US LOCAL FILE
TRANSFER PRICING DOCUMENTATION
FOR
HALCYON SEMICONDUCTOR INC.
(Fiscal Year Ended December 31, 2023)
PRIVILEGED AND CONFIDENTIAL ATTORNEY WORK PRODUCT
This document constitutes contemporaneous transfer pricing documentation prepared pursuant to IRC §§ 6662(e) and 6662(h) and Treas. Reg. § 1.6662-6. This document was prepared at the direction of counsel and contains attorney work product and confidential attorney-client communications. This document is not to be disclosed, reproduced, or distributed to any person or entity without the prior written consent of Calderwood & Harkness LLP.
Prepared by:
Calderwood & Harkness LLP 599 Lexington Avenue, 38th Floor New York, NY 10022 Tel: +1 (212) 558-4000
Fax: +1 (212) 558-3588
Engagement Partner: Leonard Cross Billing Partner: Sylvia Hartwell Lead Associate: Leila Nazari Associate: Robert Jansen
With economic analysis by:
Meridian Economics GmbH Leopoldstraße 145 80804 Munich, Germany Tel: +49 (89) 2180-7200
Managing Director: Dr. Annika Breitner Senior Analyst: Maximilian Voss
Prepared for:
Halcyon Semiconductor Inc. EIN: 84-2917630 8700 Parmer Lane, Building 4 Austin, TX 78729
Date of Preparation: March 2025
C&H Matter Number: 1032-00006 Billing Code: HSAG-TP-2025
Note: This document constitutes contemporaneous transfer pricing documentation prepared to satisfy the requirements of IRC §§ 6662(e) and 6662(h) and Treas. Reg. § 1.6662-6, and to support the rollback request under the bilateral Advance Pricing Agreement application filed pursuant to Rev. Proc. 2015-41 covering tax years 2022–2024. This document forms part of a suite including the OECD BEPS Action 13 Master File for the Halcyon group and analogous Local Files for FY 2022 and FY 2024.
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1. Executive Summary
1.1 Purpose of This Document
This document constitutes entity-level contemporaneous transfer pricing documentation for Halcyon Semiconductor Inc. ("HSI") for the fiscal year ended December 31, 2023 (hereinafter, "FY 2023"). It has been prepared by Calderwood & Harkness LLP, with economic analysis performed by Meridian Economics GmbH, to establish that HSI's intercompany transactions with its parent, Halcyon Semiconductor AG ("HSAG"), satisfy the arm's-length standard under Section 482 of the Internal Revenue Code of 1986, as amended (the "Code" or "IRC"), and the Treasury Regulations promulgated thereunder.
This documentation serves a dual purpose. First, it is intended to establish that HSI has maintained contemporaneous transfer pricing documentation within the meaning of Treas. Reg. § 1.6662-6(d), thereby providing reasonable cause and good faith as a defense against the imposition of transfer pricing penalties under IRC §§ 6662(e) (relating to substantial valuation misstatements) and 6662(h) (relating to gross valuation misstatements). The preparation and maintenance of such documentation constitutes a principal means by which a taxpayer may demonstrate the existence of reasonable cause and good faith for purposes of the penalty safe harbor.
Second, this documentation supports the rollback request under a bilateral Advance Pricing Agreement ("APA") application filed by HSAG and HSI with the Internal Revenue Service's Advance Pricing and Mutual Agreement ("APMA") program and the German Bundeszentralamt für Steuern ("BZSt") in Bonn. The APA application was filed pursuant to Rev. Proc. 2015-41, 2015-35 I.R.B. 263, and invokes the Mutual Agreement Procedure set forth in Article 25 of the Convention between the United States of America and the Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital and to Certain Other Taxes, signed June 29, 2006 (the "US-Germany Treaty"). The proposed APA covers the prospective period of January 1, 2025 through December 31, 2029, with a rollback of the agreed transfer pricing methodology to tax years 2022 through 2024. This Local File for FY 2023 thus addresses the second year within the three-year rollback period.
This document forms part of a comprehensive documentation suite that includes: (a) the OECD BEPS Action 13 Master File for the Halcyon group (maintained by HSAG in Dresden and updated annually); (b) the analogous US Local File for FY 2022; and (c) the analogous US Local File for FY 2024 (to be finalized upon completion of FY 2024 audited financial statements). Together, these documents provide a complete, contemporaneous record of the Halcyon group's intercompany transactions and the methods employed to ensure arm's-length compliance across the covered period.
1.2 Summary of Controlled Transactions (FY 2023)
During FY 2023, HSI engaged in three categories of intercompany transactions with HSAG, each of which is analyzed in this documentation:
1. Tangible Goods (Wafer/Die Sales). HSAG manufactures and sells semiconductor wafers and singulated die to HSI under the Master Intercompany Supply Agreement, which became effective January 1, 2019 and was amended on July 1, 2022 (the "Supply Agreement"). HSI receives these wafers and die, arranges for packaging and testing by third-party subcontractors where required, and resells finished and packaged semiconductor products to unrelated US customers, including original equipment manufacturers ("OEMs"), authorized distributors, and hyperscale data-center operators. During FY 2023, HSI's intercompany purchases from HSAG under the Supply Agreement totaled approximately €906,400,000 (approximately $982,100,000 at the FY 2023 average EUR/USD exchange rate of 1.0835). These purchases constituted the single largest category of intercompany flows between HSAG and HSI.
2. Royalties (IP License). HSI pays HSAG a running royalty of 6.0% on IP-attributable revenues for the right to use HSAG's proprietary semiconductor process technology and design libraries under the IP License Agreement effective January 1, 2019 (the "License Agreement"). The royalty base is computed by applying the IP-attributable share (approximately 18.1% of HSI's net US revenues) to derive the IP-attributable revenue, upon which the 6.0% royalty rate is levied. During FY 2023, HSI's royalty payments to HSAG totaled approximately €62,800,000 (approximately $68,000,000 at the FY 2023 weighted average payment-date EUR/USD exchange rate of 1.0828).
