documentation. The taxpayer must have maintained contemporaneous documentation as described in Treasury Regulation Section 1.6662-6(d)(2)(iii) that documents the taxpayer's reasonable conclusion as to best method and the application of that method to the controlled transactions. The documentation must be in existence when the return is filed for the relevant taxable year; post-filing documentation is insufficient to satisfy this requirement.

The term "contemporaneous" is defined with reference to the filing deadline for the taxpayer's return. Under Treasury Regulation Section 1.6662-6(d)(2)(iii)(A), documentation is "contemporaneous" if it is in existence by the date the return is filed. For HSI, which files its federal income tax return on Form 1120 for each of the Covered Tax Years, the relevant filing dates are the dates (including extensions) on which the returns for FY 2022, FY 2023, and FY 2024 are filed with the IRS.

Treasury Regulation Section 1.6662-6(d)(2)(iii)(B) enumerates the specific documentation requirements, organized into "principal documents" and "background documents." The eight categories of principal documents required are:

(1) An overview of the taxpayer's business, including an analysis of the economic and legal factors that affect the pricing of its property or services;

(2) A description of the taxpayer's organizational structure (including an organization chart) covering all related parties engaged in transactions potentially relevant under Section 482, including foreign affiliates whose transactions with the taxpayer may be relevant;

(3) Documentation explicitly required by the Treasury Regulations with respect to the method selected, including a complete description of the method, the reasons why that method was selected as the best method, and the economic analysis that supports the method;

(4) A description of the alternative methods that were considered and an explanation of why each was not selected;

(5) A description of the controlled transactions, including the terms of sale, and the internal data used to analyze those transactions;

(6) A description of the comparables that were used, how comparability was evaluated, and what (if any) adjustments were made;

(7) An explanation of the economic analysis and projections relied upon in developing the method, including a description of the comparable selection methodology and the economic models used; and

(8) A general index of the principal and background documents and a description of the recordkeeping system used to catalog those documents.

In addition to the principal documents, the taxpayer must maintain background documents that support the principal documents. Background documents include financial data and schedules, agreements and contracts governing intercompany transactions, working papers, and other source materials that provide the factual foundation for the transfer pricing analysis.

HSI's contemporaneous documentation satisfies both prongs of the reasonable cause and good faith defense, as set forth in detail in Sections IV and V of this Statement.

II.D. Interaction with OECD Transfer Pricing Guidelines

The transfer pricing documentation and analysis prepared by HSI and its advisors are also consistent with the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (2022 edition) (the "OECD Guidelines"). While the OECD Guidelines do not have the force of law in the United States, they are widely recognized as an authoritative interpretive aid in the transfer pricing context and are referenced by the IRS in various forms of guidance.

HSI's documentation framework is further aligned with the three-tier documentation structure established under the OECD's Base Erosion and Profit Shifting ("BEPS") Action 13, which recommends the preparation of a Master File, Local Files, and Country-by-Country Reports. HSAG has prepared a Master File at the group level, and Local Files have been prepared for each material jurisdiction, including the United States. Country-by-Country Reports have been filed by HSAG in Germany, as the ultimate parent entity of the Halcyon group.

The consistency of HSI's documentation approach with the OECD framework is relevant for several reasons. First, the OECD Guidelines inform the interpretation of Article 9 (Associated Enterprises) of the Convention between the United States of America and the Federal Republic of Germany for the Avoidance of Double Taxation (signed June 29, 2006) (the "US-Germany Income Tax Treaty" or the "Treaty"), pursuant to which HSAG and HSI may seek mutual agreement in the event of a transfer pricing dispute. Second, the alignment with OECD BEPS Action 13 documentation standards demonstrates HSI's commitment to transparency and compliance with international norms. Third, the simultaneous preparation of documentation that satisfies both the US regulatory requirements (Treas. Reg. § 1.6662-6(d)) and the OECD Action 13 framework reduces the risk of inconsistent positions between jurisdictions and further evidences good faith.

III. DESCRIPTION OF THE TAXPAYER AND CONTROLLED TRANSACTIONS

III.A. Overview of HSI

Halcyon Semiconductor Inc. is a Delaware C-corporation (Delaware Secretary of State File Number 7341825) with EIN 84-2917630. HSI was incorporated in the State of Delaware on March 14, 2016, and commenced operations on July 1, 2016. HSI is a wholly owned subsidiary of HSAG. Throughout the Covered Tax Years, 100% of HSI's outstanding common stock was held by HSAG, and there were no minority equity interests, convertible instruments, or other dilutive securities outstanding.

HSI serves as the exclusive US distribution, marketing, and design-support entity for the Halcyon semiconductor product portfolio in the North American market. HSI's functional profile is that of a limited-risk distributor with additional marketing and design-support capabilities. HSI does not own or operate any semiconductor fabrication facilities, nor does it engage in foundational semiconductor process research and development. HSI's activities are focused on (i) purchasing finished and semi-finished semiconductor products (including wafers, singulated die, and packaged components) from HSAG; (ii) marketing and selling those products to unrelated US customers, including original equipment manufacturers ("OEMs"), electronic component distributors, and hyperscale data-center operators; (iii) providing pre-sale and post-sale design-support services and application engineering to US customers to facilitate the integration of Halcyon products into customer designs; and (iv) conducting incremental development activities under the Qualified Cost Sharing Arrangement with HSAG.

HSI's principal business locations are as follows:

Principal Office: 8700 Parmer Lane, Building 4, Austin, TX 78729

Design Center: 2455 Augustine Drive, Suite 300, Santa Clara, CA 95054

Regional Sales Offices:

• 1100 Town Center Drive, Suite 420, Southfield, MI 48075 (Detroit Metro / Automotive OEM Sales)

• 9600 SW Nimbus Avenue, Suite 210, Beaverton, OR 97008 (Portland / Pacific Northwest / Data Center Sales)

As of December 31, 2024, HSI employed approximately 2,850 full-time employees across its four locations. The Austin principal office houses HSI's executive leadership, finance, legal, human resources, supply chain operations, and corporate development functions. The Santa Clara design center employs approximately 640 engineers engaged in application engineering, design enablement, and customer-specific adaptation work. The regional sales offices in Southfield and Beaverton provide dedicated support to key customer segments.

HSI's management team is led by Victor Almeida, President and General Manager, who reports directly to the HSAG Management Board (Vorstand). Priya Raghavan, Vice President of Tax, oversees HSI's US tax matters, including transfer pricing compliance, and serves as the primary HSI contact for the preparation of this Statement and the associated contemporaneous transfer pricing documentation.

HSI's financial summary for FY 2024 is as follows:

HSI's fiscal year ends on December 31 of each calendar year, consistent with the fiscal year of HSAG and the Halcyon consolidated group.

III.B. Overview of HSAG

Halcyon Semiconductor AG is a German Aktiengesellschaft publicly listed on the Frankfurt Stock Exchange (XETRA) under the ticker symbol "HAL" (ISIN: DE000HSA0017). HSAG's Steuernummer (German tax identification number) is 203/118/04527. HSAG's registered office is located at Halcyon-Allee 12, 01099 Dresden, Saxony, Germany.

HSAG is the ultimate parent entity of the Halcyon Semiconductor group, which is a globally integrated designer and manufacturer of advanced-node semiconductor products. HSAG's core competence lies in the design and fabrication of leading-edge semiconductor wafers employing advanced process nodes, including 7-nanometer ("7nm"), 5-nanometer ("5nm"), and 3-nanometer ("3nm") lithographic process technologies. HSAG's products serve three primary end markets: (i) automotive electronics (including advanced driver-assistance systems, autonomous driving platforms, and electric vehicle power management); (ii) industrial Internet of Things ("IoT") applications (including industrial automation, smart grid, and sensor networks); and (iii) data-center infrastructure (including high-performance computing accelerators, network interface controllers, and storage controllers).

HSAG operates three semiconductor fabrication facilities:

Fab 1 & Fab 2: Located at Industriepark Klotzsche, Zur Wetterwarte 50, 01109 Dresden, Germany. These two adjacent fabrication facilities produce advanced-node wafers on 300mm silicon substrates. Fab 1 serves as the primary production facility for 7nm and 5nm process technologies. Fab 2, which commenced volume production in Q3 2023, is dedicated to 3nm process technology.

Fab 3: Located at Technologiepark Chemnitz, Annaberger Straße 240, 09125 Chemnitz, Germany. Fab 3 is a mature-node facility producing wafers on 200mm substrates for legacy automotive and industrial product lines. Fab 3 also serves as a development and prototyping facility for certain next-generation process technologies prior to their transfer to the Dresden fabs for volume production.

As of December 31, 2024, HSAG employed approximately 22,400 employees globally, of whom approximately 14,600 were based in Germany. HSAG's global workforce includes research scientists, process engineers, design engineers, manufacturing technicians, and corporate and administrative staff.

HSAG's executive leadership team includes:

• Dr. Klaus-Dieter Wehrheim, Chief Executive Officer (Vorstandsvorsitzender)

• Margarethe Stein, Chief Financial Officer (Finanzvorstand)

• Dr. Hendrik Möller, Chief Technology Officer (Technologievorstand)

• Dr. Erwin Fassbinder, Senior Vice President, Group Tax

HSAG's consolidated financial highlights for FY 2024 are as follows:

HSAG is the owner of substantially all of the valuable intangible property within the Halcyon group, including proprietary semiconductor process technology, design libraries, and other trade intangibles. HSAG's R&D expenditure of €1.42 billion in FY 2024 represents approximately 16.2% of consolidated revenue and reflects the group's significant investment in next-generation process development.

III.C. Covered Controlled Transactions

The controlled transactions between HSI and HSAG that are the subject of this Statement fall into three categories, as described below. Each category of controlled transaction is governed by a written intercompany agreement that sets forth the terms and conditions of the transaction, including pricing mechanisms, payment terms, and other commercial terms.

III.C.1. Tangible Goods — Semiconductor Wafer and Die Sales (HSAG to HSI). HSAG manufactures semiconductor wafers and singulated die at its Dresden and Chemnitz fabrication facilities and sells them to HSI under the Master Intercompany Supply Agreement, which became effective on January 1, 2019, and was amended on July 1, 2022 (the "Supply Agreement"). Pursuant to the Supply Agreement, HSAG ships finished wafers and singulated die to HSI on an FOB shipping point basis (with risk of loss transferring to HSI upon delivery to the designated carrier at the HSAG facility). HSI takes title to the goods upon shipment and bears the costs of international freight, customs duties, and insurance from that point forward.

HSI resells the finished and packaged semiconductor products to unrelated US customers, including OEMs operating in the automotive, industrial, and data-center sectors; electronic component distributors; and hyperscale data-center operators. HSI does not perform any manufacturing or fabrication activities; its value-added activities with respect to tangible goods are limited to warehousing, logistics management, order fulfillment, quality assurance inspection upon receipt, and customer-facing technical support.

For FY 2024, the total value of intercompany tangible goods transferred from HSAG to HSI was €987,600,000, which translates to approximately $1,076,000,000 at the average 2024 EUR/USD exchange rate of 1.0896 (based on the European Central Bank reference rate, calculated as the arithmetic mean of daily rates for the period January 1, 2024 through December 31, 2024).

The transfer prices for tangible goods are established on a quarterly basis using a cost-plus methodology at the intercompany invoice level, which is then tested at the entity level using the CPM/TNMM to confirm that HSI's overall profitability falls within the arm's-length range. This approach is consistent with the best method analysis discussed in Section IV.B below.

