US LOCAL FILE
HALCYON SEMICONDUCTOR INC.
Transfer Pricing Documentation for Fiscal Year Ended December 31, 2024
Contemporaneous Transfer Pricing Documentation Prepared Pursuant to IRC § 6662(e) and Treas. Reg. § 1.6662-6
Prepared by
Calderwood & Harkness LLP 599 Lexington Avenue, 38th Floor New York, NY 10022
In coordination with
Meridian Economics GmbH Leopoldstraße 145, 80804 Munich, Germany
CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGED — ATTORNEY WORK PRODUCT
This document has been prepared by Calderwood & Harkness LLP, acting as US tax counsel to Halcyon Semiconductor AG and Halcyon Semiconductor Inc. The economic analysis contained herein was prepared by Meridian Economics GmbH under the direction and supervision of Calderwood & Harkness LLP. This document is protected by the attorney-client privilege, the work product doctrine, and, to the extent applicable, the tax practitioner privilege under IRC § 7525. Nothing in this document is intended to waive any applicable privilege or protection. This document is provided to the client for the sole purpose of establishing contemporaneous transfer pricing documentation within the meaning of Treasury Regulation § 1.6662-6(d) and for use in connection with the bilateral Advance Pricing Agreement application to be filed with the IRS Advance Pricing and Mutual Agreement Program and the German Bundeszentralamt für Steuern. Unauthorized reproduction, disclosure, or distribution of this document is strictly prohibited.
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LIST OF EXHIBITS AND APPENDICES
Statement of Contemporaneous Documentation. This Local File has been prepared contemporaneously within the meaning of Treasury Regulation § 1.6662-6(d). As required by such regulation, this documentation was completed and in existence no later than September 30, 2025, the date on which the federal income tax return of Halcyon Semiconductor Inc. for the fiscal year ended December 31, 2024 is due (including extensions). This documentation is intended to establish that the intercompany pricing of Halcyon Semiconductor Inc. for each covered controlled transaction satisfies the arm's-length standard under Section 482 of the Internal Revenue Code. The documentation herein reflects a reasonable effort by the taxpayer and its advisors to evaluate the principal documents and information reasonably available regarding the covered controlled transactions and to apply the best transfer pricing method for each such transaction.
1. EXECUTIVE SUMMARY
1.1 Purpose and Scope of Documentation
This US Local File (the "Local File") constitutes contemporaneous transfer pricing documentation for Halcyon Semiconductor Inc. ("HSI" or the "Taxpayer") for the fiscal year ended December 31, 2024 (the "Covered Year" or "FY 2024"). The Local File has been prepared by Calderwood & Harkness LLP ("C&H"), acting as US tax counsel to Halcyon Semiconductor AG ("HSAG" or the "Parent") and HSI, in coordination with Meridian Economics GmbH ("Meridian"), which has prepared the economic and benchmarking analyses under the direction and supervision of C&H.
This documentation has been prepared pursuant to the following legal authorities:
• Section 6662(e) of the Internal Revenue Code (the "Code" or "IRC"), which imposes a penalty for substantial valuation misstatements attributable to transfer pricing and provides that the penalty may be avoided if the taxpayer maintains contemporaneous documentation establishing reasonable cause and good faith with respect to the pricing of its controlled transactions;
• Treasury Regulation § 1.6662-6, which sets forth the specific requirements for contemporaneous documentation sufficient to satisfy the penalty protection standard, including the requirement that the taxpayer conduct a reasonable effort to evaluate the results achieved in its controlled transactions under the principles of Section 482 of the Code and the regulations thereunder;
• The OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (2022 edition) (the "OECD Guidelines"), including the BEPS Action 13 recommendations regarding transfer pricing documentation and country-by-country reporting. Although the OECD Guidelines are not binding on the United States, the IRS has acknowledged their relevance as persuasive authority, and the Local File structure and content are intended to satisfy the OECD's recommended Local File requirements set forth in Annex II to Chapter V of the OECD Guidelines.
The scope of this Local File covers three categories of controlled transactions between HSI and its parent, HSAG, during FY 2024:
1. Tangible Goods (Semiconductor Wafer and Die Purchases). HSI purchased semiconductor wafers and singulated die from HSAG under the Master Intercompany Supply Agreement (as amended). These transactions are analyzed under the Comparable Profits Method ("CPM") / Transactional Net Margin Method ("TNMM").
2. Royalties (IP License). HSI paid HSAG running royalties for the license of proprietary semiconductor process technology, design libraries, and related intangibles under the IP License Agreement. These transactions are analyzed under the Comparable Uncontrolled Transaction ("CUT") method, corroborated by a residual profit split analysis.
3. Cost-Sharing Contributions (R&D CSA). HSI made cost-sharing payments to HSAG under a Qualified Cost Sharing Arrangement ("CSA") for next-generation semiconductor process R&D. These transactions are analyzed under the income method framework prescribed by Treasury Regulation § 1.482-7.
In addition to serving as standalone penalty protection documentation for HSI's FY 2024 federal income tax return, this Local File has been prepared to support the bilateral Advance Pricing Agreement ("APA") application that HSI and HSAG intend to file with the IRS Advance Pricing and Mutual Agreement ("APMA") program (target filing date: July 7, 2025) and with the German Bundeszentralamt für Steuern ("BZSt") (target filing date: August 15, 2025). The APA is intended to cover the period from January 1, 2025 through December 31, 2029, and will address all three categories of controlled transactions described above. The analyses and documentation in this Local File provide the foundational economic evidence and legal framework upon which the APA submission is built.
1.2 Summary of Covered Controlled Transactions (FY 2024)
The following table summarizes the three controlled transactions between HSI and HSAG for FY 2024:
Tangible Goods (Wafer/Die Purchases). During FY 2024, HSI purchased semiconductor wafers and singulated die from HSAG under the Master Intercompany Supply Agreement (effective January 1, 2019; amended July 1, 2022). Total intercompany purchases for the Covered Year amounted to €987,600,000, which translates to approximately $1,076,000,000 at the average 2024 EUR/USD exchange rate of 1.0896. These purchases constitute the largest component of the intercompany relationship and represent the cost of goods that HSI resells, after further packaging and value-added services, to unrelated US customers including original equipment manufacturers ("OEMs"), independent distributors, and hyperscale data center operators.