3. Cost-Sharing Contributions (R&D CSA). HSI participates in a Qualified Cost Sharing Arrangement with HSAG (the "CSA"), effective July 15, 2018, pursuant to which the parties share qualified research and development costs for next-generation 2nm and sub-2nm semiconductor process technology development. HSI's cost-sharing percentage is 22.5%, reflecting its anticipated benefit share from the exploitation of cost-shared intangibles in North America. During FY 2023, total qualified CSA R&D costs were approximately €912,600,000, and HSI's 22.5% share was approximately €205,300,000 (approximately $222,400,000 at the FY 2023 average EUR/USD exchange rate).
The aggregate FY 2023 intercompany flows from HSI to HSAG across all three transaction categories totaled approximately €1,174,500,000 (approximately $1,272,500,000).
1.3 Summary of Conclusions
Based on the economic analyses set forth in Sections 5 through 7 of this documentation, all three categories of controlled transactions produced arm's-length results in FY 2023:
• Tangible Goods. HSI's FY 2023 operating margin on third-party resales was 4.6%, which falls within the interquartile range ("IQR") of 2.8% to 6.1% (median: 4.4%) established by the Comparable Profits Method / Transactional Net Margin Method ("CPM/TNMM") benchmarking study based on 17 comparable North American semiconductor distributors over the five-year testing period of fiscal years 2019 through 2023. HSI's operating margin is near the median, providing strong support for the arm's-length nature of the intercompany pricing.
• Royalties. The 6.0% royalty rate payable by HSI to HSAG falls within the IQR of 3.5% to 8.2% (median: 5.6%) established by the Comparable Uncontrolled Transaction ("CUT") analysis based on eight comparable uncontrolled license agreements for semiconductor process technology and related IP. The royalty rate is modestly above the median, consistent with the exceptional quality and competitive significance of HSAG's licensed technology portfolio.
• Cost Sharing. HSI's 22.5% cost-sharing percentage is supported by the anticipated benefit share analysis performed under Treas. Reg. § 1.482-7, based on discounted projected cash flows from the North American exploitation of cost-shared intangibles. No periodic adjustment was warranted for FY 2023.
Accordingly, no adjustment under IRC § 482 is warranted for any of HSI's FY 2023 intercompany transactions with HSAG, and the transfer pricing results documented herein are consistent with the proposed transfer pricing methods and ranges set forth in the bilateral APA application.
2. Overview of the Halcyon Group
2.1 Corporate Structure
Halcyon Semiconductor AG ("HSAG"). HSAG is an Aktiengesellschaft organized and existing under the laws of the Federal Republic of Germany. HSAG is publicly listed on the Frankfurt Stock Exchange (XETRA trading system) under the International Securities Identification Number DE000HSA0017 (WKN: HSA001). HSAG's registered office is located at Halcyon-Allee 12, 01099 Dresden, Saxony, Germany. HSAG's German tax identification numbers are as follows: Steuernummer 203/118/04527 (assigned by the Finanzamt Dresden-Nord); Umsatzsteuer-Identifikationsnummer (USt-IdNr.) DE 814 723 956.
HSAG is the ultimate parent entity of the Halcyon group and the legal and economic owner of substantially all of the group's intellectual property, including semiconductor process technology, design libraries, trade secrets, and an extensive global patent portfolio. HSAG serves as the central principal entity in the group's value chain, performing the core functions of research and development, manufacturing, and strategic management.
Key Affiliates. The Halcyon group is organized with HSAG as the 100% direct parent of the following principal operating subsidiaries:
(a) Halcyon Semiconductor Inc. ("HSI"). HSI is a C-corporation incorporated under the laws of the State of Delaware on March 14, 2017. HSI's Employer Identification Number is 84-2917630, and its Delaware File Number is 7341825. HSI is a wholly owned subsidiary of HSAG, which holds 100% of HSI's outstanding common stock. HSI functions as the exclusive US distribution, marketing, and design-support entity for Halcyon semiconductor products in North America.
(b) Halcyon Semiconductor Japan K.K. ("HSJ"). HSJ is a Kabushiki Kaisha organized under the laws of Japan, with its registered office in Minato-ku, Tokyo, Japan. HSJ serves as the distribution and customer-support entity for Halcyon semiconductor products in Japan and certain other Asian markets. HSJ is not within the scope of the bilateral APA application between the United States and Germany and is therefore not a focus of this Local File, although certain aspects of HSJ's operations may be referenced for comparability or contextual purposes.
(c) Halcyon Semiconductor (Shanghai) Co., Ltd. ("HSC"). HSC is a wholly foreign-owned enterprise (WFOE) organized under the laws of the People's Republic of China, with its registered office in the Pudong New Area, Shanghai, China. HSC performs distribution, marketing, and limited design-support functions for Halcyon semiconductor products in mainland China. Like HSJ, HSC is not within the scope of the bilateral APA application and is not a primary focus of this Local File.
An organizational chart depicting HSAG's ownership of HSI, HSJ, and HSC, together with the principal intercompany transaction flows, is included as Appendix G to this documentation. No other entities within the Halcyon group engage in material intercompany transactions with HSI.
2.2 Business Overview
HSAG is a leading global designer and manufacturer of advanced-node semiconductor wafers. The company specializes in 7nm, 5nm, and 3nm process technologies and serves three primary end markets: automotive semiconductors (including advanced driver-assistance systems and electric vehicle powertrains), industrial Internet of Things ("IoT") applications (including smart factory automation and edge computing), and data-center applications (including high-performance computing accelerators and network interface controllers).