III.C.2. Royalties — IP License Payments (HSI to HSAG). HSI pays HSAG a royalty under an intellectual Property License Agreement that became effective on January 1, 2019 (the "IP License Agreement"). Pursuant to the IP License Agreement, HSAG grants HSI a non-exclusive, non-transferable license to use HSAG's proprietary semiconductor process technology, design libraries, electronic design automation ("EDA") tools and methodologies, test protocols, and related trade intangibles (collectively, the "Licensed IP") in connection with HSI's marketing, sale, and design-support activities in North America. The Licensed IP does not include HSAG's patents per se (which are licensed separately through the Supply Agreement as embedded in the tangible goods), but rather encompasses the proprietary know-how, trade secrets, customer-facing technical documentation, and design enablement tools that HSI employs in its customer-facing technical support and application engineering activities.

The royalty rate is set at 6.0% of HSI's net US revenues attributable to Licensed IP. For FY 2024, HSI's royalty payments to HSAG totaled €68,400,000, which translates to approximately $70,500,000 at the weighted average payment-date EUR/USD exchange rate of 1.0307. The weighted average payment-date rate differs from the annual average rate because royalty payments are made quarterly within 30 days of the end of each fiscal quarter, and the EUR/USD exchange rate fluctuated during the year.

The 6.0% royalty rate was established at the inception of the IP License Agreement in 2019 based on a benchmarking analysis of comparable uncontrolled license agreements for semiconductor-related intellectual property. The royalty rate has not been adjusted since inception, and the contemporaneous documentation for the Covered Tax Years includes an updated benchmarking analysis confirming that the 6.0% rate continues to fall within the arm's-length range.

III.C.3. Cost-Sharing Contributions — R&D CSA (HSI to HSAG). HSAG and HSI are parties to a Qualified Cost Sharing Arrangement (the "CSA") that became effective on July 15, 2018. The CSA governs the sharing of costs and risks associated with the development of next-generation 2-nanometer ("2nm") and sub-2nm semiconductor process technologies (the "CSA Activity"). The CSA was structured to comply with the requirements of Treasury Regulation Section 1.482-7 and was designed to allocate costs between HSAG and HSI in proportion to each party's reasonably anticipated benefits from the exploitation of the intangible property developed under the CSA Activity.

HSI's cost-sharing percentage under the CSA is 22.5%, reflecting HSI's anticipated benefit share from the exploitation rights for the North American market. This anticipated benefit share was determined using the income method prescribed by Treasury Regulation Section 1.482-7(g)(4), based on a detailed financial model projecting the expected revenue and operating profit attributable to the exploitation of CSA-developed intangible property in each participant's assigned territory. The financial model incorporated assumptions regarding market size, market share, product pricing, product life cycles, and cost structures, all of which were documented at the time of CSA inception and have been reviewed and updated annually.

At the inception of the CSA on July 15, 2018, HSI made a platform contribution transaction ("PCT") buy-in payment of $312,500,000 to HSAG. The PCT payment compensated HSAG for the value of the pre-existing intangible property that HSAG contributed to the CSA Activity as a platform for further research and development. The PCT buy-in payment was valued by Stonebridge Valuation Partners LLC ("Stonebridge"), an independent valuation firm. The valuation was performed by Marcus Reinhardt, Managing Director, at Stonebridge's offices at 200 Park Avenue, Suite 1510, New York, NY 10166. Stonebridge applied the income method with a discount rate of 11.8% (reflecting the weighted average cost of capital for the CSA Activity, adjusted for the risk profile of the pre-existing intangibles) and a 15-year projection period. The Stonebridge PCT Valuation Report is included in the background documents and listed as Item 14 on the Index of Principal and Background Documents attached hereto as Exhibit A.

For FY 2024, the total qualified R&D costs incurred under the CSA Activity were €998,200,000. HSI's share of these costs, at its 22.5% anticipated benefit share, was €224,600,000 (calculated as €998,200,000 × 22.5%). Qualified R&D costs include direct research personnel costs, materials and supplies, equipment depreciation, facility costs allocable to the CSA Activity, and third-party contracted research costs, all as defined in the CSA and consistent with the cost pool requirements of Treasury Regulation Section 1.482-7(d).

The CSA documentation addendum prepared for the Covered Tax Years evaluates whether changes in circumstances since the CSA inception warrant periodic adjustments under Treasury Regulation Section 1.482-7(i)(6). This evaluation considered changes in market conditions, technology development trajectories, and actual versus projected financial results. The analysis concluded that no periodic adjustment is currently required, as the actual and projected results remain within the range of reasonably anticipated benefits that supported the original 22.5% allocation.

III.C.4. Aggregate Intercompany Flows. The total aggregate intercompany flows between HSI and HSAG for FY 2024 are summarized in the following table:

The magnitude of these intercompany flows — approximately €1.28 billion in FY 2024 — underscores the materiality of the transfer pricing positions at issue and the importance of the contemporaneous documentation and best method analyses that form the basis of this Penalty Protection Statement.

IV. SATISFACTION OF THE FIRST PRONG: REASONABLE CONCLUSION AS TO BEST METHOD

IV.A. Best Method Rule — General Principles

Treasury Regulation Section 1.482-1(c) sets forth the "best method rule," which provides that the arm's-length result of a controlled transaction must be determined under the method that, given the facts and circumstances, provides the most reliable measure of an arm's-length result. The best method rule does not prescribe a hierarchy of methods; rather, it requires an evaluation of the relative reliability of each potentially applicable method based on two primary factors:

(i) Comparability: The degree of comparability between the controlled transaction (and the tested party, where applicable) and any comparable uncontrolled transactions (or comparable uncontrolled parties), taking into account the comparability factors set forth in Treasury Regulation Section 1.482-1(d), including functions performed, risks assumed, contractual terms, economic conditions, and property or services transferred; and

(ii) Quality of Data and Assumptions: The completeness and accuracy of the data and assumptions used in the analysis, including the reliability of any adjustments made to account for differences between the controlled and uncontrolled transactions.

The best method analysis is a facts-and-circumstances inquiry that must be conducted for each category of controlled transaction. The selection of a method is "reasonable" for purposes of the penalty protection analysis if the taxpayer, having considered the available methods and their relative reliability in light of the specific facts and circumstances, concluded that the selected method provides the most reliable measure of an arm's-length result.

HSI, with the assistance of its advisors — Calderwood & Harkness LLP (US tax counsel), Meridian Economics GmbH (transfer pricing economists), and Kettner Pflüger Rechtsanwälte (German tax counsel) — performed a thorough best method analysis for each category of controlled transaction. The results of these analyses are summarized below.

IV.B. Tangible Goods Transactions — Transactional Net Margin Method / Comparable Profits Method

Method Selected. For the tangible goods transactions (semiconductor wafer and die sales from HSAG to HSI), the selected method is the Transactional Net Margin Method ("TNMM") under OECD terminology, which corresponds to the Comparable Profits Method ("CPM") under Treasury Regulation Section 1.482-5. The TNMM/CPM evaluates whether the tested party's net profit margin from the controlled transaction is consistent with the net profit margins earned by comparable uncontrolled companies performing similar functions, assuming similar risks, and employing similar assets.

Tested Party. HSI was selected as the tested party for the TNMM/CPM analysis. HSI is the less complex party to the tangible goods transaction, performing limited-risk distribution, marketing, and design-support functions with limited ownership of intangible property and limited exposure to market risk. HSAG, by contrast, is the more complex party, performing advanced semiconductor manufacturing, holding substantially all of the group's valuable intangible property (including process technology, design IP, and trade secrets), bearing significant capital investment risk, and assuming product liability and warranty obligations. Under the principles of the TNMM/CPM, the tested party should be the entity whose functions, risks, and assets can be most reliably benchmarked against comparable uncontrolled companies. HSI's limited-risk distribution profile makes it the appropriate tested party because comparable data for semiconductor distributors is more readily available and reliable than comparable data for vertically integrated semiconductor manufacturers with proprietary process technology.

Profit Level Indicator. The profit level indicator ("PLI") selected for the TNMM/CPM analysis is operating margin on net resales, defined as operating income divided by net revenue. Operating margin was selected as the PLI because it is widely used in benchmarking analyses for distribution entities, is less susceptible to differences in accounting classifications between cost of goods sold and operating expenses (which can vary across companies and jurisdictions), and is supported by reliable financial data for comparable companies. The selection of operating margin as the PLI is consistent with the guidance in Treasury Regulation Section 1.482-5(b)(4) and the OECD Guidelines (Chapter II, paragraphs 2.94–2.107).

Methods Considered and Rejected. In conducting the best method analysis, the following alternative methods were considered and rejected:

Comparable Uncontrolled Price (CUP) Method (Treas. Reg. § 1.482-3(b)). The CUP method was considered but rejected because sufficiently comparable uncontrolled transactions for advanced-node semiconductor wafers could not be identified. Advanced-node semiconductor products (particularly those employing 7nm, 5nm, and 3nm process technologies) are highly differentiated, with significant variation in product specifications, performance characteristics, yield rates, and customer-specific customization. The product specificity and process technology differentiation inherent in HSAG's semiconductor products preclude the identification of uncontrolled transactions that are sufficiently comparable to support reliable application of the CUP method. Moreover, the semiconductor industry is characterized by rapid technological change, and price comparisons across different product generations and process nodes are inherently unreliable.

Resale Price Method (Treas. Reg. § 1.482-3(c)). The Resale Price Method ("RPM") was considered because it is a traditional transaction method that tests the gross margin of a reseller in a controlled transaction against the gross margins of comparable uncontrolled resellers. However, the CPM/TNMM was deemed more reliable than the RPM for two principal reasons. First, the CPM/TNMM relies on net operating margins, which are less sensitive to differences in accounting classifications between cost of goods sold and operating expenses than the gross margins used in the RPM. Semiconductor distributors exhibit significant variation in the classification of costs (e.g., inbound freight, customs duties, warehousing costs, and quality assurance inspection costs may be classified as either COGS or operating expenses depending on the company's accounting policies), making gross margin comparisons less reliable. Second, the CPM/TNMM benefits from a broader set of comparable company data, as financial databases generally contain more complete and reliable data on operating margins than on gross margins at the transaction level.

Cost Plus Method (Treas. Reg. § 1.482-3(d)). The Cost Plus Method was not applicable to the tangible goods transaction because HSI is a reseller and distributor, not a manufacturer. The Cost Plus Method is typically applied to test the profitability of a manufacturer or a service provider by adding an appropriate markup to the costs incurred. Because HSI does not incur manufacturing costs with respect to the tangible goods it purchases from HSAG, the Cost Plus Method is not an appropriate method for evaluating the arm's-length character of the tangible goods transaction.

Profit Split Method (Treas. Reg. § 1.482-6). The Profit Split Method was considered but deemed less reliable than the CPM/TNMM for the tangible goods transaction. The Profit Split Method is most appropriate where both parties to the controlled transaction make unique and valuable contributions that cannot be reliably benchmarked on a one-sided basis. In the case of the tangible goods transaction, HSI performs routine distribution functions that are readily comparable to those performed by uncontrolled semiconductor distributors, while HSAG performs complex manufacturing and IP-intensive functions. The availability of reliable one-sided comparable data for HSI's distribution functions makes the CPM/TNMM more reliable than the Profit Split Method, which would require the complex and inherently less reliable exercise of measuring the relative contributions of distribution activities versus manufacturing and IP-development activities to combined profits.

