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MEMORANDUM

PRIVILEGED & CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION

This memorandum is a confidential attorney-client communication prepared by Calderwood & Harkness LLP for the exclusive use of the addressees identified herein. It is protected by the attorney-client privilege and the work-product doctrine. Any dissemination, distribution, or copying of this memorandum or its contents to any person other than the addressees, without the prior written consent of Calderwood & Harkness LLP, is strictly prohibited.

To: Dr. Cormac Tierney, Chief Executive Officer Ronan McBride, Chief Financial Officer Fiona Drennan, General Counsel — Solstice Biomedical Devices Limited

From: Sylvia Hartwell, Specialist Partner, Tax — Calderwood & Harkness LLP

Date: February 10, 2023

Re: U.S. Federal Income Tax Consequences to U.S. Holders of American Depositary Shares of Solstice Biomedical Devices Limited

Firm: Calderwood & Harkness LLP 425 Lexington Avenue New York, NY 10174

Matter Reference: Solstice Biomedical Devices Limited — $85,000,000 Nasdaq IPO (Ticker: SBDX)

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I. Executive Summary

You have asked us to analyze the material United States federal income tax consequences to U.S. holders of American Depositary Shares ("ADSs") issued in connection with the proposed initial public offering (the "IPO" or the "Offering") of Solstice Biomedical Devices Limited ("Solstice," "SBD," or the "Company"), an Irish company incorporated under the Companies Act 2014 (Companies Registration Office No. 587412), on the Nasdaq Global Market under the ticker symbol "SBDX." Each ADS represents one (1) ordinary share, par value €0.001 per share, of Solstice (CUSIP 83472R 109). The depositary for the ADS program is Meridian Trust Company, N.A. (the "Depositary").

The IPO targets gross proceeds of approximately $85,000,000, based on the sale of 7,670,455 ADSs at an assumed initial public offering price of $11.0769 per ADS. The Company filed a Registration Statement on Form S-1 with the Securities and Exchange Commission (SEC File No. 333-268514), which is expected to be declared effective shortly. The lead book-running manager for the Offering is Keystone Mercer & Co., LLC.

Set forth below is a summary of the key conclusions reached in this memorandum:

1. PFIC Status. Based on our analysis of Solstice's audited FY2022 financial statements and management's projections for FY2023, Solstice does not expect to be classified as a "passive foreign investment company" ("PFIC") within the meaning of Sections 1291 through 1298 of the Internal Revenue Code of 1986, as amended (the "Code"), for its taxable year ending December 31, 2023. This determination is, however, inherently factual and must be made annually; no assurance can be given with respect to Solstice's PFIC status for any future taxable year.

2. Irish Dividend Withholding Tax. Irish dividend withholding tax ("DWT") at the standard statutory rate of 25% is reduced to 15% for qualifying U.S. holders who are eligible for benefits under the Convention between the Government of the United States of America and the Government of Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains (the "U.S.–Ireland Double Taxation Convention" or the "DTC"), signed on July 28, 1997, as amended by the Protocol signed on March 24, 1999.

3. Treatment of ADSs. ADSs will generally be treated as equity in a foreign corporation for U.S. federal income tax purposes, and holders of ADSs will be treated as the beneficial owners of the underlying ordinary shares represented by such ADSs. Deposits and withdrawals of ordinary shares in exchange for ADSs will not constitute taxable events for U.S. federal income tax purposes.

4. Gain on Disposition. Gain recognized by a U.S. holder upon the sale, exchange, or other taxable disposition of ADSs will generally be treated as capital gain, and will be long-term capital gain if the ADSs have been held for more than one year at the time of disposition. Long-term capital gains of non-corporate U.S. holders are currently taxed at a maximum federal rate of 20% (plus the 3.8% net investment income tax, where applicable).

5. Dividends. Distributions paid by Solstice with respect to ADSs that are treated as dividends for U.S. federal income tax purposes may qualify for the preferential qualified dividend rate of 20% (plus the 3.8% net investment income tax) for non-corporate U.S. holders, provided that Solstice is not classified as a PFIC in the year of distribution or the preceding taxable year, that the ADSs are listed on a U.S. national securities exchange (which will be satisfied by the Nasdaq listing), and that applicable holding period requirements are met.

6. Transfer Pricing. The intercompany transfer pricing arrangements between Solstice and its wholly owned U.S. subsidiary, Solstice Surgical Inc., a Delaware corporation (EIN 87-4231568), operating under a cost-plus intercompany services agreement at a 7.5% markup, are relevant to the PFIC income composition analysis. Income earned by Solstice Surgical Inc. is attributed to Solstice under the look-through rules of Section 1297(c) and constitutes active trade or business income for PFIC purposes, provided the arrangement satisfies the arm's-length standard under Section 482 of the Code.

This memorandum is prepared for the benefit of the Company and its officers and directors in connection with the IPO. Portions of this analysis are expected to form the basis of the "Material U.S. Federal Income Tax Consequences" section of the final prospectus included in the Registration Statement. This memorandum does not address state, local, or non-U.S. tax consequences other than as specifically discussed herein with respect to Irish dividend withholding tax. Except as set forth in Section X below, this memorandum does not address the tax consequences to non-U.S. holders of ADSs. This memorandum also does not address the tax consequences to holders subject to special rules, including, without limitation, banks and other financial institutions, insurance companies, regulated investment companies, real estate investment trusts, dealers in securities or currencies, traders in securities that elect to use the mark-to-market method of accounting, tax-exempt organizations, persons holding ADSs as part of a straddle, hedging transaction, conversion transaction, or integrated transaction, persons whose functional currency is not the U.S. dollar, or persons who acquired their ADSs through the exercise or cancellation of employee stock options or otherwise as compensation.

The analysis set forth in this memorandum is based on the Code, Treasury Regulations promulgated thereunder (including proposed and temporary regulations), published rulings and administrative pronouncements of the Internal Revenue Service (the "IRS"), and judicial decisions, in each case as in effect on the date hereof. These authorities are subject to differing interpretations and may be changed, possibly with retroactive effect. No ruling has been requested from the IRS with respect to any of the matters discussed herein, and there can be no assurance that the IRS would not take a position contrary to any of the conclusions set forth in this memorandum, or that any such contrary position would not be sustained by a court.

II. Treatment of ADSs for U.S. Federal Income Tax Purposes

A. General Principles — ADSs as Equity Ownership

Under well-established IRS guidance, a holder of ADSs is generally treated for U.S. federal income tax purposes as the beneficial owner of the underlying shares of stock represented by such ADSs. This treatment is supported by Revenue Ruling 58-225, 1958-1 C.B. 234, in which the IRS held that the holder of an American depositary receipt representing shares of a foreign corporation should be treated as the owner of the underlying foreign shares for U.S. federal income tax purposes. Treasury Regulation § 1.871-14(c) further supports this position in the context of the portfolio interest exemption by treating the holders of depositary receipts as the owners of the underlying obligations.

The practical consequence of this well-settled principle is that the U.S. federal income tax treatment of a holder of ADSs will be the same as if such holder directly held the underlying ordinary shares of Solstice. Accordingly, for purposes of this memorandum, references to the tax treatment of "ADSs" should be understood as references to the tax treatment of the underlying ordinary shares represented by the ADSs, and vice versa.

Deposits and withdrawals of ordinary shares by a U.S. holder in exchange for ADSs, and withdrawals of ordinary shares in exchange for ADSs, will generally not constitute taxable events for U.S. federal income tax purposes. A U.S. holder who surrenders ADSs and receives ordinary shares will not recognize gain or loss on the exchange, and will have a tax basis in the ordinary shares received equal to such holder's adjusted tax basis in the ADSs surrendered. Similarly, a U.S. holder who deposits ordinary shares and receives ADSs will not recognize gain or loss, and will take a tax basis in the ADSs received equal to such holder's adjusted tax basis in the ordinary shares deposited. In both cases, the holding period of the securities received will include the holding period of the securities surrendered.

Meridian Trust Company, N.A., in its capacity as Depositary under the Deposit Agreement dated March 2, 2023 among Solstice, the Depositary, and the holders and beneficial owners of ADSs from time to time (the "Deposit Agreement"), acts as agent for the ADS holders. This agency relationship is disregarded for tax ownership purposes; the Depositary does not have a separate tax ownership interest in the ordinary shares held on behalf of ADS holders. The Depositary will, however, have certain reporting and withholding obligations with respect to distributions on and dispositions of ADSs, as described further in Sections IV and VIII of this memorandum.

B. ADS Ratio

Each ADS represents one (1) ordinary share of Solstice. The one-to-one ADS ratio eliminates the complexities that can arise in connection with ADS programs involving fractional share ratios, including issues related to the rounding or aggregation of fractional entitlements. Under the current structure, no fractional share issues are anticipated, and each ADS can be treated as the direct equivalent of one ordinary share for purposes of computing gain, loss, dividends, and tax basis.

If the ADS ratio were to change in the future (for example, as a result of a stock split, reverse stock split, or restructuring of the ADS program), the tax consequences to holders of ADSs would need to be reanalyzed in light of the revised ratio.

III. Passive Foreign Investment Company ("PFIC") Analysis

The classification of Solstice as a PFIC for any taxable year during which a U.S. holder holds ADSs would have significant adverse U.S. federal income tax consequences for such holder. The following analysis addresses whether Solstice is expected to be classified as a PFIC for its taxable year ending December 31, 2023, and the potential consequences if PFIC status were to apply.

A. Overview of PFIC Rules

Under Sections 1291 through 1298 of the Code, a foreign corporation is classified as a PFIC if, for any taxable year, either of the following tests is met:

(i) The Income Test: 75% or more of the corporation's gross income for such taxable year consists of "passive income" as defined in Section 1297(b); or

(ii) The Asset Test: 50% or more of the average percentage of assets (by value, determined on a quarterly basis) held by the corporation during such taxable year are assets that produce, or are held for the production of, passive income.

For purposes of the Income Test, "passive income" generally includes dividends, interest, royalties, rents (other than rents and royalties derived in the active conduct of a trade or business and received from unrelated persons), annuities, and net gains from the sale or exchange of property giving rise to such income. Section 1297(b)(1) of the Code provides that passive income means income of a kind which would be "foreign personal holding company income" as defined in Section 954(c), subject to certain modifications.

The consequences of PFIC classification are severe. Under the "excess distribution" regime of Section 1291, which applies in the absence of a timely qualified electing fund ("QEF") election or mark-to-market election:

• Any gain recognized by a U.S. holder on the disposition of stock in a PFIC, and any "excess distribution" (generally, any distribution in excess of 125% of the average of the distributions received by the holder during the shorter of the preceding three years or the holder's holding period) received by a U.S. holder, is allocated ratably over the holder's holding period for the stock.

• Amounts allocated to the current taxable year and to any taxable year prior to the first taxable year in which the corporation was a PFIC are taxed as ordinary income in the current year.

• Amounts allocated to each prior taxable year in which the corporation was a PFIC are taxed at the highest marginal rate in effect for such year, and an interest charge is imposed on the resulting tax at the rate applicable to underpayments of tax for such year.

• A U.S. holder who holds stock in a PFIC is not eligible for the preferential qualified dividend rate under Section 1(h)(11) with respect to dividends paid by the PFIC.

• A U.S. holder who holds stock in a PFIC is required to file IRS Form 8621 (Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund) for each taxable year in which the holder holds such stock.

Importantly, PFIC status is determined on a corporation-by-corporation and year-by-year basis. Once a foreign corporation is classified as a PFIC for any taxable year during which a U.S. holder holds shares, the corporation will generally continue to be treated as a PFIC with respect to such holder for all subsequent years, even if the corporation ceases to meet the Income Test or the Asset Test, unless the holder makes a "purging election" under Section 1298(b)(1).

Under the look-through rules of Section 1297(c), if a foreign corporation owns (directly or indirectly) at least 25% by value of the stock of another corporation, the foreign corporation is treated as if it held its proportionate share of the assets of the other corporation and received directly its proportionate share of the income of the other corporation. Solstice's 100% ownership of Solstice Surgical Inc. means that all of the income and assets of the U.S. subsidiary are attributed to Solstice on a look-through basis for purposes of the PFIC tests. This look-through rule is critical to the PFIC analysis because it ensures that the active trade or business income and assets of the U.S. subsidiary are taken into account in determining Solstice's PFIC status.