Royalties (IP License). During FY 2024, HSI paid HSAG running royalties for the licensed use of HSAG's proprietary semiconductor process technology, design libraries, and related intangibles under the IP License Agreement (effective January 1, 2019). The royalty is computed as 6.0% of HSI's net US revenues attributable to the licensed intellectual property. The IP-attributable share of HSI's total net revenue was 18.1% for FY 2024, yielding IP-attributable revenues of $745,720,000 ($4,120,000,000 × 18.1%). Application of the 6.0% royalty rate to the IP-attributable revenue base produces a royalty of approximately $44,743,200. Under the contractual terms, the royalty is denominated and paid in EUR, and application of the payment-date weighted average EUR/USD exchange rate of 1.0307 to the quarterly payments results in an aggregate FY 2024 royalty of €68,400,000 (approximately $70,500,000 USD equivalent at the blended annual rate).
Cost-Sharing Contributions (R&D CSA). During FY 2024, HSI made cost-sharing payments to HSAG under the Qualified Cost Sharing Arrangement (effective July 15, 2018) covering next-generation 2nm and sub-2nm semiconductor process R&D. HSI's cost-sharing percentage for FY 2024 was 22.5%, reflecting HSI's reasonably anticipated benefits from exploitation of cost-shared intangibles in North America. Total qualified R&D costs under the CSA for FY 2024 were €998,200,000 (a subset of HSAG's total R&D expenditure of €1,420,000,000). HSI's share was €998,200,000 × 22.5% = €224,600,000, or approximately $231,300,000.
The aggregate annual intercompany flows between HSI and HSAG for FY 2024 totaled approximately €1.28 billion (€1,280,600,000), underscoring the materiality of these transactions and the importance of rigorous, contemporaneous transfer pricing documentation.
1.3 Summary of Arm's-Length Conclusions
The economic analyses detailed in Sections 5, 6, and 7 of this Local File demonstrate that each of the three covered controlled transactions produces results consistent with the arm's-length standard under IRC § 482 and the Treasury Regulations thereunder. The key findings are summarized below:
Tangible Goods (CPM/TNMM Analysis). HSI, as the tested party, achieved an operating margin of 4.80% on net third-party resales in FY 2024. This result falls comfortably within the interquartile range ("IQR") of 2.8% to 6.1%, with a median of 4.4%, derived from a set of 17 comparable North American semiconductor distribution companies over the five-year period FY 2020–2024. Because HSI's actual operating margin falls within the IQR, no adjustment to the intercompany transfer prices for tangible goods is required. The transfer prices charged by HSAG to HSI for semiconductor wafers and die are consistent with the arm's-length standard.
Royalties (CUT Analysis with Residual Profit Split Corroboration). HSAG's contractual royalty rate of 6.0% of IP-attributable revenues falls within the IQR of 3.5% to 8.2%, with a median of 5.6%, derived from a set of 8 comparable uncontrolled license agreements involving semiconductor process technology and related intangibles. The arm's-length character of the royalty rate is further corroborated by a residual profit split analysis, which allocates residual profits to HSAG as the IP owner and implies a royalty rate consistent with the contractual 6.0%. The royalty payments from HSI to HSAG are consistent with the arm's-length standard.
Cost-Sharing Contributions (Income Method Analysis). HSI's cost-sharing percentage of 22.5% reflects its reasonably anticipated benefits from exploitation of the cost-shared intangibles in North America, determined under the income method prescribed by Treasury Regulation § 1.482-7(e)(2)(ii). The Platform Contribution Transaction ("PCT") buy-in payment of $312,500,000 made by HSI in 2018 was determined under the income method per Treasury Regulation § 1.482-7(g)(4) using a discount rate of 11.8% and a 15-year projection period. An evaluation of actual results against original projections confirms that no periodic adjustment trigger has been met for FY 2024. The cost-sharing contributions are consistent with the arm's-length standard.
In summary, all three controlled transactions between HSI and HSAG produce results within the applicable arm's-length ranges for FY 2024. No adjustments to intercompany pricing are required, and no compensating adjustments have been made. This documentation establishes that HSI has made a reasonable effort to determine and apply the best method for each controlled transaction, thereby satisfying the contemporaneous documentation requirements for penalty protection under IRC § 6662(e) and Treasury Regulation § 1.6662-6(d).
2. OVERVIEW OF THE HALCYON GROUP
2.1 Halcyon Semiconductor AG — Parent Company
Corporate Identity and Organization. Halcyon Semiconductor AG ("HSAG") is a stock corporation (Aktiengesellschaft) organized and existing under the laws of the Federal Republic of Germany. Its registered office is located at Halcyon-Allee 12, 01099 Dresden, Saxony, Germany. HSAG was incorporated in 2003 and has grown through a combination of organic investment and strategic acquisitions to become one of Europe's leading advanced-node semiconductor manufacturers.
Public Listing. HSAG is publicly listed on the Frankfurt Stock Exchange and trades on the XETRA electronic trading platform under the International Securities Identification Number ("ISIN") DE000HSA0017 and the German securities identification code ("WKN") HSA001. As of December 31, 2024, HSAG's market capitalization was approximately €38 billion. The company's shares are included in the MDAX index, and HSAG is subject to the disclosure and governance requirements applicable to publicly traded companies under German securities law and EU regulations.
Tax Identification. HSAG's German tax identification number (Steuernummer) is 203/118/04527. Its value-added tax identification number (Umsatzsteuer-Identifikationsnummer) is DE 814 723 956. HSAG is subject to German corporate income tax (Körperschaftsteuer), trade tax (Gewerbesteuer), and solidarity surcharge (Solidaritätszuschlag) on its worldwide income, and files its corporate income tax returns with the Finanzamt Dresden-Süd.
Principal Business Activities. HSAG's principal business activity is the design and manufacture of advanced-node semiconductor wafers and singulated die. The company specializes in process technologies at the 7 nanometer ("nm"), 5nm, and 3nm nodes, with active development programs targeting the next-generation 2nm and sub-2nm nodes. HSAG's semiconductor products serve three primary end markets: (i) automotive applications, including power semiconductors, advanced driver-assistance systems ("ADAS") processors, and vehicle connectivity modules; (ii) industrial Internet of Things ("IoT") applications, including edge computing processors, industrial sensors, and factory automation controllers; and (iii) data center applications, including high-performance computing accelerators, network interface controllers, and AI inference chips.