Benchmarking Analysis. The benchmarking analysis for the tangible goods transaction was performed by Meridian Economics GmbH, under the supervision of Dr. Annika Breitner, Managing Director, and Maximilian Voss, Senior Analyst. Meridian Economics identified 17 comparable North American semiconductor distributors through a systematic search of publicly available financial databases (including the Fenmore Services Inc. database and SEC EDGAR filings). The comparable companies were selected based on a multi-step screening process that applied quantitative and qualitative criteria, including industry classification (SIC codes 5065 and 5045; NAICS codes 423690 and 423430), functional profile (resellers or distributors of semiconductor or electronic components without significant manufacturing or IP ownership), geographic focus (North American operations), financial data availability (at least three years of audited financial data), and independence (no controlled transactions representing more than 25% of revenue). The benchmarking analysis used financial data from fiscal years 2020 through 2024 (a five-year weighted average) to smooth out cyclical fluctuations in the semiconductor industry and to provide a more reliable indication of arm's-length profitability.

The interquartile range ("IQR") of operating margins for the 17 comparable companies was determined as follows:

HSI's FY 2024 Result. HSI's operating margin for FY 2024 was 4.80%, which falls within the interquartile range of 2.8% to 6.1%. HSI's result is slightly above the median of 4.4%, reflecting HSI's somewhat superior market position and customer relationships compared to the median comparable company, but is well within the arm's-length range established by the benchmarking analysis.

Conclusion. The CPM/TNMM, applied to HSI as the tested party with operating margin as the PLI, provides the most reliable measure of an arm's-length result for the tangible goods transaction between HSAG and HSI. The method was selected after a thorough consideration of alternative methods and their relative reliability in light of the specific facts and circumstances. HSI's FY 2024 operating margin of 4.80% is within the arm's-length interquartile range, confirming that the intercompany pricing of tangible goods is consistent with the arm's-length standard.

IV.C. Royalty Transactions — Comparable Uncontrolled Transaction (CUT) Method

Method Selected. For the royalty transactions (IP license payments from HSI to HSAG), the selected method is the Comparable Uncontrolled Transaction ("CUT") method under Treasury Regulation Section 1.482-4(c). The CUT method evaluates the arm's-length character of a controlled royalty by reference to the royalty rates charged in comparable uncontrolled transactions involving similar intangible property under similar circumstances.

Corroboration. In addition to the CUT method as the primary method, a residual profit split analysis under Treasury Regulation Section 1.482-6 was performed as a secondary corroborative check. The residual profit split analysis confirmed that the allocation of residual profits between HSAG (as IP owner and manufacturer) and HSI (as distributor and licensee) is consistent with the relative value of each party's contributions, and that the 6.0% royalty rate, combined with the tangible goods transfer pricing, yields an overall allocation of profits that is consistent with the arm's-length standard.

Methods Considered and Rejected. In conducting the best method analysis for the royalty transaction, the following alternative methods were considered and rejected:

CPM/TNMM. The CPM/TNMM was not considered appropriate as a primary method for evaluating the royalty payment because the royalty is a separate and distinct intercompany transaction for which comparable company operating margins do not provide a direct measure of the arm's-length royalty rate. While the CPM/TNMM is used to evaluate HSI's overall profitability (including the effect of the royalty payment), it does not independently establish the arm's-length character of the royalty rate itself. The CUT method, which directly compares the controlled royalty rate to royalty rates in comparable uncontrolled license agreements, provides a more targeted and reliable measure of the arm's-length royalty rate.

Profit Split Method (as primary). The Profit Split Method was considered as a primary method for the royalty transaction but was deemed less reliable than the CUT method where sufficiently comparable uncontrolled license agreements could be identified. The identification of eight comparable uncontrolled license agreements for semiconductor IP (as described below) provides a sufficient basis for application of the CUT method with a reasonable degree of reliability, making it unnecessary to resort to the more complex and assumption-intensive Profit Split Method as the primary method.

Benchmarking Analysis. The benchmarking analysis for the royalty transaction was performed by Meridian Economics GmbH. Eight comparable uncontrolled license agreements for semiconductor intellectual property were identified through a systematic search of the Clearpoint Royalty Database (a proprietary database of license agreements maintained by Clearpoint Analytics Inc., to which Meridian Economics holds a subscription license) and publicly available SEC filings. The comparable license agreements were selected based on criteria including the nature of the licensed intangible property (semiconductor process technology, design libraries, or related IP), the scope of the license (non-exclusive, territory-limited licenses for distribution and marketing purposes), the identity of the licensor and licensee (unrelated parties), and the availability of sufficient detail regarding the royalty terms to permit meaningful comparison.

The comparable license agreements span a range of royalty rates, reflecting differences in the scope of licensed technology, the exclusivity of the license, the geographic territory covered, and other terms. The interquartile range of royalty rates for the eight comparable uncontrolled license agreements was determined as follows:

HSAG's Contractual Royalty Rate. The contractual royalty rate under the IP License Agreement between HSI and HSAG is 6.0% of HSI's net US revenues attributable to Licensed IP. This rate falls within the interquartile range of 3.5% to 8.2% and is above the median of 5.6%. The positioning of the 6.0% rate above the median is consistent with the high value and specificity of HSAG's proprietary semiconductor process technology and design libraries, which represent leading-edge intangible property that enables HSI to compete effectively in the advanced-node semiconductor market.

Conclusion. The CUT method provides the most reliable measure of the arm's-length royalty rate for the IP license transaction between HSI and HSAG. The 6.0% royalty rate is supported by the comparable uncontrolled license agreements and falls within the arm's-length interquartile range. The residual profit split analysis performed as a secondary corroborative check further supports the conclusion that the royalty rate is consistent with the arm's-length standard.

IV.D. Cost-Sharing Arrangement — Income Method under Treas. Reg. § 1.482-7

Method Selected. For the cost-sharing contributions under the CSA, the selected method for determining the anticipated benefit shares of each CSA participant is the income method prescribed by Treasury Regulation Section 1.482-7(g)(4). The income method determines each participant's anticipated benefit share based on the present value of the income each participant is projected to derive from the exploitation of the intangible property developed under the CSA Activity, relative to the aggregate present value of income projected for all participants.

HSI's Anticipated Benefit Share. HSI's anticipated benefit share under the CSA is 22.5%, reflecting the projected value of HSI's exploitation rights for the North American market as a proportion of the projected worldwide exploitation value. This percentage was determined at the inception of the CSA in 2018 based on a detailed financial model that projected revenue, operating profit, and net present value for each CSA participant's assigned exploitation territory over the useful life of the intangible property to be developed. The financial model incorporated assumptions regarding the North American semiconductor market (including total addressable market, projected market share, product pricing, and product life cycles), the European and rest-of-world markets (assigned to HSAG), the Japanese market (assigned to Halcyon Semiconductor Japan K.K., a non-participant in the CSA that licenses CSA-developed technology from HSAG), and the Chinese market (assigned to Halcyon Semiconductor (Shanghai) Co., Ltd., also a non-participant).

Platform Contribution Transaction (PCT). At the inception of the CSA on July 15, 2018, HSI made a PCT buy-in payment of $312,500,000 to HSAG. The PCT payment compensated HSAG for the value of pre-existing intangible property — specifically, HSAG's foundational semiconductor process technology, design methodologies, and accumulated know-how in advanced-node fabrication — that HSAG contributed to the CSA Activity as a platform for further research and development of 2nm and sub-2nm process technologies.

The PCT buy-in payment was valued by Stonebridge Valuation Partners LLC. The valuation was performed under the income method, consistent with the requirements of Treasury Regulation Section 1.482-7(g)(4) and the guidance in Treasury Regulation Section 1.482-7(g)(6). Stonebridge applied a discount rate of 11.8%, which was determined based on the weighted average cost of capital for the CSA Activity, adjusted for the specific risk profile of the pre-existing intangible property. The discount rate reflects the risk of the CSA Activity, including technology development risk, market adoption risk, and competitive dynamics risk. Stonebridge used a 15-year projection period, reflecting the estimated useful life of the pre-existing intangible property as a platform for next-generation process development. The PCT buy-in payment was amortized by HSI over the 15-year useful life for US federal income tax purposes.

Periodic Adjustment Evaluation. Treasury Regulation Section 1.482-7(i)(6) provides that a periodic adjustment to the terms of a CSA may be required if there has been a material change in circumstances that affects the reliability of the original cost-sharing allocations. The CSA documentation addendum prepared for the Covered Tax Years includes an analysis of whether such changes in circumstances have occurred. The analysis evaluated the following factors: (i) changes in actual versus projected revenue and operating profit for each CSA participant's exploitation territory; (ii) changes in the semiconductor market landscape, including competitive dynamics, customer demand, and pricing trends; (iii) changes in the technology development timeline and cost projections for the CSA Activity; and (iv) changes in the relative economic positions of the CSA participants. Based on this analysis, the conclusion was reached that no periodic adjustment is currently required, as the actual and projected results remain within the range of reasonably anticipated benefits that supported the original 22.5% allocation.

FY 2024 Qualified R&D Costs. For FY 2024, the total qualified R&D costs incurred under the CSA Activity were €998,200,000. HSI's share of these costs, at its 22.5% anticipated benefit share, was €224,600,000. The cost pool includes all costs that are directly related to or reasonably allocable to the CSA Activity, as defined in the CSA and consistent with the requirements of Treasury Regulation Section 1.482-7(d).

Conclusion. The income method, as applied to the determination of CSA benefit shares and the valuation of the PCT buy-in payment, provides the most reliable measure of arm's-length cost-sharing contributions for the CSA between HSI and HSAG. The method is mandated by the applicable regulations for determining anticipated benefit shares and is supported by a detailed financial model and an independent third-party valuation of the PCT payment.

IV.E. Summary of Best Method Determination

For each of the three categories of controlled transactions — tangible goods, royalties, and cost-sharing contributions — HSI and its advisors performed a thorough best method analysis. In each case, alternative methods were identified, considered, and their relative reliability was evaluated against the selected method in light of the specific facts and circumstances. The results of these analyses are summarized below:

The selected methods — CPM/TNMM for tangible goods, CUT for royalties, and the income method for CSA contributions — each provide the most reliable measure of an arm's-length result under the specific facts and circumstances of the relevant controlled transaction. The analyses were performed by qualified professionals with deep expertise in transfer pricing: Calderwood & Harkness LLP served as US tax counsel and coordinated the overall penalty protection analysis; Meridian Economics GmbH performed the economic analyses and benchmarking studies; Stonebridge Valuation Partners LLC performed the PCT valuation; and Kettner Pflüger Rechtsanwälte served as German tax counsel, ensuring consistency with German transfer pricing requirements.

Based on the foregoing, HSI reasonably concluded that the transfer pricing methods applied to each category of controlled transactions constitute the "best method" under Treasury Regulation Section 1.482-1(c). This conclusion satisfies the first prong of the reasonable cause and good faith defense under Treasury Regulation Section 1.6662-6(d).

V. SATISFACTION OF THE SECOND PRONG: CONTEMPORANEOUS DOCUMENTATION

V.A. Scope and Timing of Documentation

Contemporaneous transfer pricing documentation was prepared for each of the Covered Tax Years — FY 2024, FY 2023, and FY 2022 — in accordance with the requirements of Treasury Regulation Section 1.6662-6(d)(2)(iii).

