12.1.1 Material court, arbitration and administrative proceedings and other risks to the Parent or its subsidiari

Tax settlements
The Company’s tax settlements are subject to customs and tax inspections carried out by competent authorities. As at December 31st 2021, the Company disclosed a provision for tax risk, recognised in connection with such proceedings, of PLN 91.4m (December 31st 2020: PLN 87.3m, see Note 10.13.1.)

After the reporting period, on January 21st 2022 the Company was notified of the results of two revenue and customs inspections for the period January−October 2014 and October−December 2015, issued on January 7th 2022. As a result of these inspections, input VAT settlements by the Company, for a total amount of PLN 23.3m (net of interest), were questioned. The company has not filed corrections to the VAT returns for the aforementioned periods as required by the authority because it is of the opinion that there are arguments in favour of taking a different course of action. Due to the failure to submit the corrections by the Company, the tax authority (Head of the Pomeranian Customs and Fiscal Office in Gdynia) will initiate tax proceedings (transform customs and fiscal inspections into two tax proceedings) and issue decisions (both in the first and second instance). It will be possible to file complaints against the decision of the authority of second instance with the Provincial Administrative Court in Gdańsk, and if the court reaches an unfavourable verdict, it will be possible to file a cassation complaint with the Supreme Administrative Court.

In connection with a judgment by the Court of Justice of the European Union of October 16th 2019 in Case C-189/18 Glencore, on January 15th 2020 the Company filed a petition for resumption of proceedings in which the following decisions had been issued:

• decision by the Director of the Tax Chamber in Gdańsk, dated December 29th 2015, upholding the decision by the Director of the Tax Audit Office in Bydgoszcz, dated September 28th 2015, assessing the Company’s VAT liabilities for individual months of 2010 at a total amount of PLN 48.4m,
• decision by the Director of the Tax Chamber in Gdańsk, dated February 29th 2016, upholding the decision by the Director of the Tax Audit Office in Bydgoszcz, dated September 28th 2015, assessing the Company’s VAT liabilities for individual months of 2011 at a total amount of PLN 112.5m,
• decision by the Director of the Tax Administration Chamber in Gdańsk, dated October 25th 2018, upholding the decision by the Head of the Gdańsk Province Customs and Tax Office in Gdynia, dated January 19th 2018, assessing the Company’s VAT liabilities for January 2012 at a total amount of PLN 7.3m,

and after resumption of the proceedings, fo:

• reversal of the decisions by the tax authorities of both instances and discontinuation of the tax proceedings – with respect to the proceedings for 2010–2011;
• suspension of the proceedings until final conclusion of the court proceedings – with respect to the proceedings for 2012, in connection with proceedings pending before the Supreme Administrative Court, initiated by the Company’s cassation complaint.

On October 8th 2020, the Head of the Tax Administration Chamber in Gdańsk upheld the decisions of the Head of the Tax Chamber in Gdańsk, dated December 29th 2015 and February 29th 2016. On November 23rd 2020, the Company appealed against the unfavourable decisions of the Head of the Tax Administration Chamber in Gdańsk. On December 23rd 2020, the Head of the Tax Administration Chamber in Gdańsk issued decisions refusing to revoke its decision of October 8th 2020, against which the Company filed complaints with the Provincial Administrative Court in Gdańsk. On June 15th 2021, the Provincial Administrative Court of Gdańsk dismissed the Company’s complaints against refusal to reverse the final decisions concerning determination of VAT liabilities for the individual months of 2010 and 2011. On September 10th 2021, the Company appealed against the rulings of the Provincial Administrative Court of Gdańsk to the Supreme Administrative Courts.

Proceedings to which LOTOS Petrobaltic S.A. is party

In March 2013, LOTOS Petrobaltic S.A. received a call for payment from AGR Subsea Ltd. (“AGR”) for approximately GBP 6.5m as the contract sum payable to AGR for dredging the Baltic Beta rig’s legs. LOTOS Petrobaltic S.A. challenged the amount claimed by AGR and proposed that its liability to AGR be set at PLN 16m (i.e. GBP 3.2m at the mid-rate quoted by the National Bank of Poland for December 31st 2012). The dispute between the parties concerns the nature of the contract, reasons for its delayed and incomplete performance, validity of its termination by LOTOS Petrobaltic S.A., as well as the demand for reimbursement of costs incurred to employ the replacement contractor engaged by LOTOS Petrobaltic S.A. to complete the work. AGR Subsea Ltd. did not accept the terms of the settlement proposed by LOTOS Petrobaltic S.A. and took its claim to court. The court decided to refer the case for mediation, to which LOTOS Petrobaltic S.A. agreed. The mediation, initiated in April 2014, was extended on several occasions. Under the Regional Court’s decision of February 2016, the case was consolidated for joint examination with LOTOS Petrobaltic S.A.’s claim against AGR, described below.

In October 2013, an action for payment of GBP 5.6m for replacement performance was brought against AGR by LOTOS Petrobaltic S.A. before the Regional Court of Gdańsk. In March 2014, the Regional Court of Gdańsk, 9th Commercial Division, issued an order of payment in writ-of- execution proceedings, against which AGR appealed. In April 2015, the Court referred the parties to mediation, but LOTOS Petrobaltic S.A. did not agree to take part in the mediation process. Pursuant to the Regional Court’s decision of February 2016, LOTOS Petrobaltic S.A.’s claim will be consolidated for joint examination with AGR’s claim against LOTOS Petrobaltic S.A. On December 16th 2019, a court expert’s opinion was delivered stating that no allegation of failure to exercise due care may be raised against AGR for its selecting the dredging equipment. In its pleading, LOTOS Petrobaltic S.A. raised objections to the opinion and requested that a new opinion be prepared; however, the request was dismissed by the Court.