Fabrication Facilities. HSAG operates three semiconductor fabrication facilities ("fabs") in Germany:
• Fab 1 and Fab 2 are co-located at Industriepark Klotzsche, Zur Wetterwarte 50, 01109 Dresden, Germany. Fab 1, commissioned in 2010, is a 200mm and 300mm facility focused on mature-node and legacy products. Fab 2, commissioned in 2017 and expanded in 2021, is a state-of-the-art 300mm facility equipped with extreme ultraviolet ("EUV") lithography systems, capable of producing wafers at the 7nm and 5nm nodes.
• Fab 3 is located at Technologiepark Chemnitz, Annaberger Straße 240, 09125 Chemnitz, Germany. Fab 3 was commissioned in 2022 and is HSAG's most advanced manufacturing facility, dedicated to 3nm production and serving as the pilot production site for 2nm process development. Fab 3 represents a capital investment of approximately €4.2 billion, partially supported by subsidies under the European Chips Act.
Key Management. HSAG's Management Board (Vorstand) consists of the following officers:
• Chief Executive Officer: Dr. Klaus-Dieter Wehrheim, who has served as CEO since 2016 and previously held senior roles at leading European semiconductor companies;
• Chief Financial Officer: Margarethe Stein, appointed in 2020, who oversees finance, treasury, investor relations, and internal audit;
• Chief Technology Officer: Dr. Hendrik Möller, who leads HSAG's research and development organization and has directed the company's technology roadmap since 2018; and
• Senior Vice President, Group Tax: Dr. Erwin Fassbinder, who oversees all tax matters for the HSAG group, including transfer pricing, tax controversy, and tax planning.
Employees. As of December 31, 2024, HSAG employed approximately 22,400 individuals globally, of whom approximately 14,600 were based in Germany. The German workforce includes approximately 5,800 employees dedicated to research and development activities, approximately 6,200 employees engaged in manufacturing and fabrication operations, and the remainder in corporate and administrative functions.
FY 2024 Consolidated Financials. HSAG's consolidated financial results for FY 2024, prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union, are summarized as follows:
Independent Auditor. HSAG's consolidated financial statements are audited by Gresham Whitfield LLP. The group audit engagement partner is Simon Cardwell, based in Gresham Whitfield's London office. The US engagement partner responsible for the audit of HSI's financial statements is Janet Okonkwo, based in Gresham Whitfield's Houston office.
2.2 Halcyon Semiconductor Inc. — US Subsidiary (the Taxpayer)
Corporate Identity and Organization. Halcyon Semiconductor Inc. ("HSI") is a C-corporation organized under the laws of the State of Delaware. HSI was incorporated on March 18, 2015 under Delaware File Number 7341825. Its registered agent is Capitol Registered Agents LLC, located at 1209 Orange Street, Wilmington, Delaware 19801.
Principal Office and Facilities. HSI maintains its principal office and headquarters at 8700 Parmer Lane, Building 4, Austin, Texas 78729. In addition, HSI operates the following facilities in the United States:
• Design Center: 2455 Augustine Drive, Suite 300, Santa Clara, California 95054. The Santa Clara design center houses approximately 350 application engineers and design-support specialists who provide design-in support, customization services, and technical assistance to HSI's North American customer base. The design center does not conduct fundamental semiconductor process research and development; rather, its activities are focused on adapting HSAG's existing product platforms to the specific requirements of US customers.
• Regional Sales Office (Detroit): 1100 Town Center Drive, Suite 420, Southfield, Michigan 48075. This office primarily serves HSI's automotive OEM customer base concentrated in the Detroit metropolitan area, including relationships with major US and international automobile manufacturers with US operations.
• Regional Sales Office (Portland): 9600 SW Nimbus Avenue, Suite 210, Beaverton, Oregon 97008. This office supports HSI's technology customer base in the Pacific Northwest and serves as a secondary point of contact for West Coast hyperscaler accounts.
Tax Identification. HSI's Employer Identification Number ("EIN") is 84-2917630. HSI's fiscal year ends on December 31. HSI files its US federal income tax return on Form 1120 and is subject to US federal income tax on its worldwide income. HSI also files state income tax returns in Texas, California, Michigan, Oregon, and other states in which it has nexus.
Ownership and Group Role. HSI is a wholly owned subsidiary of HSAG. HSI serves as the exclusive US distribution, marketing, and design-support entity for Halcyon semiconductor products in North America. HSI does not manufacture semiconductor products; it purchases finished semiconductor wafers and singulated die from HSAG and resells them, after packaging and testing coordination, to unrelated US customers. HSI also provides value-added services including application engineering, design-in support, customer technical support, and logistics and supply chain management.
Key Management. HSI's management team includes:
• President and General Manager: Victor Almeida, who has overall responsibility for HSI's operations, sales, and customer relationships in North America. Mr. Almeida reports to HSAG's CEO, Dr. Wehrheim, and to the HSAG Supervisory Board (Aufsichtsrat).
• Vice President, Tax: Priya Raghavan, who is responsible for HSI's US federal and state tax compliance, transfer pricing, and tax planning. Ms. Raghavan coordinates closely with Dr. Erwin Fassbinder and the HSAG Group Tax team on all intercompany pricing matters and is HSI's principal contact for the APA process.
• Vice President, Supply Chain Operations: Thomas Kuroda, who oversees procurement, warehousing, inventory management, order fulfillment, and logistics for HSI's US operations.
Employees. As of December 31, 2024, HSI employed approximately 2,850 individuals in the United States. This headcount includes approximately 350 application engineers at the Santa Clara design center, approximately 1,200 sales and marketing professionals across HSI's offices, approximately 600 supply chain and logistics personnel, and approximately 700 employees in finance, human resources, legal, compliance, and other administrative functions.
Banking Relationship. HSI maintains a $600,000,000 revolving credit facility with Ridgeline National Bank, which serves as administrative agent. The facility is used for working capital purposes, including financing of inventory and accounts receivable. The senior relationship manager at Ridgeline National Bank is Daniel Furlong, located at Ridgeline's headquarters at 401 South Tryon Street, Charlotte, North Carolina 28202. As of December 31, 2024, the outstanding balance on the revolving facility was approximately $310,000,000.