The FY 2024 US Local File for HSI was completed on or before September 30, 2025, which is the transfer pricing documentation deadline and precedes the filing of HSI's US federal income tax return (Form 1120) for the taxable year ended December 31, 2024. The FY 2024 Local File was thus in existence at the time the return was filed, satisfying the contemporaneity requirement.

The FY 2023 and FY 2022 US Local Files for HSI were prepared in connection with and to support the bilateral Advance Pricing Agreement ("APA") rollback request covering the period January 1, 2022 through December 31, 2024. The documentation for these prior years was completed contemporaneously with the APA application process and prior to the filing of any amended returns or claim for refund for those years, as applicable. The FY 2023 and FY 2022 Local Files were completed prior to the filing of HSI's original US federal income tax returns for those years and thus satisfy the contemporaneity requirement.

The Master File for the Halcyon Semiconductor AG group was prepared under the OECD BEPS Action 13 framework and the German domestic transfer pricing documentation requirements (Gewinnabgrenzungsaufzeichnungsverordnung, "GAufzV"). The Master File was completed prior to the filing of HSAG's Körperschaftsteuererklärung (corporate income tax return) for FY 2024 in Germany and prior to the filing of HSI's US federal income tax return for FY 2024, and thus also satisfies the contemporaneity requirement in both jurisdictions.

V.B. Description of Principal Documents Maintained

HSI's contemporaneous transfer pricing documentation includes all eight categories of principal documents required under Treasury Regulation Section 1.6662-6(d)(2)(iii)(B):

1. Overview of the Taxpayer's Business. The US Local File for each Covered Tax Year contains a comprehensive overview of HSI's business, including a description of HSI's role within the Halcyon group as the exclusive US distribution, marketing, and design-support entity for the North American market. The overview describes HSI's principal activities, the products and services it provides, the end markets it serves (automotive, industrial IoT, and data center), the competitive environment in which it operates, and the economic and legal factors that affect the pricing of its intercompany transactions. The overview also addresses material changes in HSI's business during the Covered Tax Years, including the expansion of the design center in Santa Clara, the addition of new hyperscale data-center customers, and the impact of global semiconductor supply chain disruptions in 2022–2023.

2. Description of Organizational Structure. The Local File includes a detailed description of the organizational structure of the Halcyon Semiconductor group, including organization charts depicting the ownership relationships among the principal entities: HSAG (Germany, ultimate parent), HSI (United States), Halcyon Semiconductor Japan K.K. ("HSJ") (Japan), and Halcyon Semiconductor (Shanghai) Co., Ltd. ("HSC") (China). The description identifies all related parties that engage in transactions relevant to Section 482, including the nature and purpose of each entity within the group.

3. Documentation of Method Selection (Best Method Analysis). For each controlled transaction, the Local File contains a complete description of the transfer pricing method selected, including a detailed analysis of why that method was selected as the best method. The best method analysis, as summarized in Section IV of this Statement, describes the method, the economic rationale for its selection, and the specific factors that support its reliability relative to alternative methods.

4. Description of Alternative Methods Considered and Reasons for Rejection. The Local File includes a description of each alternative transfer pricing method that was considered for each controlled transaction, together with a detailed explanation of why each alternative was rejected. For the tangible goods transaction, the CUP, RPM, Cost Plus, and Profit Split methods are described, and the reasons for their rejection are documented. For the royalty transaction, the CPM/TNMM and Profit Split methods are described and the basis for their rejection as primary methods is explained. For the CSA, the income method is mandated by the applicable regulations, and the documentation describes the regulatory basis for this determination.

5. Description of Controlled Transactions. The Local File contains a detailed description of each controlled transaction, including identification of all parties, the terms of sale or license, the pricing mechanism, the payment terms, the volume of transactions, the currencies in which transactions are denominated, and the exchange rates used. The description covers the tangible goods transaction (including the Supply Agreement terms), the royalty transaction (including the IP License Agreement terms), and the cost-sharing contributions (including the CSA terms and the PCT buy-in).

6. Comparability Analysis. The Local File includes comprehensive comparability analyses for each controlled transaction. For the tangible goods transaction, the comparability analysis incorporates functional analysis memoranda for both HSI and HSAG, identifying the functions performed, risks assumed, and assets employed by each entity. The analysis identifies the 17 comparable semiconductor distributors used in the CPM/TNMM benchmarking study, describes the comparability factors considered (including functions, risks, contractual terms, economic conditions, and property characteristics), and documents the comparability adjustments made (if any). For the royalty transaction, the comparability analysis identifies the eight comparable uncontrolled license agreements and describes the comparability factors evaluated for each.

7. Economic Analysis and Benchmarking. The Local File incorporates the benchmarking studies prepared by Meridian Economics GmbH, including the CPM/TNMM benchmarking study (17 comparable companies, interquartile range of operating margins from 2.8% to 6.1%, median of 4.4%) and the CUT benchmarking study (8 comparable license agreements, interquartile range of royalty rates from 3.5% to 8.2%, median of 5.6%). The economic analyses include the computation of interquartile ranges and medians, the financial data of comparable companies (on a five-year weighted-average basis for the CPM/TNMM analysis), and the economic models and assumptions underlying the analyses.

8. General Index of Principal and Background Documents. The Local File includes a general index of all principal and background documents comprising the contemporaneous transfer pricing documentation set. This index is reproduced as Exhibit A to this Statement.

V.C. Description of Background Documents Maintained

In addition to the principal documents described above, HSI maintains the following background documents that support the transfer pricing analyses and provide the factual foundation for the contemporaneous documentation:

(a) Audited Financial Statements. Audited financial statements of HSI (standalone) and the HSAG consolidated group for fiscal years 2020 through 2024. The audit was performed by Gresham Whitfield LLP, an international accounting firm. The Group Audit Partner is Simon Cardwell (London office), and the US Engagement Audit Partner is Janet Okonkwo (Houston office). The audited financial statements were prepared in accordance with International Financial Reporting Standards ("IFRS") for the HSAG consolidated group and US Generally Accepted Accounting Principles ("US GAAP") for HSI's standalone financial statements.

(b) Segmented Financial Data. Segmented financial data for HSI and HSAG for fiscal years 2020 through 2024, prepared on a consistent basis for purposes of the transfer pricing analysis. The segmented data isolates the financial results attributable to the controlled transactions and enables the computation of the PLIs used in the benchmarking analyses.

(c) Intercompany Transaction Schedules. Detailed intercompany transaction schedules for tangible goods, royalties, and cost-sharing contributions for each Covered Tax Year, showing transaction volumes, unit prices, total amounts in EUR and USD, and exchange rates used (including the average 2024 EUR/USD rate of 1.0896 and the weighted average payment-date EUR/USD rate of 1.0307 for royalty payments).

(d) Intercompany Agreements. Copies of all intercompany agreements governing the controlled transactions, including: the Master Intercompany Supply Agreement (effective January 1, 2019; amended July 1, 2022); the IP License Agreement (effective January 1, 2019); and the Cost Sharing Arrangement (effective July 15, 2018), together with all amendments, addenda, and supplements thereto.

(e) Benchmarking Study Work Papers. Detailed work papers supporting the benchmarking analyses, including comparable company search strategies, screening criteria, acceptance and rejection logs, financial data of comparable companies, computation schedules, and sensitivity analyses.

