Cir

I. BACKGROUND

Xilinx, Inc. (“Xilinx”) researches, develops, manufactures, markets and sells integrated circuit devices and related devel- opment software systems. Xilinx wanted to expand its posi- tion in the European market and established Xilinx Ireland (“XI”) in 1994 as an unlimited liability company under the laws of Ireland. XI sold programmable logic devices and con- ducted research and development (“R&D”). Two wholly owned Irish subsidiaries of Xilinx owned XI during the tax years of 1997, 1998 and 1999, the only years at issue in this appeal.

In 1995, Xilinx and XI entered into a Cost and Risk Shar- ing Agreement (“the Agreement”), which provided that all right, title and interest in new technology developed by either Xilinx or XI would be jointly owned. Under the Agreement, each party was required to pay a percentage of the total R&D costs in proportion to the anticipated benefits to each from the new technology that was expected to be created. Specifically, the Agreement required the parties to share: (1) direct costs, defined as costs directly related to the R&D of new technol- 1 For the purposes of this opinion, all citations and references to regula- tions are…