B. Application of the Income Test to Solstice — FY2022 Actuals and FY2023 Projections

We have reviewed Solstice's audited consolidated financial statements for the fiscal year ended December 31, 2022 (the "FY2022 Financials"), which were audited by Calderwood & Associates LLP under the supervision of engagement partner Patricia Yuen, and are included in the Registration Statement. We have also reviewed management's financial projections for the fiscal year ending December 31, 2023 (the "FY2023 Projections"), as provided to us by Mr. McBride on January 18, 2023 and updated on February 3, 2023.

FY2022 Audited Financial Highlights:

Solstice's revenue is derived primarily from sales of and services related to its NeuroPath™ Guided Navigation System, which received FDA 510(k) clearance (K211847) on June 14, 2021. Revenue sources include (a) sales of NeuroPath™ hardware and disposable components, (b) software licensing fees for the NeuroPath™ platform, and (c) service contracts providing maintenance, training, and software updates. All of these revenue streams represent income derived from the active conduct of a trade or business, and therefore constitute active trade or business income — not passive income — under Section 1297(b)(1) of the Code. Revenue from device sales constitutes income from the sale of inventory in the ordinary course of business. Service contract revenue and software licensing fees represent compensation for services rendered and the licensing of intellectual property in the active conduct of the Company's medical device business, respectively.

With respect to passive income, Solstice's primary source of passive income in FY2022 was interest income earned on its cash and cash equivalent balances. Given that the Company maintained average cash and cash equivalent balances of approximately $11.8 million during FY2022, and prevailing short-term interest rates averaged approximately 1.5–2.0% during the year, interest income in FY2022 was modest (estimated at approximately $150,000–$200,000), representing well under 1% of the Company's gross income.

FY2023 Projections and Post-IPO Analysis:

Looking forward to FY2023, the income composition analysis must take into account the significant increase in the Company's cash balances following the IPO. Net proceeds to Solstice from the Offering, after the underwriting discount of $5,525,000 (6.5% of gross proceeds) and estimated offering expenses of approximately $3,200,000, are estimated at approximately $76,275,000. Combined with the Company's existing cash and cash equivalent balance of $11,800,000, the Company's total cash position post-IPO is expected to be approximately $88,075,000.

With interest rates on short-term investments and money market instruments currently in the range of 4.5–5.0% per annum (reflecting the elevated interest rate environment following the Federal Reserve's series of rate increases in 2022), we project that Solstice's interest income on its aggregate cash balances in FY2023 could range from approximately $3,400,000 to $3,800,000 on an annualized basis. This projection assumes that a substantial portion of the IPO proceeds will be held in money market funds, short-term U.S. Treasury obligations, and other liquid instruments pending deployment into the Company's active business operations. We note that the timing of the IPO closing (expected in early March 2023) means that the Company will earn interest on the full post-IPO cash balance for approximately ten months of FY2023.

For FY2023, management projects total revenue in the range of $63,000,000 to $65,000,000, based on the Company's 34% historical revenue growth trajectory, the continued commercial ramp of the NeuroPath™ system in the United States and the European Union, and the planned launch of new disposable component products. Adding the projected interest income of approximately $3,400,000 to $3,800,000 to the projected active revenue, total gross income for FY2023 is estimated at approximately $66,400,000 to $68,800,000.

Under this projection, passive income (interest and other investment income) would constitute approximately 5% to 6% of total gross income, which is well below the 75% threshold of the Income Test.

Conclusion on Income Test: Based on the FY2023 Projections, Solstice does not expect to meet the Income Test for its taxable year ending December 31, 2023. Projected active trade or business income exceeds 94% of projected gross income, far above the 25% threshold required to avoid PFIC classification under the Income Test.

C. Application of the Asset Test — FY2023 Projections

The Asset Test requires an analysis of the average percentage of the Company's assets that produce, or are held for the production of, passive income, measured on a quarterly basis. For a corporation whose stock is publicly traded, the Asset Test is applied based on the fair market value of the corporation's assets, rather than their adjusted tax basis or book value. This distinction is critical in the case of Solstice.

Following the IPO, Solstice's total assets on a book value basis will increase significantly, primarily as a result of the approximately $76,275,000 in net IPO proceeds held as cash and short-term investments. On a book value basis, cash and short-term investments (which are generally passive assets) will represent a substantial percentage of total assets. As of December 31, 2022, the Company's total assets were $93,600,000; following the IPO, total assets on a book value basis are expected to increase to approximately $170,000,000.

However, for publicly traded companies, the Asset Test is applied based on fair market value, and the fair market value of a publicly traded company's assets includes intangible assets such as goodwill and going-concern value that are not reflected on the balance sheet. The fair market value of a corporation's goodwill and going-concern value is generally determined based on the excess of the corporation's market capitalization over the fair market value of its net identifiable tangible and intangible assets.

At the assumed IPO price of $11.0769 per ADS, and based on the expected 35,666,667 ordinary shares outstanding immediately following the Offering (assuming no exercise of the underwriters' over-allotment option), Solstice's market capitalization at the time of the IPO will be approximately $395,000,000. The excess of this market capitalization over the Company's book value of net assets represents goodwill and going-concern value attributable to the Company's active medical device business, including the value of the NeuroPath™ product platform, the Company's customer relationships, its FDA clearances and regulatory approvals, its pipeline (including OrthoSync™), and its assembled workforce.

This goodwill and going-concern value is allocable to Solstice's active business operations and is therefore treated as an active (non-passive) asset for purposes of the Asset Test. The inclusion of goodwill and going-concern value in the denominator of the Asset Test calculation significantly reduces the percentage of the Company's assets that are passive.

Based on our calculations, even assuming that all of the Company's cash and short-term investments (approximately $88,000,000 post-IPO) are treated as passive assets, the projected passive asset percentage under the Asset Test is estimated at approximately 20% to 25%, reflecting the substantial goodwill and going-concern value embedded in the Company's market capitalization. This percentage is well below the 50% threshold required for PFIC classification under the Asset Test.

We note that the passive asset percentage under the Asset Test will fluctuate with the Company's stock price. A significant decline in the Company's market capitalization would reduce the amount of goodwill and going-concern value attributed to the active business, which would increase the relative proportion of passive assets. Conversely, an increase in the stock price would further reduce the passive asset percentage. We recommend that Solstice monitor its passive asset percentage on a quarterly basis, particularly in the event of significant stock price declines.

Conclusion on Asset Test: Based on the FY2023 Projections and the expected market capitalization at the time of the IPO, Solstice does not expect to meet the Asset Test for its taxable year ending December 31, 2023. The projected passive asset percentage of 20–25% is well below the 50% threshold.

D. Role of Solstice Surgical Inc. in PFIC Analysis

Solstice Surgical Inc. (EIN 87-4231568), a Delaware corporation with its principal office at 200 West Adams Street, Suite 1100, Chicago, IL 60606, is a wholly owned subsidiary of Solstice. Solstice Surgical Inc. serves as the Company's U.S. operating entity, providing commercial distribution, customer support, clinical trial coordination, and regulatory affairs support for Solstice's U.S. operations.

Because Solstice owns 100% of the stock of Solstice Surgical Inc. by value, the look-through rule of Section 1297(c) of the Code applies. Under this rule, Solstice is treated as if it directly held its proportionate share of the assets of Solstice Surgical Inc. and received directly its proportionate share of the income of Solstice Surgical Inc. This look-through treatment is applied on a pro rata basis, and since Solstice owns 100% of Solstice Surgical Inc., all of the U.S. subsidiary's income and assets are attributed to Solstice for PFIC purposes.

Solstice Surgical Inc. operates under an intercompany cost-plus services agreement with Solstice (the "Services Agreement"), pursuant to which Solstice Surgical Inc. provides specified services to Solstice and is compensated at cost plus a 7.5% markup. The income earned by Solstice Surgical Inc. under this arrangement represents compensation for services rendered in the active conduct of a trade or business. As such, all income attributable to Solstice Surgical Inc. constitutes active trade or business income for PFIC purposes and is not passive income.

Similarly, the assets of Solstice Surgical Inc. — which consist primarily of working capital, accounts receivable, equipment, and leasehold improvements — are used in the active conduct of the U.S. subsidiary's services business and are therefore classified as active (non-passive) assets for purposes of the Asset Test.

It is essential that the intercompany Services Agreement be maintained at arm's-length standards consistent with Section 482 of the Code and the OECD Transfer Pricing Guidelines in order to ensure proper characterization of the income attributable to Solstice Surgical Inc. We discuss the transfer pricing considerations in greater detail in Section VII of this memorandum.

E. PFIC Conclusion and Caveats

Based on the analysis set forth in Sections III.B through III.D above, and on the basis of Solstice's audited FY2022 financial statements and management's FY2023 financial projections, Solstice does not expect to be classified as a PFIC for its taxable year ending December 31, 2023. The Company does not expect to meet either the Income Test or the Asset Test for FY2023.

We emphasize, however, the following important caveats:

• Annual Determination Required. PFIC status is determined annually, and there can be no assurance that Solstice will not be classified as a PFIC for FY2023 or any future taxable year. The determination depends on the composition of the Company's income and assets in each year, which may be affected by factors beyond the Company's control.

• Factors That Could Trigger PFIC Classification. Solstice could become a PFIC in a future taxable year if, among other things: (a) active revenue declines significantly (for example, due to competitive pressures, product recalls, or loss of regulatory approvals); (b) the Company accumulates large cash balances without deploying them in active business operations; (c) the Company's market capitalization declines significantly, reducing the amount of goodwill and going-concern value attributed to the active business for purposes of the Asset Test; or (d) regulatory delays affecting the OrthoSync™ Investigational Device Exemption ("IDE") clinical trial (IDE No. G220035) reduce near-term revenue prospects and cause a shift in the income composition toward passive income.

• Risk Factor Disclosure. In light of the inherent uncertainty in the PFIC determination, the Company's prospectus will include appropriate risk factor language disclosing the possibility of PFIC classification and its adverse tax consequences to U.S. holders of ADSs.

• Mitigation Elections. If Solstice were classified as a PFIC in any taxable year, U.S. holders may be able to mitigate the adverse consequences of the Section 1291 excess distribution regime by making a QEF election under Section 1295 of the Code or a mark-to-market election under Section 1296 of the Code.

With respect to the QEF election, a U.S. holder who makes a valid and timely QEF election for the first taxable year in which the holder holds ADSs and Solstice is classified as a PFIC (a "pedigreed QEF election") would be required to include in gross income annually its pro rata share of Solstice's ordinary earnings and net capital gain, whether or not distributed, thereby avoiding the punitive excess distribution regime. The QEF election requires the PFIC to furnish to the electing holder a "PFIC Annual Information Statement" containing certain information about the PFIC's income and assets. If PFIC status were triggered in any future year, Solstice should be prepared to furnish such a statement to facilitate QEF elections by its U.S. holders.

With respect to the mark-to-market election, a U.S. holder who makes a mark-to-market election under Section 1296 with respect to ADSs (which are "marketable stock" by virtue of being regularly traded on the Nasdaq Global Market) would be required to include in income each year an amount equal to the excess, if any, of the fair market value of the ADSs at the close of the taxable year over the holder's adjusted tax basis in the ADSs. A mark-to-market deduction would be allowed for the excess, if any, of the holder's adjusted tax basis over the fair market value at year-end, but only to the extent of previously included mark-to-market income.

IV. Taxation of Distributions on ADSs (Dividends)

A. U.S. Federal Income Tax Treatment of Dividends

Distributions of cash or other property paid by Solstice with respect to ADSs will be treated as dividends for U.S. federal income tax purposes to the extent paid out of the Company's current or accumulated earnings and profits, as determined under U.S. federal income tax principles. It is important to note that U.S. federal income tax principles for determining earnings and profits differ from International Financial Reporting Standards ("IFRS") and Irish GAAP, and accordingly, the amount of a distribution that constitutes a dividend for U.S. tax purposes may differ from the amount that would be treated as a dividend under the laws of Ireland or under IFRS.