2.3 Other Group Entities (Not in Scope)
In addition to HSAG and HSI, the Halcyon Semiconductor group includes the following entities, which are not within the scope of this Local File or the bilateral APA application:
Halcyon Semiconductor Japan K.K. ("HSJ"). HSJ is a Kabushiki Kaisha (stock company) organized under Japanese law, with its principal office in Tokyo, Japan. HSJ serves as the distribution and technical support entity for Halcyon semiconductor products in the Asia-Pacific region, with particular emphasis on the Japanese automotive and industrial markets. HSJ employs approximately 680 individuals and operates in a manner functionally analogous to HSI's role in North America. HSJ's intercompany transactions with HSAG are documented separately under Japanese transfer pricing rules and are not addressed in this Local File.
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 principal office in Shanghai, China. HSC operates as a semiconductor assembly and test facility, performing back-end packaging, testing, and quality assurance services for semiconductor products manufactured by HSAG. HSC does not engage in front-end wafer fabrication or R&D activities. HSC employs approximately 2,300 individuals and is compensated for its contract assembly and test services on a cost-plus basis under a separate intercompany services agreement with HSAG. HSC's intercompany transactions are documented separately and are not within the scope of this Local File.
These entities are mentioned here solely for purposes of providing a complete overview of the Halcyon group structure. Their transactions with HSAG or HSI, to the extent they exist, are immaterial to the controlled transactions analyzed in this Local File and do not affect the arm's-length analysis of the HSI-HSAG relationship.
2.4 Group Organizational Chart
The organizational structure of the Halcyon Semiconductor group and the principal intercompany transaction flows are depicted below:
Halcyon Semiconductor AG (HSAG) Aktiengesellschaft — Dresden, Germany Ultimate Parent
|→ 100% ownership → Halcyon Semiconductor Inc. (HSI) — Delaware, USA
• Tangible Goods Flow: HSAG → HSI (semiconductor wafers and die)
• Royalty Payments: HSI → HSAG (IP license)
• Cost-Sharing Payments: HSI → HSAG (R&D CSA)
|→ 100% ownership → Halcyon Semiconductor Japan K.K. (HSJ) — Tokyo, Japan
|→ 100% ownership → Halcyon Semiconductor (Shanghai) Co., Ltd. (HSC) — Shanghai, China
A detailed organizational chart, including legal entity diagrams and intercompany transaction flow arrows, is provided in Appendix H.
3. DESCRIPTION OF CONTROLLED TRANSACTIONS
3.1 Transaction 1: Tangible Goods — Semiconductor Wafer and Die Sales
3.1.1 Nature of Transaction. The first and largest controlled transaction between HSAG and HSI involves the sale of semiconductor wafers and singulated die by HSAG to HSI. HSAG manufactures these products at its Dresden and Chemnitz fabrication facilities using advanced process technologies (7nm, 5nm, and 3nm nodes). The wafers are processed through the full front-end fabrication cycle, including photolithography, chemical vapor deposition, etching, ion implantation, metallization, and chemical mechanical planarization. Following front-end processing, the wafers are either shipped to HSI in wafer form or singulated into individual die for shipment.
HSI receives the wafers and die at designated US ports and coordinates back-end packaging and testing, either through HSI's own quality assurance processes or through third-party outsourced semiconductor assembly and test ("OSAT") providers. Once packaged and tested, HSI resells the finished semiconductor products to unrelated US customers. HSI's customer base includes automotive OEMs, tier-one automotive suppliers, industrial IoT device manufacturers, hyperscale data center operators, and independent electronic component distributors.
The products sold by HSI span three principal application categories:
• Automotive semiconductors: Power management ICs, ADAS processors, in-vehicle networking controllers, and electrification modules. This segment represented approximately 42% of HSI's FY 2024 net revenue.
• Industrial IoT semiconductors: Edge computing processors, industrial sensor ICs, programmable logic controllers, and connectivity modules. This segment represented approximately 28% of HSI's FY 2024 net revenue.
• Data center semiconductors: High-performance computing accelerators, network interface controllers, AI inference processors, and storage controllers. This segment represented approximately 30% of HSI's FY 2024 net revenue.
HSI does not independently manufacture any semiconductor products. Its value-added activities consist of distribution, marketing, design-in support, application engineering, customer technical support, and supply chain management, as described in greater detail in the functional analysis in Section 4 below.
3.1.2 Contractual Terms. The intercompany sale of semiconductor wafers and die is governed by the Master Intercompany Supply Agreement (the "Supply Agreement"), originally entered into between HSAG and HSI effective January 1, 2019, and subsequently amended effective July 1, 2022. A copy of the Supply Agreement, including the 2022 amendment, is included in Appendix G.
The principal terms of the Supply Agreement are as follows:
Pricing Mechanism. The intercompany transfer price is established on a cost-plus basis, where the cost base includes HSAG's fully loaded manufacturing costs (direct materials, direct labor, manufacturing overhead, and an allocation of fabrication facility depreciation) plus a markup. The markup percentage is established at the beginning of each fiscal year based on budgeted volumes and costs and is subject to a year-end true-up mechanism. Under the true-up, the transfer prices are adjusted prospectively to ensure that HSI earns an operating margin within the arm's-length range established by the benchmarking study documented in Section 5 of this Local File. The 2022 amendment refined the true-up mechanism to provide for quarterly interim adjustments in addition to the annual true-up, in recognition of the increasing volatility of semiconductor market conditions.
Delivery Terms. Products are delivered CIF (Cost, Insurance, and Freight) to designated US ports, principally the Port of Long Beach, California, and the Port of Houston, Texas. Title and risk of loss transfer from HSAG to HSI upon delivery of the goods to HSI's designated carrier at the US port of destination.
Payment Terms. Payment for intercompany goods is due Net 60 days from the date of invoice. All invoices are denominated in EUR. HSI makes payments in EUR from its EUR-denominated bank account maintained at Ridgeline National Bank.
Volume. During FY 2024, total intercompany goods transferred from HSAG to HSI amounted to €987,600,000, or approximately $1,076,000,000 at the average 2024 EUR/USD exchange rate of 1.0896. This volume reflects an increase of approximately 6.3% over FY 2023 intercompany purchases of €929,100,000, driven primarily by strong demand in the automotive and data center segments.