(f) Royalty Database

PRIVILEGED AND CONFIDENTIAL ATTORNEY WORK PRODUCT ATTORNEY-CLIENT COMMUNICATION PREPARED IN ANTICIPATION OF LITIGATION AND FOR THE PURPOSE OF RENDERING LEGAL ADVICE
PENALTY PROTECTION STATEMENT
UNDER IRC §§ 6662(e) AND 6662(h)
HALCYON SEMICONDUCTOR INC.
Fiscal Years Ended December 31, 2022, December 31, 2023, and December 31, 2024
Matter Number: 1032-00006 Billing Code: HSAG-TP-2025
Prepared by:
Calderwood & Harkness LLP 599 Lexington Avenue, 38th Floor New York, NY 10022
Prepared for:
Halcyon Semiconductor Inc. 8700 Parmer Lane, Building 4 Austin, TX 78729 EIN: 84-2917630
Tax Years Covered: Fiscal years ended December 31, 2022, December 31, 2023, and December 31, 2024
Date of Preparation: September 30, 2025 (contemporaneous documentation deadline for FY 2024)
Attorney Contacts:
This Statement is to be attached as an exhibit to the US Local Files for Halcyon Semiconductor Inc. for FY 2022, FY 2023, and FY 2024.
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I. PURPOSE AND SCOPE OF THIS STATEMENT
This Penalty Protection Statement (the "Statement") is prepared by Calderwood & Harkness LLP ("Calderwood & Harkness" or "Counsel") on behalf of Halcyon Semiconductor Inc. ("HSI"), a Delaware corporation and wholly owned subsidiary of Halcyon Semiconductor AG ("HSAG"), a German Aktiengesellschaft organized under the laws of the Federal Republic of Germany with its registered office at Halcyon-Allee 12, 01099 Dresden, Saxony, Germany. HSI is the exclusive US distribution, marketing, and design-support entity for the Halcyon semiconductor product portfolio in the North American market. This Statement has been prepared for the purpose of establishing that HSI has satisfied the requirements for reasonable cause and good faith under Section 6662(e) of the Internal Revenue Code of 1986, as amended (the "Code" or "IRC"), regarding substantial valuation misstatements, and Section 6662(h) of the Code, regarding gross valuation misstatements, with respect to the determination of prices charged or paid in controlled transactions between HSI and HSAG and related controlled entities for the fiscal years ended December 31, 2022, December 31, 2023, and December 31, 2024 (collectively, the "Covered Tax Years").
The purpose of this Statement is threefold. First, it asserts that HSI has reasonably concluded that the transfer pricing methods applied to its intercompany transactions with HSAG represent the "best method" within the meaning of Treasury Regulation Section 1.482-1(c) for each category of controlled transaction. Second, it documents that contemporaneous transfer pricing documentation was prepared and maintained by HSI in accordance with the requirements of Treasury Regulation Section 1.6662-6(d), including all required principal documents and background documents. Third, it sets forth the factual and legal basis for the position that, in the event the Internal Revenue Service (the "IRS" or the "Service") were to propose a transfer pricing adjustment under Section 482 of the Code with respect to any of the Covered Tax Years, the penalties imposed under Sections 6662(e) and 6662(h) should not apply.
This Statement covers all three categories of controlled transactions in which HSI participates:
(1) Tangible Goods — Semiconductor wafer and die sales from HSAG to HSI under the Master Intercompany Supply Agreement;
(2) Royalties — Intellectual property license payments from HSI to HSAG under the IP License Agreement; and
(3) Cost-Sharing Contributions — Payments from HSI to HSAG under the parties' Qualified Cost Sharing Arrangement for next-generation research and development.
The aggregate annual intercompany flows between HSI and HSAG for FY 2024 totaled approximately €1,280,600,000 (approximately €1.28 billion), comprising €987,600,000 in tangible goods transfers, €68,400,000 in royalty payments, and €224,600,000 in cost-sharing contributions. The volume and complexity of these intercompany transactions underscore the importance of rigorous transfer pricing analysis and comprehensive contemporaneous documentation, both of which HSI has undertaken in good faith.
This Statement is intended to accompany and be read in conjunction with the US Local Files for HSI for FY 2022, FY 2023, and FY 2024, the Master File prepared for the Halcyon Semiconductor AG group under the OECD BEPS Action 13 framework, and the supporting documentation listed on Exhibit A hereto. Together, these materials constitute a complete and integrated body of contemporaneous transfer pricing documentation for the Covered Tax Years.
II. LEGAL FRAMEWORK
II.A. IRC § 6662(e) — Substantial Valuation Misstatement
Section 6662(a) of the Code imposes an accuracy-related penalty equal to twenty percent (20%) of the portion of an underpayment of tax attributable to, among other things, a "substantial valuation misstatement" as defined in Section 6662(e). In the context of transfer pricing, Section 6662(e)(1)(B) provides that a substantial valuation misstatement exists with respect to any transaction between persons described in Section 482 if the price for any property or services (or for the use of property) claimed on any return is 200% or more (or 50% or less) of the amount determined under Section 482 to be the correct price or amount.
In addition, Section 6662(e)(1)(B)(ii) provides an alternative threshold based on the aggregate magnitude of the transfer pricing adjustment. Specifically, a substantial valuation misstatement exists if the net Section 482 transfer price adjustment for the taxable year exceeds the lesser of $5,000,000 or 10% of the taxpayer's gross receipts. Given HSI's FY 2024 net revenues of approximately $4.12 billion, the 10% threshold would equal approximately $412 million, making the $5 million threshold the operative test. Where the underpayment is attributable to a substantial valuation misstatement, the 20% penalty applies to the entire underpayment resulting from such misstatement.
The substantial valuation misstatement provisions of Section 6662(e) are directly applicable to the intercompany transactions between HSI and HSAG because HSI and HSAG are controlled taxpayers within the meaning of Section 482 — HSAG owns 100% of the outstanding shares of HSI, and the two entities engage in intercompany transactions involving the sale of tangible property, the licensing of intangible property, and cost-sharing contributions.
II.B. IRC § 6662(h) — Gross Valuation Misstatement
Section 6662(h) of the Code imposes a heightened penalty of forty percent (40%) of the portion of an underpayment of tax attributable to a "gross valuation misstatement." In the transfer pricing context, a gross valuation misstatement exists if the price for any property or services (or for the use of property) claimed on any return is 400% or more (or 25% or less) of the amount determined under Section 482 to be the correct price or amount. Alternatively, a gross valuation misstatement exists if the net Section 482 transfer price adjustment for the taxable year exceeds $20,000,000.
The gross valuation misstatement penalty represents a more severe sanction than the substantial valuation misstatement penalty and is intended to deter extreme mispricing of intercompany transactions. Both the 40% penalty under Section 6662(h) and the 20% penalty under Section 6662(e) are subject to the reasonable cause and good faith defense described in Section II.C below, and it is the specific purpose of this Statement to establish HSI's entitlement to that defense.
II.C. Reasonable Cause Exception — Treas. Reg. § 1.6662-6
Section 6664(c)(1) of the Code provides that no penalty shall be imposed under Section 6662 with respect to any portion of an underpayment if it is shown that there was "reasonable cause" for such portion and that the taxpayer acted in "good faith" with respect to such portion. In the specific context of transfer pricing penalties under Sections 6662(e) and 6662(h), the reasonable cause and good faith defense is further elaborated in Treasury Regulation Section 1.6662-6(d).
Treasury Regulation Section 1.6662-6(d) sets forth a two-pronged test for the reasonable cause and good faith defense:
Prong 1 — Reasonable Conclusion as to Best Method. The taxpayer must have reasonably concluded that its method of pricing (the "specified method") provided the most reliable measure of an arm's-length result under the principles of the best method rule set forth in Treasury Regulation Section 1.482-1(c). This requires that the taxpayer considered alternative methods and made a reasonable determination that the method selected was superior to the alternatives in terms of the reliability of the arm's-length result.
Prong 2 — Contemporaneous Documentation. The taxpayer must have maintained contemporaneous documentation as described in Treasury Regulation Section 1.6662-6(d)(2)(iii) that documents the taxpayer's reasonable conclusion as to best method and the application of that method to the controlled transactions. The documentation must be in existence when the return is filed for the relevant taxable year; post-filing documentation is insufficient to satisfy this requirement.
The term "contemporaneous" is defined with reference to the filing deadline for the taxpayer's return. Under Treasury Regulation Section 1.6662-6(d)(2)(iii)(A), documentation is "contemporaneous" if it is in existence by the date the return is filed. For HSI, which files its federal income tax return on Form 1120 for each of the Covered Tax Years, the relevant filing dates are the dates (including extensions) on which the returns for FY 2022, FY 2023, and FY 2024 are filed with the IRS.
Treasury Regulation Section 1.6662-6(d)(2)(iii)(B) enumerates the specific documentation requirements, organized into "principal documents" and "background documents." The eight categories of principal documents required are:
(1) An overview of the taxpayer's business, including an analysis of the economic and legal factors that affect the pricing of its property or services;
(2) A description of the taxpayer's organizational structure (including an organization chart) covering all related parties engaged in transactions potentially relevant under Section 482, including foreign affiliates whose transactions with the taxpayer may be relevant;
(3) Documentation explicitly required by the Treasury Regulations with respect to the method selected, including a complete description of the method, the reasons why that method was selected as the best method, and the economic analysis that supports the method;
(4) A description of the alternative methods that were considered and an explanation of why each was not selected;
(5) A description of the controlled transactions, including the terms of sale, and the internal data used to analyze those transactions;
(6) A description of the comparables that were used, how comparability was evaluated, and what (if any) adjustments were made;
(7) An explanation of the economic analysis and projections relied upon in developing the method, including a description of the comparable selection methodology and the economic models used; and
(8) A general index of the principal and background documents and a description of the recordkeeping system used to catalog those documents.
In addition to the principal documents, the taxpayer must maintain background documents that support the principal documents. Background documents include financial data and schedules, agreements and contracts governing intercompany transactions, working papers, and other source materials that provide the factual foundation for the transfer pricing analysis.
HSI's contemporaneous documentation satisfies both prongs of the reasonable cause and good faith defense, as set forth in detail in Sections IV and V of this Statement.
II.D. Interaction with OECD Transfer Pricing Guidelines
The transfer pricing documentation and analysis prepared by HSI and its advisors are also consistent with the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (2022 edition) (the "OECD Guidelines"). While the OECD Guidelines do not have the force of law in the United States, they are widely recognized as an authoritative interpretive aid in the transfer pricing context and are referenced by the IRS in various forms of guidance.
HSI's documentation framework is further aligned with the three-tier documentation structure established under the OECD's Base Erosion and Profit Shifting ("BEPS") Action 13, which recommends the preparation of a Master File, Local Files, and Country-by-Country Reports. HSAG has prepared a Master File at the group level, and Local Files have been prepared for each material jurisdiction, including the United States. Country-by-Country Reports have been filed by HSAG in Germany, as the ultimate parent entity of the Halcyon group.
The consistency of HSI's documentation approach with the OECD framework is relevant for several reasons. First, the OECD Guidelines inform the interpretation of Article 9 (Associated Enterprises) of the Convention between the United States of America and the Federal Republic of Germany for the Avoidance of Double Taxation (signed June 29, 2006) (the "US-Germany Income Tax Treaty" or the "Treaty"), pursuant to which HSAG and HSI may seek mutual agreement in the event of a transfer pricing dispute. Second, the alignment with OECD BEPS Action 13 documentation standards demonstrates HSI's commitment to transparency and compliance with international norms. Third, the simultaneous preparation of documentation that satisfies both the US regulatory requirements (Treas. Reg. § 1.6662-6(d)) and the OECD Action 13 framework reduces the risk of inconsistent positions between jurisdictions and further evidences good faith.
III. DESCRIPTION OF THE TAXPAYER AND CONTROLLED TRANSACTIONS
III.A. Overview of HSI
Halcyon Semiconductor Inc. is a Delaware C-corporation (Delaware Secretary of State File Number 7341825) with EIN 84-2917630. HSI was incorporated in the State of Delaware on March 14, 2016, and commenced operations on July 1, 2016. HSI is a wholly owned subsidiary of HSAG. Throughout the Covered Tax Years, 100% of HSI's outstanding common stock was held by HSAG, and there were no minority equity interests, convertible instruments, or other dilutive securities outstanding.
HSI serves as the exclusive US distribution, marketing, and design-support entity for the Halcyon semiconductor product portfolio in the North American market. HSI's functional profile is that of a limited-risk distributor with additional marketing and design-support capabilities. HSI does not own or operate any semiconductor fabrication facilities, nor does it engage in foundational semiconductor process research and development. HSI's activities are focused on (i) purchasing finished and semi-finished semiconductor products (including wafers, singulated die, and packaged components) from HSAG; (ii) marketing and selling those products to unrelated US customers, including original equipment manufacturers ("OEMs"), electronic component distributors, and hyperscale data-center operators; (iii) providing pre-sale and post-sale design-support services and application engineering to US customers to facilitate the integration of Halcyon products into customer designs; and (iv) conducting incremental development activities under the Qualified Cost Sharing Arrangement with HSAG.