As of December 31, 2022, Solstice had an accumulated deficit, having reported a net loss of ($14,100,000) for FY2022 and cumulative losses since inception. Accordingly, the Company does not currently have accumulated earnings and profits for U.S. federal income tax purposes. To the extent any distributions are made in excess of the Company's current and accumulated earnings and profits, such distributions will first be treated as a tax-free return of capital, reducing the holder's adjusted tax basis in its ADSs (but not below zero), and any excess over the holder's adjusted tax basis will be treated as capital gain from the sale or exchange of the ADSs.

If and when Solstice begins to make distributions that are treated as dividends for U.S. federal income tax purposes, such dividends will constitute foreign-source income for purposes of the foreign tax credit provisions of the Code. The foreign-source characterization of dividend income is relevant because it enables U.S. holders to claim a foreign tax credit against their U.S. federal income tax liability for Irish withholding taxes imposed on such dividends, subject to the limitations discussed in Section IV.C below.

Qualified Dividend Treatment for Non-Corporate U.S. Holders. Under Section 1(h)(11) of the Code, dividends received by non-corporate U.S. holders (including individuals) from "qualified foreign corporations" are eligible for taxation at the preferential rates applicable to long-term capital gains — currently a maximum rate of 20% (plus the 3.8% net investment income tax under Section 1411, where applicable). A foreign corporation is a "qualified foreign corporation" if (a) the stock of such corporation with respect to which the dividend is paid is readily tradable on an established securities market in the United States, or (b) the corporation is eligible for the benefits of a comprehensive income tax treaty with the United States that the Secretary of the Treasury determines is satisfactory for this purpose and that includes an exchange of information program.

Solstice is expected to satisfy both of these requirements. First, the ADSs will be listed and traded on the Nasdaq Global Market, which is an established securities market in the United States. Second, Ireland is a party to the U.S.–Ireland Double Taxation Convention, which the Treasury Department has identified as a comprehensive income tax treaty that is satisfactory for purposes of Section 1(h)(11).

However, qualified dividend treatment is available only if the following additional conditions are satisfied:

(i) Solstice is not classified as a PFIC in the taxable year in which the dividend is paid or in the immediately preceding taxable year (as discussed in Section III above, Solstice does not expect to be a PFIC for FY2023);

(ii) The U.S. holder satisfies the applicable holding period requirement — the holder must have held the ADSs for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date (the date on which the ADSs begin trading without the right to the dividend); and

(iii) The U.S. holder is not under an obligation (whether pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property.

Corporate U.S. Holders. Corporate U.S. holders will not be entitled to the dividends-received deduction under Section 243 of the Code with respect to dividends received from Solstice, because the dividends-received deduction is generally available only for dividends received from domestic corporations.

B. Irish Withholding Tax on Dividends

Standard Rate. Under Irish tax law, Ireland imposes a dividend withholding tax ("DWT") at a standard rate of 25% on dividends and other distributions paid by Irish-resident companies to their shareholders. This withholding tax applies at source, meaning that the distributing company (or its agent, including the Depositary) is required to withhold the tax from the gross amount of the distribution and remit it to the Irish Revenue Commissioners.

Treaty-Reduced Rate. Under Article 10 of the U.S.–Ireland Double Taxation Convention, the rate of Irish DWT on dividends paid by an Irish-resident company to a U.S. resident who is the beneficial owner of the dividends is reduced from the statutory rate of 25% to 15%, provided that the following conditions are satisfied:

(i) The U.S. holder is a resident of the United States within the meaning of Article 4 of the DTC;

(ii) The U.S. holder is the beneficial owner of the dividends;

(iii) The U.S. holder satisfies the limitation on benefits provision set forth in Article 23 of the DTC (which is designed to prevent "treaty shopping" and generally requires that the holder be a qualified person, such as an individual, a publicly traded company, a tax-exempt organization, or a company that satisfies an ownership and base erosion test); and

(iv) The U.S. holder has filed the appropriate claim forms with the Irish Revenue Commissioners (or has provided sufficient certifications to the Depositary to enable the Depositary to apply the reduced rate at source).

We note that for certain qualifying U.S. pension funds and other tax-exempt entities, the DTC may provide for a further reduction or elimination of Irish DWT on dividends, subject to specific conditions and limitations that are beyond the scope of this memorandum.

Mechanics Through the Depositary. Meridian Trust Company, N.A., as Depositary, will generally apply the treaty-reduced rate of 15% for U.S. holders who have provided appropriate certifications. Specifically, the Depositary will require U.S. holders to provide a properly completed IRS Form W-9 (Request for Taxpayer Identification Number and Certification) to certify their U.S. tax residency, as well as any applicable Irish withholding forms required by the Irish Revenue Commissioners. To the extent the Depositary receives proper certifications, it will withhold Irish DWT at the reduced rate of 15% on behalf of the Irish Revenue Commissioners.

Refund Procedures. If Irish DWT is withheld at the full statutory rate of 25% (for example, because the holder failed to provide proper certifications in a timely manner), the U.S. holder may claim a refund of the excess withholding (25% minus 15% = 10%) directly from the Irish Revenue Commissioners. Refund claims must be made in the prescribed form and within the applicable time limitations under Irish tax law.

C. Foreign Tax Credit Implications

Irish DWT imposed on dividends paid to U.S. holders will generally be eligible for a credit against such holders' U.S. federal income tax liability, subject to the limitations of Section 904 of the Code. The foreign tax credit is designed to mitigate the double taxation of foreign-source income — i.e., income that is subject to both Irish DWT and U.S. federal income tax.

For purposes of the foreign tax credit limitation under Section 904, dividends received from Solstice will generally constitute "passive category income" (or, for certain corporate holders, "general category income"). The foreign tax credit is limited to the U.S. tax attributable to the holder's foreign-source income in the relevant category, determined on a per-category basis. Excess foreign tax credits in a given category may be carried back one year and carried forward ten years.

As an alternative to claiming a foreign tax credit, U.S. holders may elect to deduct the Irish DWT paid or accrued against their taxable income. This election applies on an all-or-nothing basis — if the deduction election is made, it must be made with respect to all foreign taxes paid or accrued by the holder for the taxable year. In most cases, the credit will be more beneficial than the deduction, but holders should consult their own tax advisors to determine the optimal approach in their particular circumstances.

Interaction with Qualified Dividend Rate. Where the preferential qualified dividend rate of 20% applies to dividend income, the effective U.S. tax rate on the dividend is 20% (or 23.8% including the net investment income tax). If the Irish DWT rate is 15%, the foreign tax credit available may, in some cases, exceed the U.S. tax on the dividend income (before the credit), resulting in an excess foreign tax credit that must be carried forward. This interaction is inherently fact-specific and depends on the holder's overall foreign-source income, U.S. tax liability, and foreign tax credit position. Holders are urged to consult their own tax advisors regarding the application of the foreign tax credit rules to their particular circumstances.

V. Taxation of Dispositions of ADSs

A. General Treatment — Capital Gain or Loss

A U.S. holder who sells, exchanges, or otherwise disposes of ADSs in a taxable transaction will generally recognize capital gain or loss in an amount equal to the difference between (i) the amount realized on the disposition (i.e., the amount of cash and the fair market value of any other property received in exchange for the ADSs) and (ii) the holder's adjusted tax basis in the ADSs disposed of.

For U.S. holders who acquire ADSs in the IPO, the initial adjusted tax basis will generally be equal to the U.S. dollar cost of the ADSs, which is $11.0769 per ADS (the assumed public offering price). The adjusted tax basis of ADSs may be increased by any amounts previously included in income as a result of a QEF election or mark-to-market election, or decreased by any distributions previously treated as tax-free returns of capital.

Capital gain or loss recognized on the disposition of ADSs will be long-term capital gain or loss if the ADSs have been held for more than one year at the time of the disposition. Long-term capital gains of non-corporate U.S. holders are currently taxed at a maximum U.S. federal income tax rate of 20%. In addition, as discussed in Section VI below, non-corporate U.S. holders whose modified adjusted gross income exceeds certain thresholds may be subject to an additional 3.8% net investment income tax on such gains. Short-term capital gains (i.e., gains on ADSs held for one year or less) are taxed at ordinary income rates, which are currently as high as 37% for individuals (plus the 3.8% net investment income tax, where applicable).

Capital losses recognized on the disposition of ADSs are subject to limitations. For non-corporate U.S. holders, capital losses may be used to offset capital gains and, to the extent capital losses exceed capital gains, up to $3,000 ($1,500 in the case of a married individual filing a separate return) of ordinary income per taxable year. Net capital losses in excess of these limitations may be carried forward indefinitely to future taxable years. For corporate U.S. holders, capital losses may be used only to offset capital gains, and may be carried back three years and carried forward five years.

B. Source of Gain

Gain recognized by a U.S. holder on the sale or other disposition of ADSs will generally be treated as U.S.-source income for purposes of the foreign tax credit provisions of the Code. As a consequence, a U.S. holder who pays foreign tax (if any) on such gain will generally not be able to claim a foreign tax credit against its U.S. federal income tax liability with respect to such gain, absent an applicable treaty provision or election to treat the gain as foreign-source income.

We note that if Solstice were treated as a "resident" of Ireland for purposes of the U.S.–Ireland Double Taxation Convention, a U.S. holder may, under certain circumstances, elect to treat gain from the disposition of ADSs as foreign-source income for foreign tax credit purposes. However, because gain from the disposition of shares in a foreign corporation is generally not subject to Irish tax in the hands of a non-Irish resident, this issue is unlikely to arise in practice.

C. PFIC Implications on Disposition

If Solstice were classified as a PFIC for any taxable year during which a U.S. holder held ADSs (or during any prior taxable year if the "once a PFIC, always a PFIC" rule applies), gain recognized by such holder on the disposition of ADSs would not be treated as capital gain. Instead, such gain would be subject to the punitive "excess distribution" regime under Section 1291 of the Code, as described in Section III.A above. Under this regime:

• The gain would be allocated ratably over the holder's holding period for the ADSs.

• Amounts allocated to the current taxable year, and to any taxable years before the first year in which Solstice was classified as a PFIC, would be taxed as ordinary income.

• Amounts allocated to each other taxable year would be taxed at the highest marginal rate in effect for that year, and an interest charge at the rate applicable to underpayments of tax would be imposed on the resulting tax.

This punitive treatment underscores the critical importance of the PFIC analysis set forth in Section III of this memorandum. As noted above, Solstice does not expect to be classified as a PFIC for FY2023, but no assurance can be given for future years.

If a QEF election is in effect, gain on the disposition of ADSs would generally be treated as capital gain, and the holder would have already included its pro rata share of Solstice's income in its taxable income on a current basis, thereby avoiding the excess distribution regime. If a mark-to-market election is in effect, the holder would have included annual mark-to-market adjustments in income, and gain on the ultimate disposition would be treated as ordinary income to the extent of net mark-to-market gains previously included.

D. Interaction with Lock-Up Period

Under the lock-up agreements executed in connection with the Offering (the "Lock-Up Agreements"), certain directors, officers, and holders of 1% or more of the pre-IPO ordinary shares of Solstice (collectively, the "Locked-Up Holders") have agreed not to sell, offer, pledge, grant any option to purchase, make any short sale, or otherwise transfer or dispose of (directly or indirectly) any ordinary shares or ADSs, or any securities convertible into or exercisable or exchangeable for ordinary shares or ADSs, for a period of 180 days from March 2, 2023 (the date of the final prospectus), without the prior written consent of Keystone Mercer & Co., LLC, as representative of the underwriters. The lock-up period expires on August 29, 2023.

The Lock-Up Agreements cover a total of approximately 23,480,000 ordinary shares, representing approximately 83.9% of the Company's pre-IPO outstanding ordinary shares. The principal Locked-Up Holders and their respective share holdings are as follows:

Tax Consequences of the Lock-Up:

The execution and existence of the Lock-Up Agreement does not, in and of itself, create a taxable event for U.S. federal income tax purposes. A contractual restriction on the ability to sell or transfer securities is not treated as a disposition or constructive sale of such securities under the Code. The locked-up shares continue to be owned by the Locked-Up Holders for all tax purposes throughout the lock-up period.