Warranty. HSAG provides a limited product warranty to HSI covering manufacturing defects in the wafers and die for a period of 18 months from the date of delivery. HSI, in turn, provides a limited warranty to its unrelated customers, the terms of which are generally consistent with HSAG's warranty to HSI. HSI bears limited warranty risk, as the vast majority of warranty claims relate to manufacturing defects that are ultimately borne by HSAG under the intercompany warranty.
Indemnification. The Supply Agreement contains standard indemnification provisions under which HSAG indemnifies HSI for losses arising from product defects attributable to HSAG's manufacturing processes, and HSI indemnifies HSAG for losses arising from HSI's handling, storage, or distribution activities.
3.1.3 Economic Substance. The economic substance of the tangible goods transaction reflects the respective roles and risk profiles of HSAG and HSI in the controlled transaction value chain.
HSAG, as the manufacturer and IP owner, bears the most significant economic risks associated with the production and sale of semiconductor products. These include manufacturing risk (yield variability, equipment failure, cleanroom contamination), capacity utilization risk (the risk that fabrication capacity will be underutilized if demand falls short of projections), technology obsolescence risk (the risk that HSAG's process technology will be superseded by competing technologies), and product liability risk associated with manufacturing defects.
HSI, as the limited-risk distributor, bears comparatively limited economic risks. HSI's principal risks include inventory risk (the risk that finished goods held in HSI's US warehouses will become obsolete or unsaleable, although this risk is mitigated by HSI's just-in-time supply chain practices and HSAG's inventory return provisions), credit risk (the risk that unrelated US customers will fail to pay for products purchased from HSI), and limited warranty risk (to the extent that warranty claims arise from HSI's own handling or distribution activities rather than HSAG manufacturing defects). HSI does not bear significant demand risk, as HSAG sets global pricing and production strategies, and HSI's margins are protected by the intercompany true-up mechanism.
The allocation of risks between HSAG and HSI is consistent with the contractual terms of the Supply Agreement and is reflected in the functional analysis in Section 4 and the economic analysis in Section 5 of this Local File.
3.2 Transaction 2: Royalties — IP License
3.2.1 Nature of Transaction. The second controlled transaction involves HSI's payment of running royalties to HSAG for the right to use HSAG's proprietary semiconductor process technology, design libraries, and related intangibles in HSI's North American distribution and design-support activities. The licensed intellectual property is essential to HSI's ability to effectively market, distribute, and provide design-in support for Halcyon semiconductor products in the North American market. Without access to HSAG's process technology know-how and design libraries, HSI would be unable to provide the technical expertise and application engineering services that differentiate Halcyon's distribution model from that of a pure commodity distributor.
The royalty arrangement recognizes that a significant portion of the value embedded in HSI's North American sales is attributable to HSAG's intellectual property rather than to HSI's distribution and design-support functions. The royalty mechanism ensures that HSAG receives arm's-length compensation for the use of its intangible assets in the North American market.
3.2.2 Contractual Terms. The royalty arrangement is governed by the IP License Agreement (the "License Agreement"), entered into between HSAG and HSI effective January 1, 2019. A copy of the License Agreement is included in Appendix G.
The principal terms of the License Agreement are as follows:
Royalty Rate. HSI pays HSAG a running royalty equal to 6.0% of HSI's net US revenues attributable to the licensed intellectual property.
IP-Attributable Revenue Share. The License Agreement provides that the IP-attributable share of HSI's total net revenue is determined annually based on a contribution analysis that isolates the portion of HSI's revenues that are attributable to the licensed intangibles as opposed to HSI's own distribution and design-support functions. For FY 2024, the IP-attributable revenue share was 18.1% of HSI's total net revenue.
FY 2024 Royalty Computation. The FY 2024 royalty is computed as follows:
• HSI total net revenue: $4,120,000,000
• IP-attributable revenue share: 18.1%
• IP-attributable revenues: $4,120,000,000 × 18.1% = $745,720,000
• Royalty rate: 6.0%
• Royalty (USD): $745,720,000 × 6.0% = $44,743,200
• The royalty is denominated and paid in EUR under the contractual terms. Application of the payment-date weighted average EUR/USD exchange rate of 1.0307 to the quarterly royalty payments results in aggregate FY 2024 royalties of €68,400,000.
• The USD equivalent of €68,400,000 at the annual average rate is approximately $70,500,000, reflecting timing differences between the USD royalty computation and the EUR payment dates.
Payment Terms. Royalties are paid quarterly in arrears, within 30 days after the end of each calendar quarter. Payments are made in EUR.
Territory. The license is exclusive to the North American market (United States, Canada, and Mexico).
Duration. The License Agreement is co-terminous with the Master Intercompany Supply Agreement and remains in effect for so long as the intercompany supply relationship continues.
3.2.3 Licensed Intangibles. The intangibles licensed by HSAG to HSI under the License Agreement consist of the following categories:
• Semiconductor process technology. HSAG licenses to HSI the right to access and utilize technical information relating to HSAG's proprietary semiconductor fabrication processes at the 7nm, 5nm, and 3nm nodes. This includes process design kits ("PDKs"), process flow documentation, and technical specifications necessary for HSI's application engineers to provide effective design-in support to North American customers.
• Design libraries and EDA tool integrations. HSAG licenses to HSI the right to use HSAG's proprietary standard cell libraries, I/O libraries, memory compilers, and integrated electronic design automation ("EDA") tool interfaces. These design assets are used by HSI's Santa Clara design center engineers in their customer-facing application engineering work.
• Technical know-how and trade secrets. HSAG licenses to HSI confidential technical know-how relating to fabrication processes, yield enhancement techniques, reliability engineering methods, and product characterization procedures. This know-how enables HSI to provide post-sale technical support and to troubleshoot customer integration issues.
• Halcyon trademarks and trade names. HSAG licenses to HSI the right to use the Halcyon name, logo, and associated trademarks in connection with HSI's marketing, distribution, and customer-facing activities in North America.
It is important to note that the License Agreement covers only the use of existing, commercially deployed intangible assets. Rights to intangibles arising from the joint development of next-generation technologies (2nm and sub-2nm) are addressed separately under the Qualified Cost Sharing Arrangement described in Section 3.3 below.