HSI's principal business locations are as follows:
Principal Office: 8700 Parmer Lane, Building 4, Austin, TX 78729
Design Center: 2455 Augustine Drive, Suite 300, Santa Clara, CA 95054
Regional Sales Offices:
• 1100 Town Center Drive, Suite 420, Southfield, MI 48075 (Detroit Metro / Automotive OEM Sales)
• 9600 SW Nimbus Avenue, Suite 210, Beaverton, OR 97008 (Portland / Pacific Northwest / Data Center Sales)
As of December 31, 2024, HSI employed approximately 2,850 full-time employees across its four locations. The Austin principal office houses HSI's executive leadership, finance, legal, human resources, supply chain operations, and corporate development functions. The Santa Clara design center employs approximately 640 engineers engaged in application engineering, design enablement, and customer-specific adaptation work. The regional sales offices in Southfield and Beaverton provide dedicated support to key customer segments.
HSI's management team is led by Victor Almeida, President and General Manager, who reports directly to the HSAG Management Board (Vorstand). Priya Raghavan, Vice President of Tax, oversees HSI's US tax matters, including transfer pricing compliance, and serves as the primary HSI contact for the preparation of this Statement and the associated contemporaneous transfer pricing documentation.
HSI's financial summary for FY 2024 is as follows:
HSI's fiscal year ends on December 31 of each calendar year, consistent with the fiscal year of HSAG and the Halcyon consolidated group.
III.B. Overview of HSAG
Halcyon Semiconductor AG is a German Aktiengesellschaft publicly listed on the Frankfurt Stock Exchange (XETRA) under the ticker symbol "HAL" (ISIN: DE000HSA0017). HSAG's Steuernummer (German tax identification number) is 203/118/04527. HSAG's registered office is located at Halcyon-Allee 12, 01099 Dresden, Saxony, Germany.
HSAG is the ultimate parent entity of the Halcyon Semiconductor group, which is a globally integrated designer and manufacturer of advanced-node semiconductor products. HSAG's core competence lies in the design and fabrication of leading-edge semiconductor wafers employing advanced process nodes, including 7-nanometer ("7nm"), 5-nanometer ("5nm"), and 3-nanometer ("3nm") lithographic process technologies. HSAG's products serve three primary end markets: (i) automotive electronics (including advanced driver-assistance systems, autonomous driving platforms, and electric vehicle power management); (ii) industrial Internet of Things ("IoT") applications (including industrial automation, smart grid, and sensor networks); and (iii) data-center infrastructure (including high-performance computing accelerators, network interface controllers, and storage controllers).
HSAG operates three semiconductor fabrication facilities:
Fab 1 & Fab 2: Located at Industriepark Klotzsche, Zur Wetterwarte 50, 01109 Dresden, Germany. These two adjacent fabrication facilities produce advanced-node wafers on 300mm silicon substrates. Fab 1 serves as the primary production facility for 7nm and 5nm process technologies. Fab 2, which commenced volume production in Q3 2023, is dedicated to 3nm process technology.
Fab 3: Located at Technologiepark Chemnitz, Annaberger Straße 240, 09125 Chemnitz, Germany. Fab 3 is a mature-node facility producing wafers on 200mm substrates for legacy automotive and industrial product lines. Fab 3 also serves as a development and prototyping facility for certain next-generation process technologies prior to their transfer to the Dresden fabs for volume production.
As of December 31, 2024, HSAG employed approximately 22,400 employees globally, of whom approximately 14,600 were based in Germany. HSAG's global workforce includes research scientists, process engineers, design engineers, manufacturing technicians, and corporate and administrative staff.
HSAG's executive leadership team includes:
• Dr. Klaus-Dieter Wehrheim, Chief Executive Officer (Vorstandsvorsitzender)
• Margarethe Stein, Chief Financial Officer (Finanzvorstand)
• Dr. Hendrik Möller, Chief Technology Officer (Technologievorstand)
• Dr. Erwin Fassbinder, Senior Vice President, Group Tax
HSAG's consolidated financial highlights for FY 2024 are as follows:
HSAG is the owner of substantially all of the valuable intangible property within the Halcyon group, including proprietary semiconductor process technology, design libraries, and other trade intangibles. HSAG's R&D expenditure of €1.42 billion in FY 2024 represents approximately 16.2% of consolidated revenue and reflects the group's significant investment in next-generation process development.
III.C. Covered Controlled Transactions
The controlled transactions between HSI and HSAG that are the subject of this Statement fall into three categories, as described below. Each category of controlled transaction is governed by a written intercompany agreement that sets forth the terms and conditions of the transaction, including pricing mechanisms, payment terms, and other commercial terms.
III.C.1. Tangible Goods — Semiconductor Wafer and Die Sales (HSAG to HSI). HSAG manufactures semiconductor wafers and singulated die at its Dresden and Chemnitz fabrication facilities and sells them to HSI under the Master Intercompany Supply Agreement, which became effective on January 1, 2019, and was amended on July 1, 2022 (the "Supply Agreement"). Pursuant to the Supply Agreement, HSAG ships finished wafers and singulated die to HSI on an FOB shipping point basis (with risk of loss transferring to HSI upon delivery to the designated carrier at the HSAG facility). HSI takes title to the goods upon shipment and bears the costs of international freight, customs duties, and insurance from that point forward.
HSI resells the finished and packaged semiconductor products to unrelated US customers, including OEMs operating in the automotive, industrial, and data-center sectors; electronic component distributors; and hyperscale data-center operators. HSI does not perform any manufacturing or fabrication activities; its value-added activities with respect to tangible goods are limited to warehousing, logistics management, order fulfillment, quality assurance inspection upon receipt, and customer-facing technical support.
For FY 2024, the total value of intercompany tangible goods transferred from HSAG to HSI was €987,600,000, which translates to approximately $1,076,000,000 at the average 2024 EUR/USD exchange rate of 1.0896 (based on the European Central Bank reference rate, calculated as the arithmetic mean of daily rates for the period January 1, 2024 through December 31, 2024).
The transfer prices for tangible goods are established on a quarterly basis using a cost-plus methodology at the intercompany invoice level, which is then tested at the entity level using the CPM/TNMM to confirm that HSI's overall profitability falls within the arm's-length range. This approach is consistent with the best method analysis discussed in Section IV.B below.
III.C.2. Royalties — IP License Payments (HSI to HSAG). HSI pays HSAG a royalty under an intellectual Property License Agreement that became effective on January 1, 2019 (the "IP License Agreement"). Pursuant to the IP License Agreement, HSAG grants HSI a non-exclusive, non-transferable license to use HSAG's proprietary semiconductor process technology, design libraries, electronic design automation ("EDA") tools and methodologies, test protocols, and related trade intangibles (collectively, the "Licensed IP") in connection with HSI's marketing, sale, and design-support activities in North America. The Licensed IP does not include HSAG's patents per se (which are licensed separately through the Supply Agreement as embedded in the tangible goods), but rather encompasses the proprietary know-how, trade secrets, customer-facing technical documentation, and design enablement tools that HSI employs in its customer-facing technical support and application engineering activities.
The royalty rate is set at 6.0% of HSI's net US revenues attributable to Licensed IP. For FY 2024, HSI's royalty payments to HSAG totaled €68,400,000, which translates to approximately $70,500,000 at the weighted average payment-date EUR/USD exchange rate of 1.0307. The weighted average payment-date rate differs from the annual average rate because royalty payments are made quarterly within 30 days of the end of each fiscal quarter, and the EUR/USD exchange rate fluctuated during the year.
The 6.0% royalty rate was established at the inception of the IP License Agreement in 2019 based on a benchmarking analysis of comparable uncontrolled license agreements for semiconductor-related intellectual property. The royalty rate has not been adjusted since inception, and the contemporaneous documentation for the Covered Tax Years includes an updated benchmarking analysis confirming that the 6.0% rate continues to fall within the arm's-length range.
III.C.3. Cost-Sharing Contributions — R&D CSA (HSI to HSAG). HSAG and HSI are parties to a Qualified Cost Sharing Arrangement (the "CSA") that became effective on July 15, 2018. The CSA governs the sharing of costs and risks associated with the development of next-generation 2-nanometer ("2nm") and sub-2nm semiconductor process technologies (the "CSA Activity"). The CSA was structured to comply with the requirements of Treasury Regulation Section 1.482-7 and was designed to allocate costs between HSAG and HSI in proportion to each party's reasonably anticipated benefits from the exploitation of the intangible property developed under the CSA Activity.
HSI's cost-sharing percentage under the CSA is 22.5%, reflecting HSI's anticipated benefit share from the exploitation rights for the North American market. This anticipated benefit share was determined using the income method prescribed by Treasury Regulation Section 1.482-7(g)(4), based on a detailed financial model projecting the expected revenue and operating profit attributable to the exploitation of CSA-developed intangible property in each participant's assigned territory. The financial model incorporated assumptions regarding market size, market share, product pricing, product life cycles, and cost structures, all of which were documented at the time of CSA inception and have been reviewed and updated annually.
At the inception of the CSA on July 15, 2018, HSI made a platform contribution transaction ("PCT") buy-in payment of $312,500,000 to HSAG. The PCT payment compensated HSAG for the value of the pre-existing intangible property that HSAG contributed to the CSA Activity as a platform for further research and development. The PCT buy-in payment was valued by Stonebridge Valuation Partners LLC ("Stonebridge"), an independent valuation firm. The valuation was performed by Marcus Reinhardt, Managing Director, at Stonebridge's offices at 200 Park Avenue, Suite 1510, New York, NY 10166. Stonebridge applied the income method with a discount rate of 11.8% (reflecting the weighted average cost of capital for the CSA Activity, adjusted for the risk profile of the pre-existing intangibles) and a 15-year projection period. The Stonebridge PCT Valuation Report is included in the background documents and listed as Item 14 on the Index of Principal and Background Documents attached hereto as Exhibit A.
For FY 2024, the total qualified R&D costs incurred under the CSA Activity were €998,200,000. HSI's share of these costs, at its 22.5% anticipated benefit share, was €224,600,000 (calculated as €998,200,000 × 22.5%). Qualified R&D costs include direct research personnel costs, materials and supplies, equipment depreciation, facility costs allocable to the CSA Activity, and third-party contracted research costs, all as defined in the CSA and consistent with the cost pool requirements of Treasury Regulation Section 1.482-7(d).
The CSA documentation addendum prepared for the Covered Tax Years evaluates whether changes in circumstances since the CSA inception warrant periodic adjustments under Treasury Regulation Section 1.482-7(i)(6). This evaluation considered changes in market conditions, technology development trajectories, and actual versus projected financial results. The analysis concluded that no periodic adjustment is currently required, as the actual and projected results remain within the range of reasonably anticipated benefits that supported the original 22.5% allocation.
III.C.4. Aggregate Intercompany Flows. The total aggregate intercompany flows between HSI and HSAG for FY 2024 are summarized in the following table:
The magnitude of these intercompany flows — approximately €1.28 billion in FY 2024 — underscores the materiality of the transfer pricing positions at issue and the importance of the contemporaneous documentation and best method analyses that form the basis of this Penalty Protection Statement.
IV. SATISFACTION OF THE FIRST PRONG: REASONABLE CONCLUSION AS TO BEST METHOD
IV.A. Best Method Rule — General Principles
Treasury Regulation Section 1.482-1(c) sets forth the "best method rule," which provides that the arm's-length result of a controlled transaction must be determined under the method that, given the facts and circumstances, provides the most reliable measure of an arm's-length result. The best method rule does not prescribe a hierarchy of methods; rather, it requires an evaluation of the relative reliability of each potentially applicable method based on two primary factors:
(i) Comparability: The degree of comparability between the controlled transaction (and the tested party, where applicable) and any comparable uncontrolled transactions (or comparable uncontrolled parties), taking into account the comparability factors set forth in Treasury Regulation Section 1.482-1(d), including functions performed, risks assumed, contractual terms, economic conditions, and property or services transferred; and
(ii) Quality of Data and Assumptions: The completeness and accuracy of the data and assumptions used in the analysis, including the reliability of any adjustments made to account for differences between the controlled and uncontrolled transactions.
The best method analysis is a facts-and-circumstances inquiry that must be conducted for each category of controlled transaction. The selection of a method is "reasonable" for purposes of the penalty protection analysis if the taxpayer, having considered the available methods and their relative reliability in light of the specific facts and circumstances, concluded that the selected method provides the most reliable measure of an arm's-length result.