Importantly, the lock-up period counts toward the computation of the Locked-Up Holders' holding periods for purposes of determining whether gain or loss on the eventual disposition of shares will be long-term or short-term. Shares held during the lock-up period are treated as continuously held by the Locked-Up Holder for the entire lock-up period, and the running of the holding period is not interrupted or suspended by the existence of the lock-up restriction.

For founders and insiders who acquired their ordinary shares prior to September 2022 (which includes the majority of the Locked-Up Holders listed above), the lock-up period will extend well past the one-year holding period threshold for long-term capital gain treatment. By the time the lock-up expires on August 29, 2023, these holders will have held their shares for more than one year, ensuring that any gain recognized on a post-lock-up disposition will be taxed as long-term capital gain at a maximum rate of 20% (plus 3.8% net investment income tax, where applicable), rather than as short-term capital gain at ordinary income rates of up to 37% (plus 3.8%).

With respect to the pledging restrictions contained in the Lock-Up Agreements, we note that a pledge of ADSs during the lock-up period without the prior written consent of Keystone Mercer & Co., LLC would constitute a violation of the Lock-Up Agreement. Moreover, depending on the facts and circumstances, a pledge of securities could potentially be treated as a disposition for U.S. federal income tax purposes. Under Section 1001 of the Code, a disposition includes any sale, exchange, or other disposition of property. While a pledge alone is generally not treated as a disposition (absent a transfer of the benefits and burdens of ownership), if the circumstances indicate that the pledgor has effectively parted with the economic benefits and risks of ownership (for example, if the pledgee has the right to sell the securities upon default and the pledgor has no realistic expectation of recovering the securities), the pledge could be recharacterized as a sale. Locked-Up Holders should be advised to refrain from any unauthorized pledging activity during the lock-up period.

Planning Opportunity. For Locked-Up Holders whose shares will have been held for more than one year by the lock-up expiration date of August 29, 2023, post-lock-up dispositions will be eligible for long-term capital gain treatment. For any holders who may have acquired shares less than one year before the lock-up expiration date (for example, holders who received shares in connection with the IPO or in other transactions occurring after August 29, 2022), it will be important to monitor the short-term/long-term holding period cutoff and, where possible, to defer dispositions until the one-year holding period has been satisfied. We recommend that the Company coordinate with its legal counsel to provide appropriate guidance to Locked-Up Holders regarding the tax implications of post-lock-up dispositions.

VI. Net Investment Income Tax

In addition to the regular U.S. federal income tax described in Sections IV and V above, certain non-corporate U.S. holders are subject to an additional 3.8% tax on "net investment income" under Section 1411 of the Code (the "Net Investment Income Tax" or "NIIT"). The NIIT applies to individuals, estates, and trusts whose "modified adjusted gross income" exceeds certain threshold amounts:

• $250,000 for married individuals filing jointly and surviving spouses;

• $200,000 for single individuals and heads of household;

• $125,000 for married individuals filing separately.

"Net investment income" for purposes of the NIIT generally includes, among other things: (i) gross income from interest, dividends, annuities, royalties, and rents (other than such income derived in the ordinary course of a trade or business that is not a passive activity or a trade or business of trading in financial instruments or commodities); (ii) other gross income from a trade or business that is a passive activity or a trade or business of trading in financial instruments or commodities; and (iii) net gain attributable to the disposition of property other than property held in a trade or business that is not a passive activity or a trade or business of trading in financial instruments or commodities.

Both dividends on ADSs and capital gain from the disposition of ADSs will constitute "net investment income" for purposes of the NIIT. Accordingly, non-corporate U.S. holders whose modified adjusted gross income exceeds the applicable thresholds should anticipate the following combined effective federal tax rates:

Foreign tax credits under Section 27 of the Code generally may not be used to offset the NIIT. However, Treasury Regulations under Section 1411 provide that properly allocable deductions may reduce net investment income, and in limited circumstances, foreign taxes may be taken into account as deductions (rather than credits) in computing net investment income. The interplay between foreign tax credits and the NIIT is complex, and holders are urged to consult their own tax advisors regarding the application of the NIIT to their particular circumstances.

VII. Transfer Pricing Considerations — Solstice Surgical Inc.

A. Structure. As described in Section III.D above, Solstice Surgical Inc. (EIN 87-4231568), a Delaware corporation with its principal office at 200 West Adams Street, Suite 1100, Chicago, IL 60606, is a wholly owned subsidiary of Solstice. Solstice Surgical Inc. was incorporated on March 15, 2019, and has served as the Company's principal U.S. operating entity since its formation.

Solstice Surgical Inc. operates under a cost-plus intercompany services agreement (the "Services Agreement") with Solstice, pursuant to which Solstice Surgical Inc. provides the following categories of services to Solstice:

(a) U.S. commercial distribution services, including sales, marketing, and distribution of Solstice products in the United States;

(b) Customer support services, including technical support, training, and after-sale service for U.S.-based customers;

(c) Clinical trial coordination services, including coordination and management of U.S.-based clinical trial sites and regulatory submissions in connection with the OrthoSync™ IDE clinical trial (IDE No. G220035) and other clinical programs; and

(d) Regulatory affairs support, including liaison with the U.S. Food and Drug Administration and other U.S. regulatory bodies.

Under the Services Agreement, Solstice Surgical Inc. is compensated at its total costs (including direct and indirect costs allocable to the services provided) plus a markup of 7.5%.

B. Arm's-Length Standard

The intercompany cost-plus arrangement between Solstice and Solstice Surgical Inc. must satisfy the arm's-length standard set forth in Section 482 of the Code and the Treasury Regulations promulgated thereunder. Section 482 authorizes the IRS to distribute, apportion, or allocate gross income, deductions, credits, or allowances between or among two or more organizations, trades, or businesses owned or controlled by the same interests if it determines that such action is necessary to clearly reflect the income of such organizations.

The Treasury Regulations under Section 482 provide detailed rules for determining the arm's-length price for controlled transactions, including the comparable profits method, the cost-plus method, the resale price method, and the comparable uncontrolled price method, among others. For intercompany services of the type provided by Solstice Surgical Inc. — which are generally characterized as routine support services provided by a limited-risk entity — the cost-plus method is typically the most appropriate transfer pricing method.

A 7.5% cost-plus markup is generally within the interquartile range supported by comparable uncontrolled transactions involving similar limited-risk service providers in the medical device industry. Based on our review of publicly available data from comparable companies and industry benchmarking studies, cost-plus markups for comparable limited-risk service entities in the medical device sector typically range from approximately 5% to 10%, with a median in the range of 7% to 8%. The 7.5% markup applied under the Services Agreement falls within this range and is consistent with the arm's-length standard.

Notwithstanding the foregoing, we strongly recommend that Solstice Surgical Inc. prepare and maintain contemporaneous transfer pricing documentation in accordance with Treasury Regulation § 1.6662-6 to support the arm's-length nature of the intercompany arrangement. Such documentation should include, at a minimum: (i) an analysis of the functions performed, assets used, and risks assumed by each party to the controlled transaction; (ii) a description of the selected transfer pricing method and the reasons for its selection; (iii) a comparability analysis identifying comparable uncontrolled transactions; and (iv) an economic analysis demonstrating that the results of the controlled transaction are consistent with the arm's-length standard. Proper documentation provides a penalty protection defense against the imposition of transfer pricing penalties under Section 6662(e) of the Code.

C. Relevance to PFIC Analysis

As discussed in Section III.D, income earned by Solstice Surgical Inc. under the Services Agreement is attributed to Solstice under the look-through rules of Section 1297(c) and constitutes active trade or business income for PFIC purposes. The proper characterization of this income — as active rather than passive — is dependent on the intercompany arrangement being respected as a bona fide services arrangement at arm's-length terms.

If the IRS were to successfully challenge the transfer pricing arrangement under Section 482 and reallocate income between Solstice Surgical Inc. and Solstice (for example, by asserting that the cost-plus markup should be higher or lower, or by recharacterizing the nature of the intercompany transactions), such reallocation could theoretically affect the composition of Solstice's income for purposes of the PFIC Income Test. However, even under conservative transfer pricing adjustments (such as an increase in the cost-plus markup from 7.5% to 10% or a reduction to 5%), the active income proportion is expected to remain well above the 75% threshold, given that device sales revenue (which is unambiguously active) constitutes the dominant component of Solstice's consolidated gross income. Accordingly, we do not believe that reasonable transfer pricing adjustments would cause Solstice to meet the Income Test.

D. Base Erosion and Anti-Abuse Tax (BEAT) / GILTI Considerations

We briefly address certain additional international tax provisions that may be relevant to the Solstice group structure:

BEAT (Section 59A). The Base Erosion and Anti-Abuse Tax under Section 59A of the Code applies to "applicable taxpayers" — U.S. corporations (other than regulated investment companies, real estate investment trusts, and S corporations) with average annual gross receipts of at least $500 million for the three preceding taxable years and a "base erosion percentage" of 3% or higher (2% for certain banks and securities dealers). Solstice Surgical Inc. is a U.S. corporation that makes deductible payments to its Irish parent under the Services Agreement. These payments could potentially constitute "base erosion payments" for BEAT purposes. However, Solstice Surgical Inc.'s annual gross receipts are well below the $500 million threshold, and accordingly, the BEAT does not currently apply to Solstice Surgical Inc.

GILTI (Section 951A). The Global Intangible Low-Taxed Income provisions of Section 951A of the Code require each "United States shareholder" of a "controlled foreign corporation" ("CFC") to include in gross income annually its pro rata share of the CFC's "tested income" (generally, income that is not effectively connected with a U.S. trade or business and is not certain other categories of income), to the extent such income exceeds a deemed return on the CFC's qualified business asset investment. Because Solstice Surgical Inc. is a U.S. corporation (not a CFC), the GILTI provisions do not apply to its income from the perspective of Solstice Surgical Inc.'s U.S. corporate status. Moreover, from the perspective of U.S. holders of ADSs in Solstice (the Irish parent), the Subpart F and GILTI rules apply to Solstice's controlled foreign subsidiaries, not to Solstice itself. Since the primary subsidiary (Solstice Surgical Inc.) is a U.S. entity, and Solstice (the Irish parent) is the entity in which U.S. holders hold ADSs, the GILTI and Subpart F rules are not directly applicable to the ADS holders' investment in the Irish parent. U.S. holders of ADSs are not "United States shareholders" of a CFC by virtue of holding ADSs in an Irish parent company.

We note that if Solstice were to establish additional foreign subsidiaries in the future (for example, in connection with its planned European commercial expansion), the Subpart F and GILTI analyses would need to be revisited in connection with the PFIC analysis and the overall tax characterization of the Solstice group.

VIII. Information Reporting and Backup Withholding

A. Information Reporting

Payments of dividends on, and gross proceeds from the sale or other disposition of, ADSs to U.S. holders will generally be subject to information reporting requirements under the Code. Specifically, the Depositary, brokers, and other paying agents will be required to report such payments to the IRS and to the U.S. holder on IRS Form 1099-DIV (for dividends) or IRS Form 1099-B (for sale proceeds). U.S. holders who are "exempt recipients" — including corporations, tax-exempt organizations, qualified pension and profit-sharing trusts, individual retirement accounts, and certain other entities — are generally not subject to information reporting, provided they properly establish their exempt status.