3.3 Transaction 3: Cost-Sharing Contributions — Qualified Cost Sharing Arrangement
3.3.1 Nature of Transaction. The third controlled transaction involves HSI's cost-sharing contributions to HSAG under a Qualified Cost Sharing Arrangement (the "CSA") for the joint development of next-generation 2nm and sub-2nm semiconductor process technologies. Under the CSA, HSAG and HSI share the costs of developing these next-generation technologies in proportion to their reasonably anticipated benefits ("RAB") from the exploitation of the resulting intangible assets in their respective territories. HSI makes cost-sharing payments to HSAG representing HSI's proportionate share of the qualified R&D costs incurred by HSAG in the development of the cost-shared intangibles.
The CSA is structured to satisfy the requirements of Treasury Regulation § 1.482-7, which governs the tax treatment of cost-sharing arrangements between controlled participants. Under the CSA, HSI obtains exclusive exploitation rights for the cost-shared intangibles in North America, while HSAG retains exploitation rights for the rest of the world.
The next-generation 2nm and sub-2nm process technologies under development are expected to enable significant performance and power efficiency improvements over current-generation 3nm technology, with potential applications in advanced automotive processors, AI accelerators, and next-generation data center computing platforms. The CSA reflects the parties' agreement that HSI will share in both the costs and the expected economic benefits of these technologies in the North American market.
3.3.2 Contractual Terms and History. The CSA was entered into between HSAG and HSI effective July 15, 2018. A copy of the CSA, including all amendments and schedules, is included in Appendix G.
Platform Contribution Transaction (PCT). Upon execution of the CSA, HSI made a buy-in payment (the "PCT Payment") of $312,500,000 to HSAG, representing compensation for HSAG's pre-existing platform contributions — that is, the intellectual property, technical know-how, and technology base developed by HSAG prior to the CSA effective date that serve as the foundation for the cost-shared R&D program. The PCT Payment was valued by Stonebridge Valuation Partners LLC, an independent valuation firm. The valuation was directed by Marcus Reinhardt, Managing Director, at Stonebridge's offices at 200 Park Avenue, Suite 1510, New York, New York 10166.
The PCT valuation employed the income method prescribed by Treasury Regulation § 1.482-7(g)(4). Under the income method, the PCT Payment was determined as the present value of the anticipated income attributable to the platform contributions in HSI's territory (North America) over a projection period of 15 years, discounted at a rate of 11.8%. The discount rate was derived from a weighted average cost of capital ("WACC") analysis adjusted for the risk profile of the specific intangible assets. A summary of the PCT valuation is provided in Appendix F.
Cost-Sharing Percentage. HSI's cost-sharing percentage is 22.5%, representing HSI's reasonably anticipated benefits from exploitation of the cost-shared intangibles in North America as a proportion of the total anticipated benefits of all CSA participants (HSAG and HSI). The benefit share was determined under the income method per Treasury Regulation § 1.482-7(e)(2)(ii), using discounted present value projections of income attributable to the cost-shared intangibles in each participant's territory.
Triennial Review. The CSA provides for a triennial review and adjustment of the benefit shares to reflect changes in the parties' reasonably anticipated benefits. The most recent triennial review was conducted as of July 15, 2024 (the sixth anniversary of the CSA), and confirmed that HSI's 22.5% benefit share remained appropriate based on updated market projections and technology adoption assumptions.
FY 2024 Qualified R&D Costs. Total qualified R&D costs under the CSA for FY 2024 were €998,200,000. This amount represents a subset of HSAG's total R&D expenditure of €1,420,000,000 for FY 2024. The difference of €421,800,000 relates to sustaining R&D for existing process nodes (7nm, 5nm, and 3nm) and other research activities that are outside the scope of the CSA.
HSI's FY 2024 Share. HSI's share of qualified R&D costs for FY 2024 is €998,200,000 × 22.5% = €224,600,000, or approximately $231,300,000 at the blended EUR/USD exchange rate.
Additional Terms. The CSA includes provisions governing dispute resolution (binding arbitration under ICC rules), termination (with a buy-out mechanism for the departing participant's share of cost-shared intangibles), accounting methodology for qualified R&D costs, and audit rights allowing each participant to verify the other's cost determinations.
3.3.3 Scope of Cost-Shared Intangibles. The intangible property developed under the CSA consists of next-generation semiconductor process technology at the 2nm and sub-2nm nodes. The scope of the cost-shared intangibles includes:
• Process architecture and integration schemes for 2nm and sub-2nm gate-all-around ("GAA") transistor technology;
• EUV lithography process recipes and multi-patterning techniques adapted for sub-2nm feature sizes;
• Advanced materials science developments, including high-mobility channel materials and novel dielectric stacks;
• Back-end-of-line ("BEOL") interconnect technologies, including hybrid bonding and advanced copper/ruthenium metallization schemes;
• Process design kits, device models, and standard cell libraries for 2nm and sub-2nm nodes; and
• Related intellectual property, including patent applications, trade secrets, and technical documentation.
Under the CSA, HSI obtains exclusive exploitation rights for these cost-shared intangibles in North America (defined as the United States, Canada, and Mexico). HSAG retains exclusive exploitation rights for the rest of the world. Neither party may sublicense its exploitation rights without the other party's written consent.
4. FUNCTIONAL ANALYSIS
4.1 Overview and Methodology
A comprehensive functional analysis has been conducted to characterize the roles, contributions, and risk profiles of HSI and HSAG in the controlled transactions. The functional analysis serves as the foundation for the selection of the appropriate transfer pricing methods and the identification of the tested party, as required by Treasury Regulation § 1.482-1(d)(3) and the OECD Guidelines, Chapter I.
The functional analysis framework examines three dimensions of each party's involvement in the controlled transactions: (i) functions performed, (ii) assets employed, and (iii) risks assumed. This three-dimensional analysis is the standard approach endorsed by both the US Treasury Regulations and the OECD Guidelines for determining the comparability of controlled and uncontrolled transactions and for allocating income between related parties in accordance with the arm's-length principle.