HSAG's business is characterized by substantial capital intensity, a high proportion of revenue allocated to research and development, and a long investment horizon typical of the advanced semiconductor manufacturing sector. HSAG operates three state-of-the-art fabrication facilities in Saxony, Germany, and maintains a vertically integrated business model in which it controls the entire semiconductor manufacturing process from wafer fabrication through singulation and initial testing.
For the fiscal year ended December 31, 2024 (the most recent year for which complete audited consolidated financial statements were available at the date of preparation of this documentation), HSAG reported the following consolidated financial data:
For the fiscal year ended December 31, 2023 — the primary year under examination in this Local File — HSAG reported the following consolidated financial data:
These consolidated figures are derived from HSAG's annual report (Geschäftsbericht) for FY 2023, which was prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union and audited by Gresham Whitfield LLP under the direction of Simon Cardwell, audit partner (London office). The US-specific engagement for HSI's statutory financial statements was managed by Janet Okonkwo, engagement partner (Houston office).
HSAG's senior management team relevant to this documentation includes the following individuals:
• 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 (Leiter Konzernsteuerabteilung)
HSAG's independent auditor for both the consolidated group and HSI is Gresham Whitfield LLP.
2.3 HSI — Entity Profile
Corporate Information. Halcyon Semiconductor Inc. is a C-corporation incorporated in the State of Delaware on March 14, 2017. HSI is a wholly owned subsidiary of HSAG, which holds 100% of HSI's issued and outstanding shares of common stock (1,000,000 shares authorized; 100,000 shares issued and outstanding; par value $0.01 per share). HSI's Employer Identification Number is 84-2917630, and its Delaware File Number is 7341825.
HSI's registered agent in Delaware is Capitol Registered Agents LLC, located at 1209 Orange Street, Wilmington, Delaware 19801. HSI's fiscal year ends on December 31 of each calendar year.
Office Locations. HSI maintains its principal office and headquarters at 8700 Parmer Lane, Building 4, Austin, Texas 78729. This facility houses HSI's executive management, finance and tax, human resources, supply chain operations, and central administrative functions, and comprises approximately 185,000 square feet of office and warehouse space under a ten-year lease with Austin Tech Properties LLC (lease commencement date: January 1, 2020; annual base rent: approximately $7,400,000).
HSI also operates the following satellite facilities:
(a) Design Center — Santa Clara, California. 2455 Augustine Drive, Suite 300, Santa Clara, California 95054. This facility serves as HSI's application engineering and customer design-in support center, employing approximately 340 design engineers and applications specialists who assist US customers with integrating Halcyon semiconductor products into end-use applications.
(b) Regional Sales Office — Detroit (Southfield), Michigan. 1100 Town Center Drive, Suite 420, Southfield, Michigan 48075. This office serves HSI's automotive semiconductor customers, including major OEMs and Tier 1 suppliers headquartered in the greater Detroit metropolitan area.
(c) Regional Sales Office — Portland (Beaverton), Oregon. 9600 SW Nimbus Avenue, Suite 210, Beaverton, Oregon 97008. This office serves HSI's industrial IoT and semiconductor industry customers in the Pacific Northwest.
Business Function. HSI serves as the exclusive US distribution, marketing, and design-support entity for Halcyon semiconductor products in North America. HSI purchases semiconductor wafers and singulated die from HSAG under the Supply Agreement, arranges for packaging and testing through third-party US subcontractors where necessary, and resells finished semiconductor products to unrelated US customers. HSI also provides marketing, sales, customer relationship management, and after-sales technical support services to the North American customer base.
Employees. As of December 31, 2023, HSI employed approximately 2,720 full-time equivalent employees across all locations. As of December 31, 2024, HSI's headcount had grown to approximately 2,850 full-time equivalent employees, reflecting organic growth in the design-support and sales functions.
Management. HSI's senior management team relevant to this documentation includes the following individuals:
• Victor Almeida, President and General Manager
• Priya Raghavan, Vice President, Tax
• Thomas Kuroda, Vice President, Supply Chain Operations
Financing. HSI maintains a $600,000,000 senior unsecured revolving credit facility with a syndicate of lenders led by Ridgeline National Bank as administrative agent. The facility was originally established on September 15, 2020 and was most recently amended and restated on March 1, 2023. Ridgeline National Bank's senior relationship manager for the HSI account is Daniel Furlong, based at the bank's headquarters at 401 South Tryon Street, Charlotte, North Carolina 28202. As of December 31, 2023, HSI had approximately $185,000,000 in outstanding borrowings under the revolving credit facility and approximately $415,000,000 in available undrawn commitments.
3. Functional Analysis
3.1 Methodology
The functional analysis set forth in this section was prepared in accordance with the analytical framework prescribed by Treas. Reg. § 1.482-1(d)(3), which requires an examination of the functions performed, assets employed, and risks assumed by the parties to controlled transactions, as well as Chapter I of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (2022 ed.), which sets forth substantially parallel guidance for purposes of the international transfer pricing framework.
The analysis is based on detailed information gathered through a combination of document review and structured interviews with key personnel of both HSI and HSAG. The interviews were conducted during the period from October 2024 through January 2025 by members of the Calderwood & Harkness LLP engagement team — Leonard Cross (partner), Leila Nazari (senior associate), and Robert Jansen (associate) — and the Meridian Economics GmbH economic analysis team — Dr. Annika Breitner (managing director) and Maximilian Voss (senior analyst). Interviews were conducted both in person at HSI's Austin headquarters and HSAG's Dresden offices, and via secure videoconference.