B. Backup Withholding

Backup withholding at the applicable statutory rate (currently 24%) may apply to payments of dividends on ADSs and to proceeds from the sale, exchange, or other taxable disposition of ADSs, unless the U.S. holder:

(i) provides a correct taxpayer identification number ("TIN") to the paying agent on a properly completed IRS Form W-9 (or successor form) and certifies, under penalties of perjury, that such TIN is correct and that the holder is not subject to backup withholding; or

(ii) otherwise establishes an exemption from backup withholding (for exampl

MEMORANDUM
PRIVILEGED & CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION
This memorandum is a confidential attorney-client communication prepared by Calderwood & Harkness LLP for the exclusive use of the addressees identified herein. It is protected by the attorney-client privilege and the work-product doctrine. Any dissemination, distribution, or copying of this memorandum or its contents to any person other than the addressees, without the prior written consent of Calderwood & Harkness LLP, is strictly prohibited.
To: Dr. Cormac Tierney, Chief Executive Officer Ronan McBride, Chief Financial Officer Fiona Drennan, General Counsel — Solstice Biomedical Devices Limited
From: Sylvia Hartwell, Specialist Partner, Tax — Calderwood & Harkness LLP
Date: February 10, 2023
Re: U.S. Federal Income Tax Consequences to U.S. Holders of American Depositary Shares of Solstice Biomedical Devices Limited
Firm: Calderwood & Harkness LLP 425 Lexington Avenue New York, NY 10174
Matter Reference: Solstice Biomedical Devices Limited — $85,000,000 Nasdaq IPO (Ticker: SBDX)
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I. Executive Summary
You have asked us to analyze the material United States federal income tax consequences to U.S. holders of American Depositary Shares ("ADSs") issued in connection with the proposed initial public offering (the "IPO" or the "Offering") of Solstice Biomedical Devices Limited ("Solstice," "SBD," or the "Company"), an Irish company incorporated under the Companies Act 2014 (Companies Registration Office No. 587412), on the Nasdaq Global Market under the ticker symbol "SBDX." Each ADS represents one (1) ordinary share, par value €0.001 per share, of Solstice (CUSIP 83472R 109). The depositary for the ADS program is Meridian Trust Company, N.A. (the "Depositary").
The IPO targets gross proceeds of approximately $85,000,000, based on the sale of 7,670,455 ADSs at an assumed initial public offering price of $11.0769 per ADS. The Company filed a Registration Statement on Form S-1 with the Securities and Exchange Commission (SEC File No. 333-268514), which is expected to be declared effective shortly. The lead book-running manager for the Offering is Keystone Mercer & Co., LLC.
Set forth below is a summary of the key conclusions reached in this memorandum:
1.  PFIC Status. Based on our analysis of Solstice's audited FY2022 financial statements and management's projections for FY2023, Solstice does not expect to be classified as a "passive foreign investment company" ("PFIC") within the meaning of Sections 1291 through 1298 of the Internal Revenue Code of 1986, as amended (the "Code"), for its taxable year ending December 31, 2023. This determination is, however, inherently factual and must be made annually; no assurance can be given with respect to Solstice's PFIC status for any future taxable year.
2.  Irish Dividend Withholding Tax. Irish dividend withholding tax ("DWT") at the standard statutory rate of 25% is reduced to 15% for qualifying U.S. holders who are eligible for benefits under the Convention between the Government of the United States of America and the Government of Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains (the "U.S.–Ireland Double Taxation Convention" or the "DTC"), signed on July 28, 1997, as amended by the Protocol signed on March 24, 1999.
3.  Treatment of ADSs. ADSs will generally be treated as equity in a foreign corporation for U.S. federal income tax purposes, and holders of ADSs will be treated as the beneficial owners of the underlying ordinary shares represented by such ADSs. Deposits and withdrawals of ordinary shares in exchange for ADSs will not constitute taxable events for U.S. federal income tax purposes.
4.  Gain on Disposition. Gain recognized by a U.S. holder upon the sale, exchange, or other taxable disposition of ADSs will generally be treated as capital gain, and will be long-term capital gain if the ADSs have been held for more than one year at the time of disposition. Long-term capital gains of non-corporate U.S. holders are currently taxed at a maximum federal rate of 20% (plus the 3.8% net investment income tax, where applicable).
5.  Dividends. Distributions paid by Solstice with respect to ADSs that are treated as dividends for U.S. federal income tax purposes may qualify for the preferential qualified dividend rate of 20% (plus the 3.8% net investment income tax) for non-corporate U.S. holders, provided that Solstice is not classified as a PFIC in the year of distribution or the preceding taxable year, that the ADSs are listed on a U.S. national securities exchange (which will be satisfied by the Nasdaq listing), and that applicable holding period requirements are met.
6.  Transfer Pricing. The intercompany transfer pricing arrangements between Solstice and its wholly owned U.S. subsidiary, Solstice Surgical Inc., a Delaware corporation (EIN 87-4231568), operating under a cost-plus intercompany services agreement at a 7.5% markup, are relevant to the PFIC income composition analysis. Income earned by Solstice Surgical Inc. is attributed to Solstice under the look-through rules of Section 1297(c) and constitutes active trade or business income for PFIC purposes, provided the arrangement satisfies the arm's-length standard under Section 482 of the Code.
This memorandum is prepared for the benefit of the Company and its officers and directors in connection with the IPO. Portions of this analysis are expected to form the basis of the "Material U.S. Federal Income Tax Consequences" section of the final prospectus included in the Registration Statement. This memorandum does not address state, local, or non-U.S. tax consequences other than as specifically discussed herein with respect to Irish dividend withholding tax. Except as set forth in Section X below, this memorandum does not address the tax consequences to non-U.S. holders of ADSs. This memorandum also does not address the tax consequences to holders subject to special rules, including, without limitation, banks and other financial institutions, insurance companies, regulated investment companies, real estate investment trusts, dealers in securities or currencies, traders in securities that elect to use the mark-to-market method of accounting, tax-exempt organizations, persons holding ADSs as part of a straddle, hedging transaction, conversion transaction, or integrated transaction, persons whose functional currency is not the U.S. dollar, or persons who acquired their ADSs through the exercise or cancellation of employee stock options or otherwise as compensation.
The analysis set forth in this memorandum is based on the Code, Treasury Regulations promulgated thereunder (including proposed and temporary regulations), published rulings and administrative pronouncements of the Internal Revenue Service (the "IRS"), and judicial decisions, in each case as in effect on the date hereof. These authorities are subject to differing interpretations and may be changed, possibly with retroactive effect. No ruling has been requested from the IRS with respect to any of the matters discussed herein, and there can be no assurance that the IRS would not take a position contrary to any of the conclusions set forth in this memorandum, or that any such contrary position would not be sustained by a court.
II. Treatment of ADSs for U.S. Federal Income Tax Purposes
A. General Principles — ADSs as Equity Ownership
Under well-established IRS guidance, a holder of ADSs is generally treated for U.S. federal income tax purposes as the beneficial owner of the underlying shares of stock represented by such ADSs. This treatment is supported by Revenue Ruling 58-225, 1958-1 C.B. 234, in which the IRS held that the holder of an American depositary receipt representing shares of a foreign corporation should be treated as the owner of the underlying foreign shares for U.S. federal income tax purposes. Treasury Regulation § 1.871-14(c) further supports this position in the context of the portfolio interest exemption by treating the holders of depositary receipts as the owners of the underlying obligations.
The practical consequence of this well-settled principle is that the U.S. federal income tax treatment of a holder of ADSs will be the same as if such holder directly held the underlying ordinary shares of Solstice. Accordingly, for purposes of this memorandum, references to the tax treatment of "ADSs" should be understood as references to the tax treatment of the underlying ordinary shares represented by the ADSs, and vice versa.
Deposits and withdrawals of ordinary shares by a U.S. holder in exchange for ADSs, and withdrawals of ordinary shares in exchange for ADSs, will generally not constitute taxable events for U.S. federal income tax purposes. A U.S. holder who surrenders ADSs and receives ordinary shares will not recognize gain or loss on the exchange, and will have a tax basis in the ordinary shares received equal to such holder's adjusted tax basis in the ADSs surrendered. Similarly, a U.S. holder who deposits ordinary shares and receives ADSs will not recognize gain or loss, and will take a tax basis in the ADSs received equal to such holder's adjusted tax basis in the ordinary shares deposited. In both cases, the holding period of the securities received will include the holding period of the securities surrendered.
Meridian Trust Company, N.A., in its capacity as Depositary under the Deposit Agreement dated March 2, 2023 among Solstice, the Depositary, and the holders and beneficial owners of ADSs from time to time (the "Deposit Agreement"), acts as agent for the ADS holders. This agency relationship is disregarded for tax ownership purposes; the Depositary does not have a separate tax ownership interest in the ordinary shares held on behalf of ADS holders. The Depositary will, however, have certain reporting and withholding obligations with respect to distributions on and dispositions of ADSs, as described further in Sections IV and VIII of this memorandum.
B. ADS Ratio
Each ADS represents one (1) ordinary share of Solstice. The one-to-one ADS ratio eliminates the complexities that can arise in connection with ADS programs involving fractional share ratios, including issues related to the rounding or aggregation of fractional entitlements. Under the current structure, no fractional share issues are anticipated, and each ADS can be treated as the direct equivalent of one ordinary share for purposes of computing gain, loss, dividends, and tax basis.
If the ADS ratio were to change in the future (for example, as a result of a stock split, reverse stock split, or restructuring of the ADS program), the tax consequences to holders of ADSs would need to be reanalyzed in light of the revised ratio.
III. Passive Foreign Investment Company ("PFIC") Analysis
The classification of Solstice as a PFIC for any taxable year during which a U.S. holder holds ADSs would have significant adverse U.S. federal income tax consequences for such holder. The following analysis addresses whether Solstice is expected to be classified as a PFIC for its taxable year ending December 31, 2023, and the potential consequences if PFIC status were to apply.
A. Overview of PFIC Rules
Under Sections 1291 through 1298 of the Code, a foreign corporation is classified as a PFIC if, for any taxable year, either of the following tests is met:
(i) The Income Test: 75% or more of the corporation's gross income for such taxable year consists of "passive income" as defined in Section 1297(b); or
(ii) The Asset Test: 50% or more of the average percentage of assets (by value, determined on a quarterly basis) held by the corporation during such taxable year are assets that produce, or are held for the production of, passive income.
For purposes of the Income Test, "passive income" generally includes dividends, interest, royalties, rents (other than rents and royalties derived in the active conduct of a trade or business and received from unrelated persons), annuities, and net gains from the sale or exchange of property giving rise to such income. Section 1297(b)(1) of the Code provides that passive income means income of a kind which would be "foreign personal holding company income" as defined in Section 954(c), subject to certain modifications.
The consequences of PFIC classification are severe. Under the "excess distribution" regime of Section 1291, which applies in the absence of a timely qualified electing fund ("QEF") election or mark-to-market election:
•  Any gain recognized by a U.S. holder on the disposition of stock in a PFIC, and any "excess distribution" (generally, any distribution in excess of 125% of the average of the distributions received by the holder during the shorter of the preceding three years or the holder's holding period) received by a U.S. holder, is allocated ratably over the holder's holding period for the stock.
•  Amounts allocated to the current taxable year and to any taxable year prior to the first taxable year in which the corporation was a PFIC are taxed as ordinary income in the current year.
•  Amounts allocated to each prior taxable year in which the corporation was a PFIC are taxed at the highest marginal rate in effect for such year, and an interest charge is imposed on the resulting tax at the rate applicable to underpayments of tax for such year.
•  A U.S. holder who holds stock in a PFIC is not eligible for the preferential qualified dividend rate under Section 1(h)(11) with respect to dividends paid by the PFIC.
•  A U.S. holder who holds stock in a PFIC is required to file IRS Form 8621 (Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund) for each taxable year in which the holder holds such stock.
Importantly, PFIC status is determined on a corporation-by-corporation and year-by-year basis. Once a foreign corporation is classified as a PFIC for any taxable year during which a U.S. holder holds shares, the corporation will generally continue to be treated as a PFIC with respect to such holder for all subsequent years, even if the corporation ceases to meet the Income Test or the Asset Test, unless the holder makes a "purging election" under Section 1298(b)(1).