HSI, with the assistance of its advisors — Calderwood & Harkness LLP (US tax counsel), Meridian Economics GmbH (transfer pricing economists), and Kettner Pflüger Rechtsanwälte (German tax counsel) — performed a thorough best method analysis for each category of controlled transaction. The results of these analyses are summarized below.
IV.B. Tangible Goods Transactions — Transactional Net Margin Method / Comparable Profits Method
Method Selected. For the tangible goods transactions (semiconductor wafer and die sales from HSAG to HSI), the selected method is the Transactional Net Margin Method ("TNMM") under OECD terminology, which corresponds to the Comparable Profits Method ("CPM") under Treasury Regulation Section 1.482-5. The TNMM/CPM evaluates whether the tested party's net profit margin from the controlled transaction is consistent with the net profit margins earned by comparable uncontrolled companies performing similar functions, assuming similar risks, and employing similar assets.
Tested Party. HSI was selected as the tested party for the TNMM/CPM analysis. HSI is the less complex party to the tangible goods transaction, performing limited-risk distribution, marketing, and design-support functions with limited ownership of intangible property and limited exposure to market risk. HSAG, by contrast, is the more complex party, performing advanced semiconductor manufacturing, holding substantially all of the group's valuable intangible property (including process technology, design IP, and trade secrets), bearing significant capital investment risk, and assuming product liability and warranty obligations. Under the principles of the TNMM/CPM, the tested party should be the entity whose functions, risks, and assets can be most reliably benchmarked against comparable uncontrolled companies. HSI's limited-risk distribution profile makes it the appropriate tested party because comparable data for semiconductor distributors is more readily available and reliable than comparable data for vertically integrated semiconductor manufacturers with proprietary process technology.
Profit Level Indicator. The profit level indicator ("PLI") selected for the TNMM/CPM analysis is operating margin on net resales, defined as operating income divided by net revenue. Operating margin was selected as the PLI because it is widely used in benchmarking analyses for distribution entities, is less susceptible to differences in accounting classifications between cost of goods sold and operating expenses (which can vary across companies and jurisdictions), and is supported by reliable financial data for comparable companies. The selection of operating margin as the PLI is consistent with the guidance in Treasury Regulation Section 1.482-5(b)(4) and the OECD Guidelines (Chapter II, paragraphs 2.94–2.107).
Methods Considered and Rejected. In conducting the best method analysis, the following alternative methods were considered and rejected:
Comparable Uncontrolled Price (CUP) Method (Treas. Reg. § 1.482-3(b)). The CUP method was considered but rejected because sufficiently comparable uncontrolled transactions for advanced-node semiconductor wafers could not be identified. Advanced-node semiconductor products (particularly those employing 7nm, 5nm, and 3nm process technologies) are highly differentiated, with significant variation in product specifications, performance characteristics, yield rates, and customer-specific customization. The product specificity and process technology differentiation inherent in HSAG's semiconductor products preclude the identification of uncontrolled transactions that are sufficiently comparable to support reliable application of the CUP method. Moreover, the semiconductor industry is characterized by rapid technological change, and price comparisons across different product generations and process nodes are inherently unreliable.
Resale Price Method (Treas. Reg. § 1.482-3(c)). The Resale Price Method ("RPM") was considered because it is a traditional transaction method that tests the gross margin of a reseller in a controlled transaction against the gross margins of comparable uncontrolled resellers. However, the CPM/TNMM was deemed more reliable than the RPM for two principal reasons. First, the CPM/TNMM relies on net operating margins, which are less sensitive to differences in accounting classifications between cost of goods sold and operating expenses than the gross margins used in the RPM. Semiconductor distributors exhibit significant variation in the classification of costs (e.g., inbound freight, customs duties, warehousing costs, and quality assurance inspection costs may be classified as either COGS or operating expenses depending on the company's accounting policies), making gross margin comparisons less reliable. Second, the CPM/TNMM benefits from a broader set of comparable company data, as financial databases generally contain more complete and reliable data on operating margins than on gross margins at the transaction level.
Cost Plus Method (Treas. Reg. § 1.482-3(d)). The Cost Plus Method was not applicable to the tangible goods transaction because HSI is a reseller and distributor, not a manufacturer. The Cost Plus Method is typically applied to test the profitability of a manufacturer or a service provider by adding an appropriate markup to the costs incurred. Because HSI does not incur manufacturing costs with respect to the tangible goods it purchases from HSAG, the Cost Plus Method is not an appropriate method for evaluating the arm's-length character of the tangible goods transaction.
Profit Split Method (Treas. Reg. § 1.482-6). The Profit Split Method was considered but deemed less reliable than the CPM/TNMM for the tangible goods transaction. The Profit Split Method is most appropriate where both parties to the controlled transaction make unique and valuable contributions that cannot be reliably benchmarked on a one-sided basis. In the case of the tangible goods transaction, HSI performs routine distribution functions that are readily comparable to those performed by uncontrolled semiconductor distributors, while HSAG performs complex manufacturing and IP-intensive functions. The availability of reliable one-sided comparable data for HSI's distribution functions makes the CPM/TNMM more reliable than the Profit Split Method, which would require the complex and inherently less reliable exercise of measuring the relative contributions of distribution activities versus manufacturing and IP-development activities to combined profits.
Benchmarking Analysis. The benchmarking analysis for the tangible goods transaction was performed by Meridian Economics GmbH, under the supervision of Dr. Annika Breitner, Managing Director, and Maximilian Voss, Senior Analyst. Meridian Economics identified 17 comparable North American semiconductor distributors through a systematic search of publicly available financial databases (including the Fenmore Services Inc. database and SEC EDGAR filings). The comparable companies were selected based on a multi-step screening process that applied quantitative and qualitative criteria, including industry classification (SIC codes 5065 and 5045; NAICS codes 423690 and 423430), functional profile (resellers or distributors of semiconductor or electronic components without significant manufacturing or IP ownership), geographic focus (North American operations), financial data availability (at least three years of audited financial data), and independence (no controlled transactions representing more than 25% of revenue). The benchmarking analysis used financial data from fiscal years 2020 through 2024 (a five-year weighted average) to smooth out cyclical fluctuations in the semiconductor industry and to provide a more reliable indication of arm's-length profitability.
The interquartile range ("IQR") of operating margins for the 17 comparable companies was determined as follows:
HSI's FY 2024 Result. HSI's operating margin for FY 2024 was 4.80%, which falls within the interquartile range of 2.8% to 6.1%. HSI's result is slightly above the median of 4.4%, reflecting HSI's somewhat superior market position and customer relationships compared to the median comparable company, but is well within the arm's-length range established by the benchmarking analysis.
Conclusion. The CPM/TNMM, applied to HSI as the tested party with operating margin as the PLI, provides the most reliable measure of an arm's-length result for the tangible goods transaction between HSAG and HSI. The method was selected after a thorough consideration of alternative methods and their relative reliability in light of the specific facts and circumstances. HSI's FY 2024 operating margin of 4.80% is within the arm's-length interquartile range, confirming that the intercompany pricing of tangible goods is consistent with the arm's-length standard.
IV.C. Royalty Transactions — Comparable Uncontrolled Transaction (CUT) Method
Method Selected. For the royalty transactions (IP license payments from HSI to HSAG), the selected method is the Comparable Uncontrolled Transaction ("CUT") method under Treasury Regulation Section 1.482-4(c). The CUT method evaluates the arm's-length character of a controlled royalty by reference to the royalty rates charged in comparable uncontrolled transactions involving similar intangible property under similar circumstances.
Corroboration. In addition to the CUT method as the primary method, a residual profit split analysis under Treasury Regulation Section 1.482-6 was performed as a secondary corroborative check. The residual profit split analysis confirmed that the allocation of residual profits between HSAG (as IP owner and manufacturer) and HSI (as distributor and licensee) is consistent with the relative value of each party's contributions, and that the 6.0% royalty rate, combined with the tangible goods transfer pricing, yields an overall allocation of profits that is consistent with the arm's-length standard.
Methods Considered and Rejected. In conducting the best method analysis for the royalty transaction, the following alternative methods were considered and rejected:
CPM/TNMM. The CPM/TNMM was not considered appropriate as a primary method for evaluating the royalty payment because the royalty is a separate and distinct intercompany transaction for which comparable company operating margins do not provide a direct measure of the arm's-length royalty rate. While the CPM/TNMM is used to evaluate HSI's overall profitability (including the effect of the royalty payment), it does not independently establish the arm's-length character of the royalty rate itself. The CUT method, which directly compares the controlled royalty rate to royalty rates in comparable uncontrolled license agreements, provides a more targeted and reliable measure of the arm's-length royalty rate.
Profit Split Method (as primary). The Profit Split Method was considered as a primary method for the royalty transaction but was deemed less reliable than the CUT method where sufficiently comparable uncontrolled license agreements could be identified. The identification of eight comparable uncontrolled license agreements for semiconductor IP (as described below) provides a sufficient basis for application of the CUT method with a reasonable degree of reliability, making it unnecessary to resort to the more complex and assumption-intensive Profit Split Method as the primary method.
Benchmarking Analysis. The benchmarking analysis for the royalty transaction was performed by Meridian Economics GmbH. Eight comparable uncontrolled license agreements for semiconductor intellectual property were identified through a systematic search of the Clearpoint Royalty Database (a proprietary database of license agreements maintained by Clearpoint Analytics Inc., to which Meridian Economics holds a subscription license) and publicly available SEC filings. The comparable license agreements were selected based on criteria including the nature of the licensed intangible property (semiconductor process technology, design libraries, or related IP), the scope of the license (non-exclusive, territory-limited licenses for distribution and marketing purposes), the identity of the licensor and licensee (unrelated parties), and the availability of sufficient detail regarding the royalty terms to permit meaningful comparison.
The comparable license agreements span a range of royalty rates, reflecting differences in the scope of licensed technology, the exclusivity of the license, the geographic territory covered, and other terms. The interquartile range of royalty rates for the eight comparable uncontrolled license agreements was determined as follows:
HSAG's Contractual Royalty Rate. The contractual royalty rate under the IP License Agreement between HSI and HSAG is 6.0% of HSI's net US revenues attributable to Licensed IP. This rate falls within the interquartile range of 3.5% to 8.2% and is above the median of 5.6%. The positioning of the 6.0% rate above the median is consistent with the high value and specificity of HSAG's proprietary semiconductor process technology and design libraries, which represent leading-edge intangible property that enables HSI to compete effectively in the advanced-node semiconductor market.
Conclusion. The CUT method provides the most reliable measure of the arm's-length royalty rate for the IP license transaction between HSI and HSAG. The 6.0% royalty rate is supported by the comparable uncontrolled license agreements and falls within the arm's-length interquartile range. The residual profit split analysis performed as a secondary corroborative check further supports the conclusion that the royalty rate is consistent with the arm's-length standard.
IV.D. Cost-Sharing Arrangement — Income Method under Treas. Reg. § 1.482-7
Method Selected. For the cost-sharing contributions under the CSA, the selected method for determining the anticipated benefit shares of each CSA participant is the income method prescribed by Treasury Regulation Section 1.482-7(g)(4). The income method determines each participant's anticipated benefit share based on the present value of the income each participant is projected to derive from the exploitation of the intangible property developed under the CSA Activity, relative to the aggregate present value of income projected for all participants.
HSI's Anticipated Benefit Share. HSI's anticipated benefit share under the CSA is 22.5%, reflecting the projected value of HSI's exploitation rights for the North American market as a proportion of the projected worldwide exploitation value. This percentage was determined at the inception of the CSA in 2018 based on a detailed financial model that projected revenue, operating profit, and net present value for each CSA participant's assigned exploitation territory over the useful life of the intangible property to be developed. The financial model incorporated assumptions regarding the North American semiconductor market (including total addressable market, projected market share, product pricing, and product life cycles), the European and rest-of-world markets (assigned to HSAG), the Japanese market (assigned to Halcyon Semiconductor Japan K.K., a non-participant in the CSA that licenses CSA-developed technology from HSAG), and the Chinese market (assigned to Halcyon Semiconductor (Shanghai) Co., Ltd., also a non-participant).