The following individuals were interviewed as part of the functional analysis:
• Victor Almeida, President and General Manager, HSI — interviewed regarding HSI's overall business operations, customer relationships, market positioning, and operational decision-making authority
• Priya Raghavan, Vice President, Tax, HSI — interviewed regarding HSI's intercompany transaction flows, financial reporting, and compliance processes
• Thomas Kuroda, Vice President, Supply Chain Operations, HSI — interviewed regarding HSI's procurement, logistics, inventory management, packaging and testing subcontractor relationships, and order fulfillment operations
• Dr. Hendrik Möller, Chief Technology Officer, HSAG — interviewed regarding HSAG's R&D activities, technology roadmap, patent strategy, the CSA scope and qualified R&D cost pool, and the nature of the licensed intangibles
• Dr. Erwin Fassbinder, Senior Vice President, Group Tax, HSAG — interviewed regarding the group's transfer pricing policy, the intercompany agreements, and the APA process
In addition to the interviews, the engagement team reviewed the following categories of documents: the Master Intercompany Supply Agreement and all amendments thereto; the IP License Agreement; the Cost Sharing Arrangement and all addenda; HSAG's annual reports for FY 2019 through FY 2023; HSI's audited financial statements for FY 2019 through FY 2023; internal management reports on inventory levels, customer receivables, and operating expenses; HSAG's patent portfolio register and R&D project summaries; and HSI's organizational charts, employee headcount reports, and facility lease agreements.
3.2 Functions Performed by HSAG
HSAG performs the following principal functions within the intercompany value chain:
Manufacturing and Fabrication. HSAG operates three advanced semiconductor fabrication facilities located in Saxony, Germany:
• Dresden Fab 1 and Fab 2, located at Industriepark Klotzsche, Zur Wetterwarte 50, 01109 Dresden, Germany. These two facilities are co-located at HSAG's main campus and collectively represent the group's largest manufacturing complex. Dresden Fab 1 is dedicated to 7nm process technology production, while Dresden Fab 2 handles 5nm and emerging 3nm production runs.
• Chemnitz Fab 3, located at Technologiepark Chemnitz, Annaberger Straße 240, 09125 Chemnitz, Germany. Chemnitz Fab 3 is a newer facility, having commenced volume production in 2021, and is primarily dedicated to 3nm process technology for the latest-generation automotive and data-center products.
These facilities produce semiconductor wafers at advanced process nodes (7nm, 5nm, and 3nm) and perform wafer-level testing and singulation into individual die. The fabrication process involves highly capital-intensive equipment (including extreme ultraviolet lithography systems, chemical vapor deposition tools, ion implantation systems, and advanced metrology equipment), sophisticated cleanroom environments, and a deeply specialized technical workforce. The aggregate capital investment across HSAG's three fabrication facilities exceeds €12,000,000,000 as of December 31, 2023, based on historical cost.
Research and Development. HSAG conducts substantially all of the Halcyon group's research and development activities. HSAG's R&D organization encompasses process technology development, device architecture research, design library creation and maintenance, and advanced packaging technology research. For FY 2023, HSAG's total R&D expenditure was approximately €1,310,000,000, representing approximately 16.0% of consolidated revenue. Of this amount, approximately €912,600,000 constituted qualified R&D costs under the Cost Sharing Arrangement. HSAG employs approximately 4,800 R&D engineers and scientists at its Dresden and Chemnitz campuses, as well as at dedicated research laboratories in Dresden.
HSAG bears the primary R&D investment risk, including the risk that R&D investments may not yield commercially viable technologies or may be rendered obsolete by competitive developments. While HSI participates in sharing a portion of qualified R&D costs under the CSA, HSAG retains the predominant economic exposure to R&D outcomes, consistent with its role as the IP-rich principal entity.
intellectual Property Ownership and Development. HSAG is the legal and economic owner of all of the Halcyon group's semiconductor process technology, design libraries, trade secrets, and related intangible assets. HSAG's patent portfolio includes over 6,200 active patents and patent applications across the United States, Europe, Japan, China, South Korea, and Taiwan, covering process technologies, device architectures, materials science innovations, and design methodologies. HSAG registers and maintains all patents globally, bears all prosecution and maintenance costs, and has the exclusive authority to enforce, license, sublicense, or abandon any intellectual property rights.
The intangible assets licensed to HSI under the License Agreement — specifically, HSAG's proprietary semiconductor process technology and design libraries — represent the culmination of decades of cumulative R&D investment and constitute a core source of the Halcyon group's competitive advantage.
Strategic Management. HSAG sets the group's overall strategic direction, including global pricing strategy, product roadmap, technology node transition planning, capital allocation, and key commercial terms with major customers. While HSI has operational discretion in managing day-to-day sales and customer relationships within North America, HSAG retains control over the fundamental strategic parameters that determine product pricing, product availability, and market positioning.
Supply Chain Management (Upstream). HSAG procures the raw materials necessary for semiconductor fabrication, including high-purity silicon wafers (primarily from Westvale Corporation and Brightwater Partners LLC), specialty chemicals (including photoresists and etchants), and photomasks. HSAG manages fabrication scheduling and capacity allocation across its three facilities, including the determination of production volumes allocated to meet HSI's North American demand.
Characterization. Based on the foregoing analysis, HSAG is properly characterized as the complex, IP-rich principal entity in the intercompany relationship with HSI. HSAG performs the predominant value-creating functions within the group's value chain, owns and develops substantially all of the group's economically significant intangible assets, and bears the preponderance of the group's material business risks.
3.3 Functions Performed by HSI
HSI performs the following principal functions within the intercompany value chain:
Distribution. HSI serves as the exclusive North American distributor for Halcyon semiconductor products. HSI purchases semiconductor wafers and singulated die from HSAG under the Supply Agreement and resells finished and packaged semiconductor products to unrelated US customers. HSI's customer base includes automotive OEMs (such as major US-based automobile manufacturers and their Tier 1 suppliers), data-center operators (including hyperscale cloud service providers), industrial IoT companies, and authorized electronic component distributors. HSI does not manufacture or fabricate any semiconductor products; its distribution function is limited to the purchase, packaging (through third-party subcontractors), warehousing, and resale of HSAG-manufactured products.