Under the look-through rules of Section 1297(c), if a foreign corporation owns (directly or indirectly) at least 25% by value of the stock of another corporation, the foreign corporation is treated as if it held its proportionate share of the assets of the other corporation and received directly its proportionate share of the income of the other corporation. Solstice's 100% ownership of Solstice Surgical Inc. means that all of the income and assets of the U.S. subsidiary are attributed to Solstice on a look-through basis for purposes of the PFIC tests. This look-through rule is critical to the PFIC analysis because it ensures that the active trade or business income and assets of the U.S. subsidiary are taken into account in determining Solstice's PFIC status.
B. Application of the Income Test to Solstice — FY2022 Actuals and FY2023 Projections
We have reviewed Solstice's audited consolidated financial statements for the fiscal year ended December 31, 2022 (the "FY2022 Financials"), which were audited by Calderwood & Associates LLP under the supervision of engagement partner Patricia Yuen, and are included in the Registration Statement. We have also reviewed management's financial projections for the fiscal year ending December 31, 2023 (the "FY2023 Projections"), as provided to us by Mr. McBride on January 18, 2023 and updated on February 3, 2023.
FY2022 Audited Financial Highlights:
Solstice's revenue is derived primarily from sales of and services related to its NeuroPath™ Guided Navigation System, which received FDA 510(k) clearance (K211847) on June 14, 2021. Revenue sources include (a) sales of NeuroPath™ hardware and disposable components, (b) software licensing fees for the NeuroPath™ platform, and (c) service contracts providing maintenance, training, and software updates. All of these revenue streams represent income derived from the active conduct of a trade or business, and therefore constitute active trade or business income — not passive income — under Section 1297(b)(1) of the Code. Revenue from device sales constitutes income from the sale of inventory in the ordinary course of business. Service contract revenue and software licensing fees represent compensation for services rendered and the licensing of intellectual property in the active conduct of the Company's medical device business, respectively.
With respect to passive income, Solstice's primary source of passive income in FY2022 was interest income earned on its cash and cash equivalent balances. Given that the Company maintained average cash and cash equivalent balances of approximately $11.8 million during FY2022, and prevailing short-term interest rates averaged approximately 1.5–2.0% during the year, interest income in FY2022 was modest (estimated at approximately $150,000–$200,000), representing well under 1% of the Company's gross income.
FY2023 Projections and Post-IPO Analysis:
Looking forward to FY2023, the income composition analysis must take into account the significant increase in the Company's cash balances following the IPO. Net proceeds to Solstice from the Offering, after the underwriting discount of $5,525,000 (6.5% of gross proceeds) and estimated offering expenses of approximately $3,200,000, are estimated at approximately $76,275,000. Combined with the Company's existing cash and cash equivalent balance of $11,800,000, the Company's total cash position post-IPO is expected to be approximately $88,075,000.
With interest rates on short-term investments and money market instruments currently in the range of 4.5–5.0% per annum (reflecting the elevated interest rate environment following the Federal Reserve's series of rate increases in 2022), we project that Solstice's interest income on its aggregate cash balances in FY2023 could range from approximately $3,400,000 to $3,800,000 on an annualized basis. This projection assumes that a substantial portion of the IPO proceeds will be held in money market funds, short-term U.S. Treasury obligations, and other liquid instruments pending deployment into the Company's active business operations. We note that the timing of the IPO closing (expected in early March 2023) means that the Company will earn interest on the full post-IPO cash balance for approximately ten months of FY2023.
For FY2023, management projects total revenue in the range of $63,000,000 to $65,000,000, based on the Company's 34% historical revenue growth trajectory, the continued commercial ramp of the NeuroPath™ system in the United States and the European Union, and the planned launch of new disposable component products. Adding the projected interest income of approximately $3,400,000 to $3,800,000 to the projected active revenue, total gross income for FY2023 is estimated at approximately $66,400,000 to $68,800,000.
Under this projection, passive income (interest and other investment income) would constitute approximately 5% to 6% of total gross income, which is well below the 75% threshold of the Income Test.
Conclusion on Income Test: Based on the FY2023 Projections, Solstice does not expect to meet the Income Test for its taxable year ending December 31, 2023. Projected active trade or business income exceeds 94% of projected gross income, far above the 25% threshold required to avoid PFIC classification under the Income Test.
C. Application of the Asset Test — FY2023 Projections
The Asset Test requires an analysis of the average percentage of the Company's assets that produce, or are held for the production of, passive income, measured on a quarterly basis. For a corporation whose stock is publicly traded, the Asset Test is applied based on the fair market value of the corporation's assets, rather than their adjusted tax basis or book value. This distinction is critical in the case of Solstice.
Following the IPO, Solstice's total assets on a book value basis will increase significantly, primarily as a result of the approximately $76,275,000 in net IPO proceeds held as cash and short-term investments. On a book value basis, cash and short-term investments (which are generally passive assets) will represent a substantial percentage of total assets. As of December 31, 2022, the Company's total assets were $93,600,000; following the IPO, total assets on a book value basis are expected to increase to approximately $170,000,000.
However, for publicly traded companies, the Asset Test is applied based on fair market value, and the fair market value of a publicly traded company's assets includes intangible assets such as goodwill and going-concern value that are not reflected on the balance sheet. The fair market value of a corporation's goodwill and going-concern value is generally determined based on the excess of the corporation's market capitalization over the fair market value of its net identifiable tangible and intangible assets.
At the assumed IPO price of $11.0769 per ADS, and based on the expected 35,666,667 ordinary shares outstanding immediately following the Offering (assuming no exercise of the underwriters' over-allotment option), Solstice's market capitalization at the time of the IPO will be approximately $395,000,000. The excess of this market capitalization over the Company's book value of net assets represents goodwill and going-concern value attributable to the Company's active medical device business, including the value of the NeuroPath™ product platform, the Company's customer relationships, its FDA clearances and regulatory approvals, its pipeline (including OrthoSync™), and its assembled workforce.
This goodwill and going-concern value is allocable to Solstice's active business operations and is therefore treated as an active (non-passive) asset for purposes of the Asset Test. The inclusion of goodwill and going-concern value in the denominator of the Asset Test calculation significantly reduces the percentage of the Company's assets that are passive.
Based on our calculations, even assuming that all of the Company's cash and short-term investments (approximately $88,000,000 post-IPO) are treated as passive assets, the projected passive asset percentage under the Asset Test is estimated at approximately 20% to 25%, reflecting the substantial goodwill and going-concern value embedded in the Company's market capitalization. This percentage is well below the 50% threshold required for PFIC classification under the Asset Test.
We note that the passive asset percentage under the Asset Test will fluctuate with the Company's stock price. A significant decline in the Company's market capitalization would reduce the amount of goodwill and going-concern value attributed to the active business, which would increase the relative proportion of passive assets. Conversely, an increase in the stock price would further reduce the passive asset percentage. We recommend that Solstice monitor its passive asset percentage on a quarterly basis, particularly in the event of significant stock price declines.
Conclusion on Asset Test: Based on the FY2023 Projections and the expected market capitalization at the time of the IPO, Solstice does not expect to meet the Asset Test for its taxable year ending December 31, 2023. The projected passive asset percentage of 20–25% is well below the 50% threshold.
D. Role of Solstice Surgical Inc. in PFIC Analysis
Solstice Surgical Inc. (EIN 87-4231568), a Delaware corporation with its principal office at 200 West Adams Street, Suite 1100, Chicago, IL 60606, is a wholly owned subsidiary of Solstice. Solstice Surgical Inc. serves as the Company's U.S. operating entity, providing commercial distribution, customer support, clinical trial coordination, and regulatory affairs support for Solstice's U.S. operations.
Because Solstice owns 100% of the stock of Solstice Surgical Inc. by value, the look-through rule of Section 1297(c) of the Code applies. Under this rule, Solstice is treated as if it directly held its proportionate share of the assets of Solstice Surgical Inc. and received directly its proportionate share of the income of Solstice Surgical Inc. This look-through treatment is applied on a pro rata basis, and since Solstice owns 100% of Solstice Surgical Inc., all of the U.S. subsidiary's income and assets are attributed to Solstice for PFIC purposes.
Solstice Surgical Inc. operates under an intercompany cost-plus services agreement with Solstice (the "Services Agreement"), pursuant to which Solstice Surgical Inc. provides specified services to Solstice and is compensated at cost plus a 7.5% markup. The income earned by Solstice Surgical Inc. under this arrangement represents compensation for services rendered in the active conduct of a trade or business. As such, all income attributable to Solstice Surgical Inc. constitutes active trade or business income for PFIC purposes and is not passive income.
Similarly, the assets of Solstice Surgical Inc. — which consist primarily of working capital, accounts receivable, equipment, and leasehold improvements — are used in the active conduct of the U.S. subsidiary's services business and are therefore classified as active (non-passive) assets for purposes of the Asset Test.
It is essential that the intercompany Services Agreement be maintained at arm's-length standards consistent with Section 482 of the Code and the OECD Transfer Pricing Guidelines in order to ensure proper characterization of the income attributable to Solstice Surgical Inc. We discuss the transfer pricing considerations in greater detail in Section VII of this memorandum.
E. PFIC Conclusion and Caveats
Based on the analysis set forth in Sections III.B through III.D above, and on the basis of Solstice's audited FY2022 financial statements and management's FY2023 financial projections, Solstice does not expect to be classified as a PFIC for its taxable year ending December 31, 2023. The Company does not expect to meet either the Income Test or the Asset Test for FY2023.
We emphasize, however, the following important caveats:
•  Annual Determination Required. PFIC status is determined annually, and there can be no assurance that Solstice will not be classified as a PFIC for FY2023 or any future taxable year. The determination depends on the composition of the Company's income and assets in each year, which may be affected by factors beyond the Company's control.
•  Factors That Could Trigger PFIC Classification. Solstice could become a PFIC in a future taxable year if, among other things: (a) active revenue declines significantly (for example, due to competitive pressures, product recalls, or loss of regulatory approvals); (b) the Company accumulates large cash balances without deploying them in active business operations; (c) the Company's market capitalization declines significantly, reducing the amount of goodwill and going-concern value attributed to the active business for purposes of the Asset Test; or (d) regulatory delays affecting the OrthoSync™ Investigational Device Exemption ("IDE") clinical trial (IDE No. G220035) reduce near-term revenue prospects and cause a shift in the income composition toward passive income.
•  Risk Factor Disclosure. In light of the inherent uncertainty in the PFIC determination, the Company's prospectus will include appropriate risk factor language disclosing the possibility of PFIC classification and its adverse tax consequences to U.S. holders of ADSs.
•  Mitigation Elections. If Solstice were classified as a PFIC in any taxable year, U.S. holders may be able to mitigate the adverse consequences of the Section 1291 excess distribution regime by making a QEF election under Section 1295 of the Code or a mark-to-market election under Section 1296 of the Code.
With respect to the QEF election, a U.S. holder who makes a valid and timely QEF election for the first taxable year in which the holder holds ADSs and Solstice is classified as a PFIC (a "pedigreed QEF election") would be required to include in gross income annually its pro rata share of Solstice's ordinary earnings and net capital gain, whether or not distributed, thereby avoiding the punitive excess distribution regime. The QEF election requires the PFIC to furnish to the electing holder a "PFIC Annual Information Statement" containing certain information about the PFIC's income and assets. If PFIC status were triggered in any future year, Solstice should be prepared to furnish such a statement to facilitate QEF elections by its U.S. holders.
With respect to the mark-to-market election, a U.S. holder who makes a mark-to-market election under Section 1296 with respect to ADSs (which are "marketable stock" by virtue of being regularly traded on the Nasdaq Global Market) would be required to include in income each year an amount equal to the excess, if any, of the fair market value of the ADSs at the close of the taxable year over the holder's adjusted tax basis in the ADSs. A mark-to-market deduction would be allowed for the excess, if any, of the holder's adjusted tax basis over the fair market value at year-end, but only to the extent of previously included mark-to-market income.
IV. Taxation of Distributions on ADSs (Dividends)
A. U.S. Federal Income Tax Treatment of Dividends