The functional analysis was conducted through a combination of on-site and virtual interviews with key personnel at both HSI and HSAG, review of internal documentation and operational records, and analysis of financial data. The following individuals were interviewed during the course of this analysis:
• Victor Almeida, President and General Manager, HSI — regarding HSI's distribution, marketing, and customer relationship functions;
• Priya Raghavan, Vice President Tax, HSI — regarding HSI's financial reporting, intercompany pricing mechanisms, and tax compliance processes;
• Thomas Kuroda, Vice President Supply Chain Operations, HSI — regarding HSI's supply chain, logistics, inventory management, and procurement functions;
• Dr. Hendrik Möller, Chief Technology Officer, HSAG — regarding HSAG's R&D activities, technology roadmap, and IP management; and
• Dr. Erwin Fassbinder, Senior Vice President Group Tax, HSAG — regarding HSAG's group transfer pricing policies, intercompany agreements, and the CSA structure.
The interviews were conducted between March and May 2025. The functional profiles described below reflect the actual conduct of the parties during FY 2024 and are consistent with the contractual terms of the intercompany agreements.
4.2 Functional Analysis — HSI
4.2.1 Functions Performed. HSI performs the following principal functions in connection with the controlled transactions:
Distribution and Sales. HSI serves as the exclusive North American distributor for Halcyon semiconductor products. HSI maintains direct sales relationships with major OEM customers, hyperscale data center operators, and tier-one automotive suppliers, as well as relationships with independent electronic component distributors that resell Halcyon products to smaller customers. HSI employs approximately 1,200 sales and marketing professionals across its offices in Austin, Detroit (Southfield), and Portland (Beaverton). The sales function includes account management, order processing, pricing negotiation (within parameters established by HSAG's global pricing framework), and customer relationship management. HSI's sales team generates demand for Halcyon products in the North American market and is responsible for achieving revenue targets established in coordination with HSAG's global sales leadership.
Marketing. HSI conducts market research, develops marketing materials, participates in industry trade shows (including CES, Embedded World, and the IEEE International Solid-State Circuits Conference), manages digital marketing campaigns, and coordinates with HSAG's global marketing team on product launches and brand positioning in the North American market. HSI's marketing activities are designed to build brand awareness, generate qualified leads, and support the sales team's customer engagement efforts. HSI does not independently develop or own significant marketing intangibles, although it contributes to the development of local market knowledge and customer relationships.
Design Support. HSI operates a design center in Santa Clara, California, employing approximately 350 application engineers and design-support specialists. The Santa Clara design center provides the following services to HSI's North American customers:
• Application engineering: Technical consultation with customers to identify the appropriate Halcyon semiconductor product for their application requirements, including performance specifications, power budgets, thermal constraints, and form factor considerations.
• Design-in support: Assistance to customers in integrating Halcyon semiconductor products into their system designs, including schematic review, layout consultation, and signal integrity analysis.
• Customization services: Limited customization of HSAG's standard products to meet customer-specific requirements, such as custom packaging options, testing protocols, and qualification programs for automotive-grade applications.
• Reference design development: Creation of reference designs and evaluation boards that enable customers to rapidly prototype systems incorporating Halcyon semiconductors.
It is important to emphasize that HSI's design center activities do not constitute fundamental semiconductor process R&D. The Santa Clara engineers work with existing product platforms and design libraries provided by HSAG under the IP License Agreement. They do not develop new process technologies, create new transistor architectures, or conduct basic materials science research. The distinction between HSI's design-support activities (which are routine in nature) and HSAG's process R&D activities (which are the source of the group's core intellectual property) is central to the characterization of HSI as a limited-risk distributor with design-support capabilities rather than as an R&D-intensive entity.
Customer Service and Technical Support. HSI provides post-sale technical support to its North American customers, including troubleshooting assistance, failure analysis coordination, and warranty claim processing. HSI handles first-level technical inquiries directly and escalates complex issues to HSAG's engineering teams in Germany. HSI manages product returns in accordance with the terms of the Supply Agreement and coordinates warranty claims with HSAG.
Supply Chain and Logistics. Under the direction of Vice President Thomas Kuroda, HSI manages the end-to-end supply chain for Halcyon products in North America. This includes demand forecasting and planning (in coordination with HSAG's global supply chain organization), order management, warehousing and inventory management, outbound logistics and shipping to customers, and import/export compliance. HSI operates distribution centers in Austin, Texas, and Ontario, California, from which it fulfills customer orders. HSI's supply chain operates on a just-in-time basis to minimize inventory holding costs and reduce the risk of finished goods obsolescence.
Administration. HSI maintains its own finance, human resources, legal, and compliance functions at its Austin headquarters. These functions support HSI's day-to-day operations and ensure compliance with US federal and state regulatory requirements, including tax compliance, financial reporting, employment law, import/export regulations, and data privacy.
4.2.2 Assets Employed. Tangible Assets. HSI's tangible assets consist primarily of leased office and warehouse space in Austin, Santa Clara, Southfield, and Beaverton; information technology infrastructure (servers, networking equipment, enterprise software licenses); limited test and measurement equipment at the Santa Clara design center (oscilloscopes, spectrum analyzers, thermal chambers); and office furniture and equipment. HSI does not own fabrication facilities, cleanroom infrastructure, or advanced manufacturing equipment. HSI's total tangible assets (net book value) as of December 31, 2024 were approximately $87,000,000.
Intangible Assets. HSI's intangible assets are limited in scope and value compared to those of HSAG. HSI possesses local market knowledge, customer relationships, and customer lists developed through its distribution and sales activities in North America. However, HSI does not own any core semiconductor process technology, design libraries, or fundamental IP. These intangibles are owned by HSAG and made available to HSI under the IP License Agreement. HSI does hold exploitation rights to the cost-shared intangibles for North America under the CSA, but these intangibles are still in the development stage and have not yet generated commercial revenues.
Financial Assets. HSI's financial assets include working capital (accounts receivable from unrelated customers, inventory of finished semiconductor products) and the $600,000,000 revolving credit facility with Ridgeline National Bank. As of December 31, 2024, HSI's accounts receivable were approximately $412,000,000 and its finished goods inventory was approximately $198,000,000.
4.2.3 Risks Assumed. Inventory Risk. HSI bears the risk that finished semiconductor products held in its US warehouses and distribution centers may become obsolete or unsaleable due to changes in customer demand, product lifecycle transitions, or technological obsolescence. However, this risk is substantially mitigated by HSI's just-in-time inventory practices, HSAG's inventory return provisions in the Supply Agreement, and the relatively short time that products are held in HSI's inventory before resale to customers (average inventory holding period of approximately 35 days in FY 2024).