Marketing and Sales. HSI conducts marketing and sales activities directed at the North American customer base. These activities include participation in industry trade shows and conferences (such as CES, Embedded World North America, and the Automotive Testing Expo), targeted marketing campaigns, digital marketing initiatives, and direct customer engagement through HSI's field sales force. HSI maintains regional sales offices in Austin (headquarters), Detroit (Southfield), and Portland (Beaverton) to serve the automotive, data-center, and industrial IoT customer segments, respectively. HSI's marketing activities are conducted within the strategic framework established by HSAG but involve meaningful local adaptation to the North American market, including pricing negotiations with customers within parameters set by HSAG, channel management, and customer-specific marketing programs.
Design Support. HSI's Santa Clara design center employs approximately 340 applications engineers and design specialists who provide technical support to US customers integrating Halcyon semiconductor products into their end-use applications. Design support activities include reference design creation, application notes, simulation and modeling support, customer design reviews, and pre-silicon and post-silicon validation assistance. The design-support function is a key element of HSI's customer engagement model and contributes to customer design-in wins, but it does not involve the development of new semiconductor process technology or design libraries — those activities are performed exclusively by HSAG's R&D organization.
Customer Service and Logistics. HSI manages US warehousing, order fulfillment, and after-sales technical support. HSI maintains a central warehouse and distribution facility at its Austin headquarters and coordinates shipments to customers through third-party logistics providers. HSI also provides first-line warranty administration and technical troubleshooting services, although complex technical issues are escalated to HSAG's engineering teams in Germany.
Limited Procurement. For certain products, HSI procures packaging and testing services from third-party US subcontractors. These outsourced semiconductor assembly and test ("OSAT") services involve the assembly of bare die into packaged semiconductor devices and final electrical testing. HSI manages these subcontractor relationships, including vendor qualification, quality assurance, and pricing negotiations, but the packaging and testing processes are performed to HSAG's technical specifications.
Characterization. Based on the foregoing analysis, HSI is properly characterized as a limited-risk distributor that performs routine distribution, marketing, design-support, and logistics functions in the North American market. HSI does not own or develop material intellectual property (other than limited marketing intangibles and customer lists developed locally), does not perform manufacturing or fabrication, and does not bear significant technology, manufacturing, or product liability risk.
3.4 Assets Employed
The assets employed by HSAG and HSI in connection with the controlled transactions are summarized as follows:
HSAG:
• Fabrication plant and equipment (multi-billion EUR capital investment across three fabrication facilities, with a net book value in excess of €7,500,000,000 as of December 31, 2023)
• Proprietary semiconductor process technology IP (7nm, 5nm, and 3nm process nodes, plus next-generation 2nm and sub-2nm technologies under development)
• Design library IP (comprising thousands of pre-validated IP blocks for use in customer designs)
• Trade secrets and proprietary manufacturing know-how
• Extensive global patent portfolio (over 6,200 active patents and applications)
• Highly trained and specialized technical workforce (~4,800 R&D engineers and scientists, plus ~9,000 manufacturing and process engineering personnel in Germany)
• Significant working capital (raw materials inventory, work-in-process, and finished goods at the wafer/die level)
HSI:
• Limited tangible assets (leased office, warehouse, and design-center facilities; IT equipment and office furnishings; no manufacturing assets)
• Limited intangible assets (customer lists and customer relationships developed through HSI's marketing and sales activities; limited marketing intangibles, including the Halcyon brand awareness developed in the North American market, though the Halcyon trademark is owned by HSAG)
• Working capital, including accounts receivable from unrelated US customers and finished goods inventory held for US distribution
• Access to a $600,000,000 revolving credit facility with Ridgeline National Bank for working capital and general corporate purposes
The disparity in asset intensity between HSAG and HSI is substantial and reflects HSI's role as a limited-risk distributor rather than a capital-intensive manufacturer or IP developer.
3.5 Risks Assumed
The risks assumed by HSAG and HSI in connection with the controlled transactions are summarized as follows:
HSAG:
• Technology and obsolescence risk: The risk that HSAG's current process technologies may become obsolete due to competitive advances, changes in customer demand, or shifts in end-market requirements. This risk is inherent in the semiconductor industry, where continuous investment in next-generation technologies is required to maintain market position.
• Manufacturing yield risk: The risk that fabrication processes may not achieve target yields, resulting in higher per-unit production costs and reduced profitability. Yield risk is particularly significant at advanced process nodes (3nm and below), where manufacturing complexity is extreme.
• Product liability risk: The risk of claims arising from defective semiconductor products, including potential liability for field failures in safety-critical applications (e.g., automotive ADAS systems).
• R&D investment risk: The risk that substantial R&D investments may not result in commercially viable technologies or may not generate sufficient returns to justify the investment.
• Market risk (global demand fluctuations): The risk that global semiconductor demand may decline due to macroeconomic factors, end-market cyclicality, or competitive dynamics, resulting in reduced revenue and profitability.
• Foreign exchange risk: The risk arising from HSAG's intercompany transactions with HSI (denominated in EUR) and other affiliates, as well as from HSAG's global revenue streams denominated in multiple currencies.
HSI:
• Limited inventory risk: HSI holds finished goods inventory for US distribution (typically four to six weeks of anticipated customer demand). While HSI bears the risk of inventory obsolescence for products held in its US warehouse, this risk is mitigated by HSAG's demand forecasting and by contractual provisions that permit HSI to return slow-moving inventory to HSAG under certain conditions.
• Credit risk (customer receivables): HSI bears the risk of customer non-payment on its accounts receivable from unrelated US customers. HSI manages this risk through credit policies, customer credit limits, and, in certain cases, credit insurance.