Distributions of cash or other property paid by Solstice with respect to ADSs will be treated as dividends for U.S. federal income tax purposes to the extent paid out of the Company's current or accumulated earnings and profits, as determined under U.S. federal income tax principles. It is important to note that U.S. federal income tax principles for determining earnings and profits differ from International Financial Reporting Standards ("IFRS") and Irish GAAP, and accordingly, the amount of a distribution that constitutes a dividend for U.S. tax purposes may differ from the amount that would be treated as a dividend under the laws of Ireland or under IFRS.
As of December 31, 2022, Solstice had an accumulated deficit, having reported a net loss of ($14,100,000) for FY2022 and cumulative losses since inception. Accordingly, the Company does not currently have accumulated earnings and profits for U.S. federal income tax purposes. To the extent any distributions are made in excess of the Company's current and accumulated earnings and profits, such distributions will first be treated as a tax-free return of capital, reducing the holder's adjusted tax basis in its ADSs (but not below zero), and any excess over the holder's adjusted tax basis will be treated as capital gain from the sale or exchange of the ADSs.
If and when Solstice begins to make distributions that are treated as dividends for U.S. federal income tax purposes, such dividends will constitute foreign-source income for purposes of the foreign tax credit provisions of the Code. The foreign-source characterization of dividend income is relevant because it enables U.S. holders to claim a foreign tax credit against their U.S. federal income tax liability for Irish withholding taxes imposed on such dividends, subject to the limitations discussed in Section IV.C below.
Qualified Dividend Treatment for Non-Corporate U.S. Holders. Under Section 1(h)(11) of the Code, dividends received by non-corporate U.S. holders (including individuals) from "qualified foreign corporations" are eligible for taxation at the preferential rates applicable to long-term capital gains — currently a maximum rate of 20% (plus the 3.8% net investment income tax under Section 1411, where applicable). A foreign corporation is a "qualified foreign corporation" if (a) the stock of such corporation with respect to which the dividend is paid is readily tradable on an established securities market in the United States, or (b) the corporation is eligible for the benefits of a comprehensive income tax treaty with the United States that the Secretary of the Treasury determines is satisfactory for this purpose and that includes an exchange of information program.
Solstice is expected to satisfy both of these requirements. First, the ADSs will be listed and traded on the Nasdaq Global Market, which is an established securities market in the United States. Second, Ireland is a party to the U.S.–Ireland Double Taxation Convention, which the Treasury Department has identified as a comprehensive income tax treaty that is satisfactory for purposes of Section 1(h)(11).
However, qualified dividend treatment is available only if the following additional conditions are satisfied:
(i) Solstice is not classified as a PFIC in the taxable year in which the dividend is paid or in the immediately preceding taxable year (as discussed in Section III above, Solstice does not expect to be a PFIC for FY2023);
(ii) The U.S. holder satisfies the applicable holding period requirement — the holder must have held the ADSs for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date (the date on which the ADSs begin trading without the right to the dividend); and
(iii) The U.S. holder is not under an obligation (whether pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property.
Corporate U.S. Holders. Corporate U.S. holders will not be entitled to the dividends-received deduction under Section 243 of the Code with respect to dividends received from Solstice, because the dividends-received deduction is generally available only for dividends received from domestic corporations.
B. Irish Withholding Tax on Dividends
Standard Rate. Under Irish tax law, Ireland imposes a dividend withholding tax ("DWT") at a standard rate of 25% on dividends and other distributions paid by Irish-resident companies to their shareholders. This withholding tax applies at source, meaning that the distributing company (or its agent, including the Depositary) is required to withhold the tax from the gross amount of the distribution and remit it to the Irish Revenue Commissioners.
Treaty-Reduced Rate. Under Article 10 of the U.S.–Ireland Double Taxation Convention, the rate of Irish DWT on dividends paid by an Irish-resident company to a U.S. resident who is the beneficial owner of the dividends is reduced from the statutory rate of 25% to 15%, provided that the following conditions are satisfied:
(i) The U.S. holder is a resident of the United States within the meaning of Article 4 of the DTC;
(ii) The U.S. holder is the beneficial owner of the dividends;
(iii) The U.S. holder satisfies the limitation on benefits provision set forth in Article 23 of the DTC (which is designed to prevent "treaty shopping" and generally requires that the holder be a qualified person, such as an individual, a publicly traded company, a tax-exempt organization, or a company that satisfies an ownership and base erosion test); and
(iv) The U.S. holder has filed the appropriate claim forms with the Irish Revenue Commissioners (or has provided sufficient certifications to the Depositary to enable the Depositary to apply the reduced rate at source).
We note that for certain qualifying U.S. pension funds and other tax-exempt entities, the DTC may provide for a further reduction or elimination of Irish DWT on dividends, subject to specific conditions and limitations that are beyond the scope of this memorandum.
Mechanics Through the Depositary. Meridian Trust Company, N.A., as Depositary, will generally apply the treaty-reduced rate of 15% for U.S. holders who have provided appropriate certifications. Specifically, the Depositary will require U.S. holders to provide a properly completed IRS Form W-9 (Request for Taxpayer Identification Number and Certification) to certify their U.S. tax residency, as well as any applicable Irish withholding forms required by the Irish Revenue Commissioners. To the extent the Depositary receives proper certifications, it will withhold Irish DWT at the reduced rate of 15% on behalf of the Irish Revenue Commissioners.
Refund Procedures. If Irish DWT is withheld at the full statutory rate of 25% (for example, because the holder failed to provide proper certifications in a timely manner), the U.S. holder may claim a refund of the excess withholding (25% minus 15% = 10%) directly from the Irish Revenue Commissioners. Refund claims must be made in the prescribed form and within the applicable time limitations under Irish tax law.
C. Foreign Tax Credit Implications
Irish DWT imposed on dividends paid to U.S. holders will generally be eligible for a credit against such holders' U.S. federal income tax liability, subject to the limitations of Section 904 of the Code. The foreign tax credit is designed to mitigate the double taxation of foreign-source income — i.e., income that is subject to both Irish DWT and U.S. federal income tax.
For purposes of the foreign tax credit limitation under Section 904, dividends received from Solstice will generally constitute "passive category income" (or, for certain corporate holders, "general category income"). The foreign tax credit is limited to the U.S. tax attributable to the holder's foreign-source income in the relevant category, determined on a per-category basis. Excess foreign tax credits in a given category may be carried back one year and carried forward ten years.
As an alternative to claiming a foreign tax credit, U.S. holders may elect to deduct the Irish DWT paid or accrued against their taxable income. This election applies on an all-or-nothing basis — if the deduction election is made, it must be made with respect to all foreign taxes paid or accrued by the holder for the taxable year. In most cases, the credit will be more beneficial than the deduction, but holders should consult their own tax advisors to determine the optimal approach in their particular circumstances.
Interaction with Qualified Dividend Rate. Where the preferential qualified dividend rate of 20% applies to dividend income, the effective U.S. tax rate on the dividend is 20% (or 23.8% including the net investment income tax). If the Irish DWT rate is 15%, the foreign tax credit available may, in some cases, exceed the U.S. tax on the dividend income (before the credit), resulting in an excess foreign tax credit that must be carried forward. This interaction is inherently fact-specific and depends on the holder's overall foreign-source income, U.S. tax liability, and foreign tax credit position. Holders are urged to consult their own tax advisors regarding the application of the foreign tax credit rules to their particular circumstances.
V. Taxation of Dispositions of ADSs
A. General Treatment — Capital Gain or Loss
A U.S. holder who sells, exchanges, or otherwise disposes of ADSs in a taxable transaction will generally recognize capital gain or loss in an amount equal to the difference between (i) the amount realized on the disposition (i.e., the amount of cash and the fair market value of any other property received in exchange for the ADSs) and (ii) the holder's adjusted tax basis in the ADSs disposed of.
For U.S. holders who acquire ADSs in the IPO, the initial adjusted tax basis will generally be equal to the U.S. dollar cost of the ADSs, which is $11.0769 per ADS (the assumed public offering price). The adjusted tax basis of ADSs may be increased by any amounts previously included in income as a result of a QEF election or mark-to-market election, or decreased by any distributions previously treated as tax-free returns of capital.
Capital gain or loss recognized on the disposition of ADSs will be long-term capital gain or loss if the ADSs have been held for more than one year at the time of the disposition. Long-term capital gains of non-corporate U.S. holders are currently taxed at a maximum U.S. federal income tax rate of 20%. In addition, as discussed in Section VI below, non-corporate U.S. holders whose modified adjusted gross income exceeds certain thresholds may be subject to an additional 3.8% net investment income tax on such gains. Short-term capital gains (i.e., gains on ADSs held for one year or less) are taxed at ordinary income rates, which are currently as high as 37% for individuals (plus the 3.8% net investment income tax, where applicable).
Capital losses recognized on the disposition of ADSs are subject to limitations. For non-corporate U.S. holders, capital losses may be used to offset capital gains and, to the extent capital losses exceed capital gains, up to $3,000 ($1,500 in the case of a married individual filing a separate return) of ordinary income per taxable year. Net capital losses in excess of these limitations may be carried forward indefinitely to future taxable years. For corporate U.S. holders, capital losses may be used only to offset capital gains, and may be carried back three years and carried forward five years.
B. Source of Gain
Gain recognized by a U.S. holder on the sale or other disposition of ADSs will generally be treated as U.S.-source income for purposes of the foreign tax credit provisions of the Code. As a consequence, a U.S. holder who pays foreign tax (if any) on such gain will generally not be able to claim a foreign tax credit against its U.S. federal income tax liability with respect to such gain, absent an applicable treaty provision or election to treat the gain as foreign-source income.
We note that if Solstice were treated as a "resident" of Ireland for purposes of the U.S.–Ireland Double Taxation Convention, a U.S. holder may, under certain circumstances, elect to treat gain from the disposition of ADSs as foreign-source income for foreign tax credit purposes. However, because gain from the disposition of shares in a foreign corporation is generally not subject to Irish tax in the hands of a non-Irish resident, this issue is unlikely to arise in practice.
C. PFIC Implications on Disposition
If Solstice were classified as a PFIC for any taxable year during which a U.S. holder held ADSs (or during any prior taxable year if the "once a PFIC, always a PFIC" rule applies), gain recognized by such holder on the disposition of ADSs would not be treated as capital gain. Instead, such gain would be subject to the punitive "excess distribution" regime under Section 1291 of the Code, as described in Section III.A above. Under this regime:
•  The gain would be allocated ratably over the holder's holding period for the ADSs.
•  Amounts allocated to the current taxable year, and to any taxable years before the first year in which Solstice was classified as a PFIC, would be taxed as ordinary income.
•  Amounts allocated to each other taxable year would be taxed at the highest marginal rate in effect for that year, and an interest charge at the rate applicable to underpayments of tax would be imposed on the resulting tax.
This punitive treatment underscores the critical importance of the PFIC analysis set forth in Section III of this memorandum. As noted above, Solstice does not expect to be classified as a PFIC for FY2023, but no assurance can be given for future years.
If a QEF election is in effect, gain on the disposition of ADSs would generally be treated as capital gain, and the holder would have already included its pro rata share of Solstice's income in its taxable income on a current basis, thereby avoiding the excess distribution regime. If a mark-to-market election is in effect, the holder would have included annual mark-to-market adjustments in income, and gain on the ultimate disposition would be treated as ordinary income to the extent of net mark-to-market gains previously included.
D. Interaction with Lock-Up Period
Under the lock-up agreements executed in connection with the Offering (the "Lock-Up Agreements"), certain directors, officers, and holders of 1% or more of the pre-IPO ordinary shares of Solstice (collectively, the "Locked-Up Holders") have agreed not to sell, offer, pledge, grant any option to purchase, make any short sale, or otherwise transfer or dispose of (directly or indirectly) any ordinary shares or ADSs, or any securities convertible into or exercisable or exchangeable for ordinary shares or ADSs, for a period of 180 days from March 2, 2023 (the date of the final prospectus), without the prior written consent of Keystone Mercer & Co., LLC, as representative of the underwriters. The lock-up period expires on August 29, 2023.
The Lock-Up Agreements cover a total of approximately 23,480,000 ordinary shares, representing approximately 83.9% of the Company's pre-IPO outstanding ordinary shares. The principal Locked-Up Holders and their respective share holdings are as follows:
Tax Consequences of the Lock-Up:
The execution and existence of the Lock-Up Agreement does not, in and of itself, create a taxable event for U.S. federal income tax purposes. A contractual restriction on the ability to sell or transfer securities is not treated as a disposition or constructive sale of such securities under the Code. The locked-up shares continue to be owned by the Locked-Up Holders for all tax purposes throughout the lock-up period.
Importantly, the lock-up period counts toward the computation of the Locked-Up Holders' holding periods for purposes of determining whether gain or loss on the eventual disposition of shares will be long-term or short-term. Shares held during the lock-up period are treated as continuously held by the Locked-Up Holder for the entire lock-up period, and the running of the holding period is not interrupted or suspended by the existence of the lock-up restriction.
For founders and insiders who acquired their ordinary shares prior to September 2022 (which includes the majority of the Locked-Up Holders listed above), the lock-up period will extend well past the one-year holding period threshold for long-term capital gain treatment. By the time the lock-up expires on August 29, 2023, these holders will have held their shares for more than one year, ensuring that any gain recognized on a post-lock-up disposition will be taxed as long-term capital gain at a maximum rate of 20% (plus 3.8% net investment income tax, where applicable), rather than as short-term capital gain at ordinary income rates of up to 37% (plus 3.8%).
With respect to the pledging restrictions contained in the Lock-Up Agreements, we note that a pledge of ADSs during the lock-up period without the prior written consent of Keystone Mercer & Co., LLC would constitute a violation of the Lock-Up Agreement. Moreover, depending on the facts and circumstances, a pledge of securities could potentially be treated as a disposition for U.S. federal income tax purposes. Under Section 1001 of the Code, a disposition includes any sale, exchange, or other disposition of property. While a pledge alone is generally not treated as a disposition (absent a transfer of the benefits and burdens of ownership), if the circumstances indicate that the pledgor has effectively parted with the economic benefits and risks of ownership (for example, if the pledgee has the right to sell the securities upon default and the pledgor has no realistic expectation of recovering the securities), the pledge could be recharacterized as a sale. Locked-Up Holders should be advised to refrain from any unauthorized pledging activity during the lock-up period.
Planning Opportunity. For Locked-Up Holders whose shares will have been held for more than one year by the lock-up expiration date of August 29, 2023, post-lock-up dispositions will be eligible for long-term capital gain treatment. For any holders who may have acquired shares less than one year before the lock-up expiration date (for example, holders who received shares in connection with the IPO or in other transactions occurring after August 29, 2022), it will be important to monitor the short-term/long-term holding period cutoff and, where possible, to defer dispositions until the one-year holding period has been satisfied. We recommend that the Company coordinate with its legal counsel to provide appropriate guidance to Locked-Up Holders regarding the tax implications of post-lock-up dispositions.
VI. Net Investment Income Tax
In addition to the regular U.S. federal income tax described in Sections IV and V above, certain non-corporate U.S. holders are subject to an additional 3.8% tax on "net investment income" under Section 1411 of the Code (the "Net Investment Income Tax" or "NIIT"). The NIIT applies to individuals, estates, and trusts whose "modified adjusted gross income" exceeds certain threshold amounts:
•  $250,000 for married individuals filing jointly and surviving spouses;
•  $200,000 for single individuals and heads of household;
•  $125,000 for married individuals filing separately.
"Net investment income" for purposes of the NIIT generally includes, among other things: (i) gross income from interest, dividends, annuities, royalties, and rents (other than such income derived in the ordinary course of a trade or business that is not a passive activity or a trade or business of trading in financial instruments or commodities); (ii) other gross income from a trade or business that is a passive activity or a trade or business of trading in financial instruments or commodities; and (iii) net gain attributable to the disposition of property other than property held in a trade or business that is not a passive activity or a trade or business of trading in financial instruments or commodities.
Both dividends on ADSs and capital gain from the disposition of ADSs will constitute "net investment income" for purposes of the NIIT. Accordingly, non-corporate U.S. holders whose modified adjusted gross income exceeds the applicable thresholds should anticipate the following combined effective federal tax rates:
Foreign tax credits under Section 27 of the Code generally may not be used to offset the NIIT. However, Treasury Regulations under Section 1411 provide that properly allocable deductions may reduce net investment income, and in limited circumstances, foreign taxes may be taken into account as deductions (rather than credits) in computing net investment income. The interplay between foreign tax credits and the NIIT is complex, and holders are urged to consult their own tax advisors regarding the application of the NIIT to their particular circumstances.
VII. Transfer Pricing Considerations — Solstice Surgical Inc.
A. Structure.  As described in Section III.D above, Solstice Surgical Inc. (EIN 87-4231568), a Delaware corporation with its principal office at 200 West Adams Street, Suite 1100, Chicago, IL 60606, is a wholly owned subsidiary of Solstice. Solstice Surgical Inc. was incorporated on March 15, 2019, and has served as the Company's principal U.S. operating entity since its formation.
Solstice Surgical Inc. operates under a cost-plus intercompany services agreement (the "Services Agreement") with Solstice, pursuant to which Solstice Surgical Inc. provides the following categories of services to Solstice:
(a) U.S. commercial distribution services, including sales, marketing, and distribution of Solstice products in the United States;
(b) Customer support services, including technical support, training, and after-sale service for U.S.-based customers;
(c) Clinical trial coordination services, including coordination and management of U.S.-based clinical trial sites and regulatory submissions in connection with the OrthoSync™ IDE clinical trial (IDE No. G220035) and other clinical programs; and
(d) Regulatory affairs support, including liaison with the U.S. Food and Drug Administration and other U.S. regulatory bodies.
Under the Services Agreement, Solstice Surgical Inc. is compensated at its total costs (including direct and indirect costs allocable to the services provided) plus a markup of 7.5%.
B. Arm's-Length Standard
The intercompany cost-plus arrangement between Solstice and Solstice Surgical Inc. must satisfy the arm's-length standard set forth in Section 482 of the Code and the Treasury Regulations promulgated thereunder. Section 482 authorizes the IRS to distribute, apportion, or allocate gross income, deductions, credits, or allowances between or among two or more organizations, trades, or businesses owned or controlled by the same interests if it determines that such action is necessary to clearly reflect the income of such organizations.
The Treasury Regulations under Section 482 provide detailed rules for determining the arm's-length price for controlled transactions, including the comparable profits method, the cost-plus method, the resale price method, and the comparable uncontrolled price method, among others. For intercompany services of the type provided by Solstice Surgical Inc. — which are generally characterized as routine support services provided by a limited-risk entity — the cost-plus method is typically the most appropriate transfer pricing method.
A 7.5% cost-plus markup is generally within the interquartile range supported by comparable uncontrolled transactions involving similar limited-risk service providers in the medical device industry. Based on our review of publicly available data from comparable companies and industry benchmarking studies, cost-plus markups for comparable limited-risk service entities in the medical device sector typically range from approximately 5% to 10%, with a median in the range of 7% to 8%. The 7.5% markup applied under the Services Agreement falls within this range and is consistent with the arm's-length standard.
Notwithstanding the foregoing, we strongly recommend that Solstice Surgical Inc. prepare and maintain contemporaneous transfer pricing documentation in accordance with Treasury Regulation § 1.6662-6 to support the arm's-length nature of the intercompany arrangement. Such documentation should include, at a minimum: (i) an analysis of the functions performed, assets used, and risks assumed by each party to the controlled transaction; (ii) a description of the selected transfer pricing method and the reasons for its selection; (iii) a comparability analysis identifying comparable uncontrolled transactions; and (iv) an economic analysis demonstrating that the results of the controlled transaction are consistent with the arm's-length standard. Proper documentation provides a penalty protection defense against the imposition of transfer pricing penalties under Section 6662(e) of the Code.
C. Relevance to PFIC Analysis
As discussed in Section III.D, income earned by Solstice Surgical Inc. under the Services Agreement is attributed to Solstice under the look-through rules of Section 1297(c) and constitutes active trade or business income for PFIC purposes. The proper characterization of this income — as active rather than passive — is dependent on the intercompany arrangement being respected as a bona fide services arrangement at arm's-length terms.
If the IRS were to successfully challenge the transfer pricing arrangement under Section 482 and reallocate income between Solstice Surgical Inc. and Solstice (for example, by asserting that the cost-plus markup should be higher or lower, or by recharacterizing the nature of the intercompany transactions), such reallocation could theoretically affect the composition of Solstice's income for purposes of the PFIC Income Test. However, even under conservative transfer pricing adjustments (such as an increase in the cost-plus markup from 7.5% to 10% or a reduction to 5%), the active income proportion is expected to remain well above the 75% threshold, given that device sales revenue (which is unambiguously active) constitutes the dominant component of Solstice's consolidated gross income. Accordingly, we do not believe that reasonable transfer pricing adjustments would cause Solstice to meet the Income Test.
D. Base Erosion and Anti-Abuse Tax (BEAT) / GILTI Considerations
We briefly address certain additional international tax provisions that may be relevant to the Solstice group structure:
BEAT (Section 59A). The Base Erosion and Anti-Abuse Tax under Section 59A of the Code applies to "applicable taxpayers" — U.S. corporations (other than regulated investment companies, real estate investment trusts, and S corporations) with average annual gross receipts of at least $500 million for the three preceding taxable years and a "base erosion percentage" of 3% or higher (2% for certain banks and securities dealers). Solstice Surgical Inc. is a U.S. corporation that makes deductible payments to its Irish parent under the Services Agreement. These payments could potentially constitute "base erosion payments" for BEAT purposes. However, Solstice Surgical Inc.'s annual gross receipts are well below the $500 million threshold, and accordingly, the BEAT does not currently apply to Solstice Surgical Inc.
GILTI (Section 951A). The Global Intangible Low-Taxed Income provisions of Section 951A of the Code require each "United States shareholder" of a "controlled foreign corporation" ("CFC") to include in gross income annually its pro rata share of the CFC's "tested income" (generally, income that is not effectively connected with a U.S. trade or business and is not certain other categories of income), to the extent such income exceeds a deemed return on the CFC's qualified business asset investment. Because Solstice Surgical Inc. is a U.S. corporation (not a CFC), the GILTI provisions do not apply to its income from the perspective of Solstice Surgical Inc.'s U.S. corporate status. Moreover, from the perspective of U.S. holders of ADSs in Solstice (the Irish parent), the Subpart F and GILTI rules apply to Solstice's controlled foreign subsidiaries, not to Solstice itself. Since the primary subsidiary (Solstice Surgical Inc.) is a U.S. entity, and Solstice (the Irish parent) is the entity in which U.S. holders hold ADSs, the GILTI and Subpart F rules are not directly applicable to the ADS holders' investment in the Irish parent. U.S. holders of ADSs are not "United States shareholders" of a CFC by virtue of holding ADSs in an Irish parent company.
We note that if Solstice were to establish additional foreign subsidiaries in the future (for example, in connection with its planned European commercial expansion), the Subpart F and GILTI analyses would need to be revisited in connection with the PFIC analysis and the overall tax characterization of the Solstice group.
VIII. Information Reporting and Backup Withholding
A. Information Reporting
Payments of dividends on, and gross proceeds from the sale or other disposition of, ADSs to U.S. holders will generally be subject to information reporting requirements under the Code. Specifically, the Depositary, brokers, and other paying agents will be required to report such payments to the IRS and to the U.S. holder on IRS Form 1099-DIV (for dividends) or IRS Form 1099-B (for sale proceeds). U.S. holders who are "exempt recipients" — including corporations, tax-exempt organizations, qualified pension and profit-sharing trusts, individual retirement accounts, and certain other entities — are generally not subject to information reporting, provided they properly establish their exempt status.
B. Backup Withholding
Backup withholding at the applicable statutory rate (currently 24%) may apply to payments of dividends on ADSs and to proceeds from the sale, exchange, or other taxable disposition of ADSs, unless the U.S. holder:
(i) provides a correct taxpayer identification number ("TIN") to the paying agent on a properly completed IRS Form W-9 (or successor form) and certifies, under penalties of perjury, that such TIN is correct and that the holder is not subject to backup withholding; or
(ii) otherwise establishes an exemption from backup withholding (for exampl

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