Platform Contribution Transaction (PCT). At the inception of the CSA on July 15, 2018, HSI made a PCT buy-in payment of $312,500,000 to HSAG. The PCT payment compensated HSAG for the value of pre-existing intangible property — specifically, HSAG's foundational semiconductor process technology, design methodologies, and accumulated know-how in advanced-node fabrication — that HSAG contributed to the CSA Activity as a platform for further research and development of 2nm and sub-2nm process technologies.
The PCT buy-in payment was valued by Stonebridge Valuation Partners LLC. The valuation was performed under the income method, consistent with the requirements of Treasury Regulation Section 1.482-7(g)(4) and the guidance in Treasury Regulation Section 1.482-7(g)(6). Stonebridge applied a discount rate of 11.8%, which was determined based on the weighted average cost of capital for the CSA Activity, adjusted for the specific risk profile of the pre-existing intangible property. The discount rate reflects the risk of the CSA Activity, including technology development risk, market adoption risk, and competitive dynamics risk. Stonebridge used a 15-year projection period, reflecting the estimated useful life of the pre-existing intangible property as a platform for next-generation process development. The PCT buy-in payment was amortized by HSI over the 15-year useful life for US federal income tax purposes.
Periodic Adjustment Evaluation. Treasury Regulation Section 1.482-7(i)(6) provides that a periodic adjustment to the terms of a CSA may be required if there has been a material change in circumstances that affects the reliability of the original cost-sharing allocations. The CSA documentation addendum prepared for the Covered Tax Years includes an analysis of whether such changes in circumstances have occurred. The analysis evaluated the following factors: (i) changes in actual versus projected revenue and operating profit for each CSA participant's exploitation territory; (ii) changes in the semiconductor market landscape, including competitive dynamics, customer demand, and pricing trends; (iii) changes in the technology development timeline and cost projections for the CSA Activity; and (iv) changes in the relative economic positions of the CSA participants. Based on this analysis, the conclusion was reached that no periodic adjustment is currently required, as the actual and projected results remain within the range of reasonably anticipated benefits that supported the original 22.5% allocation.
FY 2024 Qualified R&D Costs. For FY 2024, the total qualified R&D costs incurred under the CSA Activity were €998,200,000. HSI's share of these costs, at its 22.5% anticipated benefit share, was €224,600,000. The cost pool includes all costs that are directly related to or reasonably allocable to the CSA Activity, as defined in the CSA and consistent with the requirements of Treasury Regulation Section 1.482-7(d).
Conclusion. The income method, as applied to the determination of CSA benefit shares and the valuation of the PCT buy-in payment, provides the most reliable measure of arm's-length cost-sharing contributions for the CSA between HSI and HSAG. The method is mandated by the applicable regulations for determining anticipated benefit shares and is supported by a detailed financial model and an independent third-party valuation of the PCT payment.
IV.E. Summary of Best Method Determination
For each of the three categories of controlled transactions — tangible goods, royalties, and cost-sharing contributions — HSI and its advisors performed a thorough best method analysis. In each case, alternative methods were identified, considered, and their relative reliability was evaluated against the selected method in light of the specific facts and circumstances. The results of these analyses are summarized below:
The selected methods — CPM/TNMM for tangible goods, CUT for royalties, and the income method for CSA contributions — each provide the most reliable measure of an arm's-length result under the specific facts and circumstances of the relevant controlled transaction. The analyses were performed by qualified professionals with deep expertise in transfer pricing: Calderwood & Harkness LLP served as US tax counsel and coordinated the overall penalty protection analysis; Meridian Economics GmbH performed the economic analyses and benchmarking studies; Stonebridge Valuation Partners LLC performed the PCT valuation; and Kettner Pflüger Rechtsanwälte served as German tax counsel, ensuring consistency with German transfer pricing requirements.
Based on the foregoing, HSI reasonably concluded that the transfer pricing methods applied to each category of controlled transactions constitute the "best method" under Treasury Regulation Section 1.482-1(c). This conclusion satisfies the first prong of the reasonable cause and good faith defense under Treasury Regulation Section 1.6662-6(d).
V. SATISFACTION OF THE SECOND PRONG: CONTEMPORANEOUS DOCUMENTATION
V.A. Scope and Timing of Documentation
Contemporaneous transfer pricing documentation was prepared for each of the Covered Tax Years — FY 2024, FY 2023, and FY 2022 — in accordance with the requirements of Treasury Regulation Section 1.6662-6(d)(2)(iii).
The FY 2024 US Local File for HSI was completed on or before September 30, 2025, which is the transfer pricing documentation deadline and precedes the filing of HSI's US federal income tax return (Form 1120) for the taxable year ended December 31, 2024. The FY 2024 Local File was thus in existence at the time the return was filed, satisfying the contemporaneity requirement.
The FY 2023 and FY 2022 US Local Files for HSI were prepared in connection with and to support the bilateral Advance Pricing Agreement ("APA") rollback request covering the period January 1, 2022 through December 31, 2024. The documentation for these prior years was completed contemporaneously with the APA application process and prior to the filing of any amended returns or claim for refund for those years, as applicable. The FY 2023 and FY 2022 Local Files were completed prior to the filing of HSI's original US federal income tax returns for those years and thus satisfy the contemporaneity requirement.
The Master File for the Halcyon Semiconductor AG group was prepared under the OECD BEPS Action 13 framework and the German domestic transfer pricing documentation requirements (Gewinnabgrenzungsaufzeichnungsverordnung, "GAufzV"). The Master File was completed prior to the filing of HSAG's Körperschaftsteuererklärung (corporate income tax return) for FY 2024 in Germany and prior to the filing of HSI's US federal income tax return for FY 2024, and thus also satisfies the contemporaneity requirement in both jurisdictions.
V.B. Description of Principal Documents Maintained
HSI's contemporaneous transfer pricing documentation includes all eight categories of principal documents required under Treasury Regulation Section 1.6662-6(d)(2)(iii)(B):
1. Overview of the Taxpayer's Business. The US Local File for each Covered Tax Year contains a comprehensive overview of HSI's business, including a description of HSI's role within the Halcyon group as the exclusive US distribution, marketing, and design-support entity for the North American market. The overview describes HSI's principal activities, the products and services it provides, the end markets it serves (automotive, industrial IoT, and data center), the competitive environment in which it operates, and the economic and legal factors that affect the pricing of its intercompany transactions. The overview also addresses material changes in HSI's business during the Covered Tax Years, including the expansion of the design center in Santa Clara, the addition of new hyperscale data-center customers, and the impact of global semiconductor supply chain disruptions in 2022–2023.
2. Description of Organizational Structure. The Local File includes a detailed description of the organizational structure of the Halcyon Semiconductor group, including organization charts depicting the ownership relationships among the principal entities: HSAG (Germany, ultimate parent), HSI (United States), Halcyon Semiconductor Japan K.K. ("HSJ") (Japan), and Halcyon Semiconductor (Shanghai) Co., Ltd. ("HSC") (China). The description identifies all related parties that engage in transactions relevant to Section 482, including the nature and purpose of each entity within the group.
3. Documentation of Method Selection (Best Method Analysis). For each controlled transaction, the Local File contains a complete description of the transfer pricing method selected, including a detailed analysis of why that method was selected as the best method. The best method analysis, as summarized in Section IV of this Statement, describes the method, the economic rationale for its selection, and the specific factors that support its reliability relative to alternative methods.
4. Description of Alternative Methods Considered and Reasons for Rejection. The Local File includes a description of each alternative transfer pricing method that was considered for each controlled transaction, together with a detailed explanation of why each alternative was rejected. For the tangible goods transaction, the CUP, RPM, Cost Plus, and Profit Split methods are described, and the reasons for their rejection are documented. For the royalty transaction, the CPM/TNMM and Profit Split methods are described and the basis for their rejection as primary methods is explained. For the CSA, the income method is mandated by the applicable regulations, and the documentation describes the regulatory basis for this determination.
5. Description of Controlled Transactions. The Local File contains a detailed description of each controlled transaction, including identification of all parties, the terms of sale or license, the pricing mechanism, the payment terms, the volume of transactions, the currencies in which transactions are denominated, and the exchange rates used. The description covers the tangible goods transaction (including the Supply Agreement terms), the royalty transaction (including the IP License Agreement terms), and the cost-sharing contributions (including the CSA terms and the PCT buy-in).
6. Comparability Analysis. The Local File includes comprehensive comparability analyses for each controlled transaction. For the tangible goods transaction, the comparability analysis incorporates functional analysis memoranda for both HSI and HSAG, identifying the functions performed, risks assumed, and assets employed by each entity. The analysis identifies the 17 comparable semiconductor distributors used in the CPM/TNMM benchmarking study, describes the comparability factors considered (including functions, risks, contractual terms, economic conditions, and property characteristics), and documents the comparability adjustments made (if any). For the royalty transaction, the comparability analysis identifies the eight comparable uncontrolled license agreements and describes the comparability factors evaluated for each.
7. Economic Analysis and Benchmarking. The Local File incorporates the benchmarking studies prepared by Meridian Economics GmbH, including the CPM/TNMM benchmarking study (17 comparable companies, interquartile range of operating margins from 2.8% to 6.1%, median of 4.4%) and the CUT benchmarking study (8 comparable license agreements, interquartile range of royalty rates from 3.5% to 8.2%, median of 5.6%). The economic analyses include the computation of interquartile ranges and medians, the financial data of comparable companies (on a five-year weighted-average basis for the CPM/TNMM analysis), and the economic models and assumptions underlying the analyses.
8. General Index of Principal and Background Documents. The Local File includes a general index of all principal and background documents comprising the contemporaneous transfer pricing documentation set. This index is reproduced as Exhibit A to this Statement.
V.C. Description of Background Documents Maintained
In addition to the principal documents described above, HSI maintains the following background documents that support the transfer pricing analyses and provide the factual foundation for the contemporaneous documentation:
(a) Audited Financial Statements. Audited financial statements of HSI (standalone) and the HSAG consolidated group for fiscal years 2020 through 2024. The audit was performed by Gresham Whitfield LLP, an international accounting firm. The Group Audit Partner is Simon Cardwell (London office), and the US Engagement Audit Partner is Janet Okonkwo (Houston office). The audited financial statements were prepared in accordance with International Financial Reporting Standards ("IFRS") for the HSAG consolidated group and US Generally Accepted Accounting Principles ("US GAAP") for HSI's standalone financial statements.
(b) Segmented Financial Data. Segmented financial data for HSI and HSAG for fiscal years 2020 through 2024, prepared on a consistent basis for purposes of the transfer pricing analysis. The segmented data isolates the financial results attributable to the controlled transactions and enables the computation of the PLIs used in the benchmarking analyses.
(c) Intercompany Transaction Schedules. Detailed intercompany transaction schedules for tangible goods, royalties, and cost-sharing contributions for each Covered Tax Year, showing transaction volumes, unit prices, total amounts in EUR and USD, and exchange rates used (including the average 2024 EUR/USD rate of 1.0896 and the weighted average payment-date EUR/USD rate of 1.0307 for royalty payments).
(d) Intercompany Agreements. Copies of all intercompany agreements governing the controlled transactions, including: the Master Intercompany Supply Agreement (effective January 1, 2019; amended July 1, 2022); the IP License Agreement (effective January 1, 2019); and the Cost Sharing Arrangement (effective July 15, 2018), together with all amendments, addenda, and supplements thereto.
(e) Benchmarking Study Work Papers. Detailed work papers supporting the benchmarking analyses, including comparable company search strategies, screening criteria, acceptance and rejection logs, financial data of comparable companies, computation schedules, and sensitivity analyses.
(f) Royalty Database

PENALTY PROTECTION STATEMENT

HALCYON SEMICONDUCTOR INC.

I. PURPOSE AND SCOPE OF THIS STATEMENT

II. LEGAL FRAMEWORK

III. DESCRIPTION OF THE TAXPAYER AND CONTROLLED TRANSACTIONS

IV. SATISFACTION OF THE FIRST PRONG: REASONABLE CONCLUSION AS TO BEST METHOD

V. SATISFACTION OF THE SECOND PRONG: CONTEMPORANEOUS DOCUMENTATION

Record

Parties

Dates

Amounts