• Limited market risk: While HSI is exposed to fluctuations in US semiconductor demand, price variations are largely passed through under the intercompany pricing mechanism established by the Supply Agreement, and HSAG retains the predominant market risk.
• Warranty administration risk: HSI administers warranty claims from US customers but does not bear the ultimate product liability risk, which resides with HSAG as the manufacturer.
• HSI does not bear material technology risk, manufacturing risk, or R&D investment risk.
3.6 Functional Analysis Summary Table
The following table summarizes the functions performed, assets employed, and risks assumed by HSAG and HSI, demonstrating that HSI is the least complex entity and is therefore suitable as the tested party under the CPM/TNMM analysis:
Legend: ● = Primary responsibility/high significance; ○ = Secondary/limited; = Not applicable/not borne.
The functional analysis demonstrates that HSI performs routine, limited-risk distribution functions, while HSAG performs the complex, value-creating functions and bears the preponderance of material business risks. HSI is accordingly the least complex entity and the appropriate tested party for the CPM/TNMM benchmarking analysis described in Section 5.
4. Controlled Transactions — Description
4.1 Transaction 1: Tangible Goods (Wafer/Die Sales)
Governing Agreement. The intercompany sale of semiconductor wafers and singulated die from HSAG to HSI is governed by the Master Intercompany Supply Agreement between HSAG and HSI (the "Supply Agreement"). The Supply Agreement became effective on January 1, 2019 and was amended on July 1, 2022 to, among other things, update pricing methodology provisions and extend the term through December 31, 2028. A summary of the key terms of the Supply Agreement is included in Appendix E to this documentation.
Transaction Description. Under the Supply Agreement, HSAG manufactures semiconductor wafers at its fabrication facilities in Dresden and Chemnitz, performs wafer-level testing and singulation (dicing) into individual die, and sells the finished wafers and/or singulated die to HSI. Shipments are made on an FCA (Free Carrier) basis, Incoterms 2020, with the named place of delivery being HSAG's designated shipping point in Dresden, Germany. Title and risk of loss pass to HSI upon delivery to the carrier at the named place.
Upon receipt of the wafers and die at HSI's Austin facility (or, in some cases, at a designated third-party OSAT subcontractor facility in the United States), HSI arranges for any required packaging, assembly, and final testing of the semiconductor devices. HSI then resells the finished and packaged semiconductor products to unrelated US customers — including automotive OEMs, hyperscale data-center operators, industrial IoT companies, and authorized electronic component distributors — under separate, arm's-length commercial agreements.
FY 2023 Transaction Volume. During FY 2023, HSI's intercompany purchases from HSAG under the Supply Agreement totaled approximately €906,400,000 (approximately $982,100,000 at the FY 2023 average EUR/USD exchange rate of 1.0835). These purchases encompassed a broad range of semiconductor wafers and die across 7nm, 5nm, and 3nm process nodes, serving all three of HSI's primary end-market segments.
Pricing Mechanism. Under the original Supply Agreement, intercompany pricing was established on a cost-plus basis with quarterly price adjustments. As amended on July 1, 2022, the Supply Agreement provides for a pricing mechanism designed to yield an arm's-length operating margin for HSI on its third-party resales, consistent with the CPM/TNMM benchmarking study described in Section 5 of this documentation. Specifically, intercompany prices are set at the beginning of each fiscal quarter based on HSAG's standard product cost schedules, with a year-end true-up mechanism to ensure that HSI's full-year operating margin falls within the arm's-length range established by the CPM/TNMM benchmark.
Payment Terms. Invoices are denominated in EUR and are payable within 60 days of the invoice date. HSI settles intercompany payables through wire transfer to HSAG's designated bank account at Adriatic Trust Bank, Dresden branch.
Delivery and Logistics. Shipments from HSAG's Dresden facility to HSI's Austin warehouse are typically made via air freight for high-value, time-sensitive products and via ocean freight for bulk shipments. Transit time averages 7 to 14 days depending on the mode of transport. HSI bears all freight, insurance, and customs costs from the point of FCA delivery in Dresden.
4.2 Transaction 2: Royalties (IP License)
Governing Agreement. The royalty payments from HSI to HSAG are governed by the IP License Agreement between HSAG and HSI (the "License Agreement"), which became effective on January 1, 2019. A summary of the key terms of the License Agreement is included in Appendix E to this documentation.
Licensed Intangibles. Under the License Agreement, HSAG grants HSI a non-exclusive, non-transferable license to use HSAG's proprietary semiconductor process technology, design libraries, and related technical know-how in connection with HSI's distribution, marketing, and design-support activities in North America. The licensed intangibles are critical to the value proposition that HSI offers to its US customers, as they enable HSI to provide product specifications, performance data, reference designs, and technical support that are directly derived from HSAG's proprietary IP.
The scope of the license encompasses HSAG's 7nm, 5nm, and 3nm process technologies, including all associated process design kits ("PDKs"), standard cell libraries, memory compilers, analog/mixed-signal IP blocks, and related documentation. The license does not convey any ownership interest in the licensed intangibles, and HSI has no right to sublicense, modify, or create derivative works from the licensed IP without HSAG's prior written consent.
Royalty Rate and Base. Under the License Agreement, HSI pays HSAG a running royalty of 6.0% on IP-attributable revenues. The IP-attributable revenue is computed by applying the IP-attributable share — determined to be approximately 18.1% of HSI's net US revenues — to HSI's net third-party revenue for the applicable period. The 18.1% IP-attributable share reflects the proportion of the value of HSI's product sales that is directly attributable to the licensed IP, as determined by a technology contribution analysis performed at the inception of the License Agreement and reviewed periodically.