Credit Risk. HSI bears the risk that its unrelated US customers may default on their payment obligations. HSI manages this risk through credit assessment procedures, credit insurance for selected accounts, and active accounts receivable management. HSI's bad debt expense in FY 2024 was approximately $3,200,000, or 0.08% of net revenue.
Limited Market Risk. HSI does not bear significant demand risk because HSAG's global pricing strategy and production planning function determine the overall market positioning and volume allocation for Halcyon products. HSI's role is to distribute products in its territory at prices substantially influenced by HSAG's global framework. While HSI has some discretion to adjust prices to individual customers within prescribed ranges, the overall demand and pricing risk resides with HSAG as the principal entity.
Foreign Exchange Risk. HSI is exposed to EUR/USD exchange rate risk because its intercompany purchases from HSAG are denominated in EUR while its third-party sales to US customers are denominated in USD. HSI manages this exposure through natural hedging (maintaining a EUR-denominated bank account and timing payments to take advantage of favorable exchange rate movements) and periodic foreign exchange forward contracts. The net impact of foreign exchange fluctuations on HSI's operating results was not material in FY 2024.
No Significant Manufacturing, R&D, or Technology Obsolescence Risk. HSI does not operate fabrication facilities, does not conduct fundamental R&D, and does not make multi-billion-dollar capital investments in manufacturing capacity. Accordingly, HSI does not bear manufacturing risk, R&D risk, or technology obsolescence risk. These risks reside with HSAG.
4.2.4 Characterization. Based on the foregoing analysis, HSI is characterized as the least complex entity in the controlled transaction value chain. HSI functions as a limited-risk distributor with design-support capabilities. HSI's contribution to the value chain is primarily in the form of routine distribution, marketing, and application engineering services. HSI does not own or develop core intellectual property, does not manufacture products, and does not bear the significant risks associated with semiconductor fabrication and R&D.
Consistent with HSI's characterization as the least complex party, HSI's profit should reflect compensation for its distribution, marketing, and design-support functions and for the limited risks it assumes. HSI's profit should not reflect the returns attributable to HSAG's manufacturing capabilities, intellectual property, or entrepreneurial risk-bearing.
HSI is the appropriate tested party for purposes of the CPM/TNMM analysis of the tangible goods transaction (Section 5), as it is the party to which the transfer pricing method can be applied most reliably. This conclusion is consistent with Treasury Regulation § 1.482-5(b)(2) and OECD Guidelines ¶¶ 3.18–3.19, which provide that the tested party in a one-sided transfer pricing analysis should be the less complex of the two controlled parties.
4.3 Functional Analysis — HSAG
4.3.1 Functions Performed. Manufacturing. HSAG operates three state-of-the-art semiconductor fabrication facilities in Dresden and Chemnitz, Germany, as described in Section 2.1. HSAG performs the full range of front-end semiconductor manufacturing processes, including photolithography (using both deep ultraviolet ("DUV") and extreme ultraviolet ("EUV") exposure tools), chemical vapor deposition, plasma etching, ion implantation, metallization, chemical mechanical planarization, and wafer-level testing. HSAG also performs back-end singulation (dicing) of wafers into individual die for shipment. HSAG's manufacturing operations are capital-intensive, requiring continuous investment in advanced equipment and cleanroom infrastructure. In FY 2024, HSAG's capital expenditures for fabrication equipment and facility upgrades totaled approximately €2,100,000,000.
Research and Development. HSAG is the group's primary and essentially sole center of fundamental R&D activity. HSAG's R&D organization employs approximately 5,800 engineers and scientists in Germany and is responsible for the development of proprietary semiconductor process technologies across multiple technology nodes. FY 2024 total R&D expenditure was €1,420,000,000, representing 16.2% of HSAG's consolidated revenue. HSAG's R&D activities span the full technology development lifecycle, from basic materials science and device physics research through process integration, technology qualification, and yield enhancement. HSAG's current R&D programs include:
• Sustaining R&D for existing 7nm, 5nm, and 3nm process nodes (€421,800,000 in FY 2024, not within the scope of the CSA);
• Development of next-generation 2nm gate-all-around ("GAA") transistor technology (the primary focus of the CSA);
• Exploratory research into sub-2nm technologies, including complementary FET ("CFET") architectures, monolithic 3D integration, and advanced packaging techniques; and
• EUV lithography process optimization, including high-NA EUV development.
IP Ownership and Management. HSAG owns substantially all of the group's core semiconductor intellectual property. This portfolio includes over 8,200 active patents and patent applications worldwide covering semiconductor process technologies, device structures, circuit design methodologies, and manufacturing techniques. HSAG also possesses extensive trade secrets relating to fabrication processes, yield enhancement methods, and reliability engineering. HSAG's IP management function, under the supervision of the CTO and the Group IP Counsel, is responsible for patent prosecution, IP licensing, trade secret protection, and IP enforcement.
Strategic Management. HSAG's executive management team sets the global strategy for the Halcyon group, including product roadmap decisions, market positioning, pricing strategy, capital allocation, and organizational structure. All material strategic decisions affecting the group's operations, including decisions regarding HSI's North American distribution activities, are made at the HSAG level. HSI's management operates within the strategic framework established by HSAG.
Procurement. HSAG procures raw materials and equipment from third-party suppliers, including silicon wafer substrates, photoresist chemicals, specialty gases, etch chemicals, and advanced lithography and deposition equipment. HSAG's procurement function manages a complex global supply chain for fabrication inputs and maintains strategic partnerships with key equipment and materials suppliers.
4.3.2 Assets Employed. Tangible Assets. HSAG's tangible assets include its three fabrication facilities, with a total replacement cost estimated in excess of €12 billion. These facilities house advanced manufacturing equipment, including EUV and DUV lithography systems, chemical vapor deposition reactors, plasma etch tools, ion implantation systems, and metrology and inspection equipment. HSAG also maintains extensive cleanroom infrastructure, utilities, and support systems at each fabrication site.
Intangible Assets. HSAG's intangible assets are the most valuable assets in the Halcyon group and are the primary drivers of the group's profitability and competitive advantage. These intangibles include:
• Semiconductor process technology patents (over 8,200 active patents and applications);
• Design libraries and EDA tool integrations;
• Trade secrets and confidential technical know-how;
• The Halcyon brand and trademarks; and
• Customer relationships at the global level (distinct from HSI's North American customer relationships).