The royalty base computation for FY 2023 was as follows:
• HSI net third-party revenue (FY 2023): approximately $3,880,000,000
• IP-attributable share: 18.1%
• IP-attributable revenue: approximately $702,300,000
• Royalty rate: 6.0%
• Royalty payable: approximately $42,100,000
However, the royalty is contractually denominated in EUR. Based on the FY 2023 weighted average payment-date EUR/USD exchange rate of 1.0828, the FY 2023 royalty payments totaled approximately €62,800,000 (approximately $68,000,000). The difference between the royalty computed directly on USD-denominated IP-attributable revenue and the EUR-denominated contractual amount reflects the mechanics of the quarterly settlement process, whereby royalty payments are calculated in EUR based on the EUR equivalent of IP-attributable revenue at the payment-date exchange rate.
Payment Terms. Royalty payments are made quarterly in arrears, within 30 days following the end of each fiscal quarter, based on HSI's quarterly revenue reports. An annual reconciliation is performed within 90 days following the end of each fiscal year.
4.3 Transaction 3: Cost-Sharing Contributions (R&D CSA)
Governing Agreement. The cost-sharing contributions from HSI to HSAG are governed by the Qualified Cost Sharing Arrangement between HSAG and HSI (the "CSA"), which became effective on July 15, 2018. The CSA is documented in accordance with the requirements of Treas. Reg. § 1.482-7, and a separate CSA Documentation Addendum provides detailed PCT valuation and periodic adjustment analysis. A summary of the key terms of the CSA is included in Appendix E to this documentation.
Scope of the CSA. The CSA covers the joint development of next-generation 2nm and sub-2nm semiconductor process technologies, including associated device architectures, materials science innovations, process integration techniques, and design enablement tools. The CSA is intended to ensure that each participant bears a share of the qualified R&D costs that is commensurate with its anticipated benefits from the exploitation of the cost-shared intangibles in its assigned territory.
Participants and Territories. The CSA has two participants: HSAG, which is the developer and principal participant, and HSI, which is the cost-sharing participant. HSAG is assigned the exploitation rights for all territories worldwide except North America, while HSI is assigned the exploitation rights for North America (defined as the United States, Canada, and Mexico).
Cost-Sharing Percentages. HSI's cost-sharing percentage is 22.5%, reflecting its anticipated benefit share from the exploitation of cost-shared intangibles in North America. HSAG's cost-sharing percentage is 77.5%, reflecting its anticipated benefit share from the exploitation of cost-shared intangibles in all other territories. The methodology for determining the anticipated benefit shares is discussed in detail in Section 7.2 and Appendix C of this documentation.
Platform Contribution Transaction (PCT). Upon execution of the CSA on July 15, 2018, HSI made a buy-in payment of $312,500,000 to HSAG as consideration for the right to participate in the CSA and to obtain an interest in the pre-existing intangibles contributed by HSAG to the cost-sharing activity. The PCT buy-in payment was valued by Stonebridge Valuation Partners LLC (Marcus Reinhardt, Managing Director; 200 Park Avenue, Suite 1510, New York, New York 10166) using the income method with an 11.8% discount rate and a 15-year projection period. The PCT valuation is summarized in Appendix D to this documentation.
FY 2023 Cost-Sharing Contributions. During FY 2023, total qualified CSA R&D costs were approximately €912,600,000. HSI's 22.5% share of qualified R&D costs was approximately €205,300,000 (approximately $222,400,000 at the FY 2023 average EUR/USD exchange rate of 1.0835). Cost-sharing contributions are payable quarterly in arrears, with an annual reconciliation within 90 days following the end of each fiscal year.
Compliance with Treas. Reg. § 1.482-7. The CSA has been documented and administered in compliance with the requirements of Treas. Reg. § 1.482-7, including the requirements for documentation (§ 1.482-7(b)(4)), cost allocation (§ 1.482-7(d)), PCT obligations (§ 1.482-7(g)), and periodic adjustments (§ 1.482-7(i)). A detailed analysis of the CSA's compliance with these requirements is set forth in the separate CSA Documentation Addendum, which is incorporated herein by reference.
5. Economic Analysis — Tangible Goods (CPM/TNMM)
5.1 Method Selection and Best Method Analysis
In accordance with Treas. Reg. § 1.482-1(c) (the "best method rule"), Calderwood & Harkness LLP and Meridian Economics GmbH considered all of the specified transfer pricing methods available under the Treasury Regulations and the OECD Transfer Pricing Guidelines, and determined that the Comparable Profits Method ("CPM") under Treas. Reg. § 1.482-5 — also referred to as the Transactional Net Margin Method ("TNMM") under Chapter II of the OECD Transfer Pricing Guidelines — is the best method for evaluating the arm's-length nature of the intercompany pricing for tangible goods transactions between HSAG and HSI.
The following methods were considered and evaluated:
Comparable Uncontrolled Price Method ("CUP") / Comparable Uncontrolled Transaction Method. The CUP method, described in Treas. Reg. § 1.482-3(b), compares the price charged in a controlled transaction with the price charged in a comparable uncontrolled transaction. While the CUP method is generally considered the most direct and reliable method when comparable uncontrolled transactions are available, it was determined not to be the best method in this case because: (i) advanced-node semiconductor wafers and die are highly differentiated products with no readily available market price quotations; (ii) wafer and die transactions in the semiconductor industry involve complex specifications, process-node-specific pricing, and volume-dependent terms that make it extremely difficult to identify comparable uncontrolled transactions with sufficient reliability; and (iii) no internal CUPs are available, as HSAG does not sell comparable wafers or die to unrelated third parties in the same process nodes and product configurations sold to HSI.
Resale Price Method ("RPM"). The RPM, described in Treas. Reg. § 1.482-3(c), evaluates the arm's-length price by reference to the resale price obtained by the buyer in uncontrolled sales, less an appropriate gross margin. While the RPM is often considered an appropriate method for distribution transactions, it was not selected as the best method because: (i) the availability of reliable gross margin comparables for semiconductor distributors is limited, as differences in product mix, value-added services, and contractual terms can significantly affect gross margins; and (ii) the CPM/TNMM, which employs an operating margin PLI, provides a more reliable comparison because it is less sensitive to functional differences among comparable companies (particularly differences in the classification of costs between cost of goods sold and operating expenses).
Cost Plus Method. The Cost Plus Method, described in Treas. Reg. § 1.482-3(d), evaluates the arm's-length price by reference to the cost of producing the controlled product, plus an appropriate markup. This method was not selected because HSAG, as the manufacturer, is the complex, IP-rich entity, and reliable cost-plus comparables for advanced semiconductor manufacturers are not available. Application of the cost plus method on the HSI side would be analytically equivalent to a one-sided TNMM approach, but less reliable due to the need to identify the appropriate cost base.
Profit Split Method. The Profit Split Method, described in Treas. Reg. § 1.482-6, allocates the combined profits from controlled transactions between the parties based on the relative value of their contributions. While the profit split method may be appropriate in cases where both parties make unique and valuable contributions, it was not selected as the primary method because: (i) HSI performs routine functions and does not make unique or valuable intangible contributions to the tangible goods transaction; (ii) a one-sided method (CPM/TNMM) is more reliable and practical when one party is clearly the least complex entity; and (iii) the profit split method requires detailed information about both parties' contributions and often involves subjective allocation keys. However, a residual profit split analysis was performed as a corroborative check for the royalty transaction (see Section 6.4).
CPM/TNMM — Selected as Best Method. The CPM/TNMM was selected as the best method for the tangible goods transaction for the following reasons:
(a) HSI is clearly identifiable as the least complex party in the controlled transaction, performing routine distribution, marketing, and limited design-support functions with limited risk exposure.
(b) Reliable comparable companies — specifically, independent North American semiconductor and electronic component distributors — are available and can be identified through public financial databases.
(c) The CPM/TNMM, applied with an operating margin PLI, provides a reliable measure of the arm's-length return attributable to HSI's functions, assets, and risks, and is less sensitive to differences in accounting classifications and functional differences than gross-margin-based methods.
(d) HSAG, as the IP-rich, capital-intensive manufacturer, is not a suitable tested party due to the difficulty of identifying comparable independent manufacturers with similar technology portfolios, capital intensity, and risk profiles.
This selection is consistent with the best method rule under Treas. Reg. § 1.482-1(c), which requires the selection of the method that, under the facts and circumstances, provides the most reliable measure of an arm's-length result, taking into account the degree of comparability between the controlled and uncontrolled transactions and the quality of the data and assumptions used in the analysis.
5.2 Tested Party Selection
HSI was selected as the tested party under the CPM/TNMM analysis. This selection is based on the functional analysis set forth in Section 3, which demonstrates that HSI is the least complex entity in the controlled transaction. HSI performs routine distribution, marketing, and limited design-support functions, employs limited tangible and intangible assets, and assumes limited risks. In contrast, HSAG performs complex manufacturing, R&D, and strategic management functions, owns substantially all of the group's intellectual property, and bears the preponderance of the group's material business risks.
Under the best method rule, the selection of the least complex party as the tested party enhances the reliability of the analysis by minimizing the number of comparability adjustments required and by focusing the analysis on the entity for which reliable comparables can most readily be identified. This approach is consistent with Treas. Reg. § 1.482-5(b)(2) and the OECD Transfer Pricing Guidelines, Chapter II, ¶ 3.18.
5.3 Profit Level Indicator
The operating margin on net resales was selected as the profit level indicator ("PLI") for the CPM/TNMM analysis. The operating margin is computed as operating income divided by net revenue, expressed as a percentage. For purposes of this analysis, operating income is defined as gross profit less selling, general, and administrative expenses, and excludes royalty payments and CSA contributions to the extent these are analyzed as separate controlled transactions.
The operating margin was selected as the most reliable PLI for the following reasons:
(a) The operating margin is the most widely accepted and commonly used PLI for distribution entities, as it provides a comprehensive measure of the return attributable to all of the tested party's functions, assets, and risks.
(b) The operating margin is less susceptible to distortions arising from differences in product mix, accounting classifications, and functional variations among comparable companies than alternative PLIs such as gross margin or Berry ratio.
(c) The operating margin PLI is consistent with the guidance in Treas. Reg. § 1.482-5(b)(4) and the OECD Transfer Pricing Guidelines, which recognize operating profit margins as appropriate indicators for distribution activities.
(d) The operating margin facilitates a direct comparison between HSI's results and those of the comparable companies identified in the benchmarking study, as all comparable companies report operating margins computed on a consistent basis.
5.4 Comparability Analysis and Benchmarking Study
Search Methodology. Meridian Economics GmbH conducted a systematic search for comparable companies using public financial databases, including the Fenmore Services Inc. database, the Bureau van Dijk Orbis database, and SEC EDGAR filings. The search was designed to identify independent North American (United States and Canada) companies primarily engaged in the distribution of semiconductors and electronic components, which is the functional analog of HSI's activities.
Quantitative Screening Criteria. The following quantitative screens were applied to the initial population of potential comparables:
(a) Industry Classification. Companies classified under SIC codes 5065 (Electronic Parts and Equipment, Not Elsewhere Classified — Wholesale) and 5045 (Computers and Computer Peripherals and Software — Wholesale), and NAICS codes 423690 (Other Electronic Parts and Equipment Merchant Wholesalers) and 423430 (Computer and Computer Peripheral Equipment and Software Merchant Wholesalers). Companies in related semiconductor distribution sectors were also considered.
(b) Revenue Threshold. Minimum annual net revenue of $100,000,000 to ensure a level of operational scale and maturity broadly comparable to HSI. Companies with annual net revenue below this threshold were excluded due to concerns about comparability of operational profiles and economies of scale.