On November 27th 2020, a court hearing was held during which the case was closed and the date of entry of the Court’s decision was set. On December 11th 2020, the Court issued a judgment awarding the full claimed amount to AGR, i.e. GBP 6.5m increased by default interest, court expenses and legal representation costs, and dismissed LOTOS Petrobaltic S.A.’s claim.

As the notice stating the date of the Court’s hearing closing the case and announcement of the judgment was not effectively served upon LOTOS Petrobaltic S.A.’s attorney, the attorney, without his fault, did not participate in the hearing closing the case held on November 27th 2020, did not become aware of the date of entry of the judgment issued on December 11th 2020, was absent on the date of entry of the judgment, and did not read its content. Therefore, on January 7th 2021 a request was submitted to reinstate the deadline for submitting a request to prepare and deliver the statement of reasons for the judgment. The Company’s attorney is of the opinion that the judgment is not final and that the Court will not be able to confirm the final nature of its judgment until a decision regarding reinstatement of the deadline becomes final.

On March 23rd 2021, a Court session was held to examine the request for deadline reinstatement, at which the Court took the relevant procedural steps, including hearing of the witnesses named in LOTOS Petrobaltic S.A.’s motion. Furthermore, in view of certain information of which LOTOS Petrobaltic S.A. had become aware, objections were raised to the Court regarding AGR’s capacity to sue and be sued, its entitlement to participate in the proceedings and proper authorisation of its attorneys. These doubts arose in March 2021 as LOTOS Petrobaltic

S.A. became aware of the announcement (on May 25th 2015) of a Winding-up procedure with respect to AGR and appointment of a Liquidator to administer and represent AGR. In view of the objections, the Court ordered AGR to address these doubts. The case was adjourned to a date set by the Court. In connection with the formal objections raised by LOTOS Petrobaltic S.A. regarding ADR’s capacity to sue and be sued and its proper representation, the Court should take relevant steps to examine these doubts, which it is required to do ex officio. Such examination will certainly delay the time when the judgment becomes final. Given various procedures available for the Court to examine these doubts, it is not possible to give an expected date of the Court session or its decision on the requested deadline reinstatement. On April 2nd 2021, a motion was filed for the resumption of proceedings in the case.

On April 28th 2021, the Court dismissed the motion. On June 18th 2021, a complaint was filed against the Court’s decision of April 28th 2021. On May 28th 2021, the Court rejected the complaint as premature. On July 4th 2021, a complaint was filed against the Court’s decision of May 28th 2021. By a decision of July 3rd 2021, the Court of Appeal changed the decision of the Court of First Instance to rectify the judgment as to the type of interest awarded.

On May 18th 2021, LOTOS Petrobaltic S.A. filed a motion with the Regional Prosecutor’s Office in Gdańsk to raise a complaint for the resumption of proceedings in case No. IX GC 811/13 and IX GC 12/15, due to the fact that the prosecutor, as a participant in civil proceedings, is not bound by limitations in invoking grounds for resumption, which could potentially affect the effectiveness of LOTOS Petrobaltic S.A.’s complaint. (case No. IX GC 325/21). The complaint of the Regional Prosecutor’s Office in Gdańsk for the resumption of proceedings in the combined cases was filed with the Court on August 12th 2021.

On December 1st 2021, the Court of Appeal refused to reinstate the deadline, ultimately dismissing the Company’s motion of January 7th 2021. On December 9th 2021, AGR applied for enforcement of the judgment. By a decision of December 13th 2021 issued in case IX GC 696/21 (motion for resumption of proceedings – complaint of the Regional Prosecutor’s Office), the Regional Court in Gdańsk suspended the enforceability of the judgment of December 11th 2020 covered by the enforcement motion. AGR’s enforcement motion was dismissed by a court order dated December 15th 2021.

In view of the above, as at December 31st 2021 LOTOS Petrobaltic S.A. maintained the provision recognised in 2020 for disputed claims of PLN 49.7m (see Note 10.13.1), including a PLN 32.1m principal receivable (see Note 9.5) and interest of PLN 17.6m (see Note 9.7 ).

Tax settlements of LOTOS Exploration and Production Norge AS

Due to the crisis caused by the COVID-19 pandemic and the sharp decline in commodity prices, the Norwegian government introduced a temporary tax regime for 2020-2021 that allowed companies investing on the Norwegian continental shelf to directly expense capital expenditure and to receive an immediate refund of the tax loss incurred in each of the years. With these solutions, the effective tax rate is significantly lower than the 78% applied in 2021.

In September 2020, the company submitted to the Oil Taxation Office its position on the preliminary decision of the authority concerning thin capitalisation in 2015–2016, along with its response to the ‘deviation notice’ for the following years 2017 and 2018. In its preliminary decision, OTO challenges the inclusion of all debt service costs and exchange rate differences on debt financing in the company’s tax-deductible costs due to the company’s equity being too low at the time. In the first matter raised by OTO, the expected tax surcharge for 2015 and 2016 is NOK 175 million. The estimated amount to be paid for 2017 and 2018 is NOK 20m, with the proviso that the letter pertaining to this period has not yet received the status of a tax decision.

The OTO has extended the period under investigation by one year, so the second matter is investigated for years 2017-2019. The company was creditworthy during the period and, therefore, no provision was recognised for the stated amount. Furthermore, in its tax returns for 2017 and 2019 the company did not include in its taxable income finance income arising from foreign exchange gains realised on loans in the case of which the OTO had previously questioned the deductibility of related finance costs. Tax deductions made on this account totalled NOK 88 million (2017: NOK 52 million; 2019: NOK 36 million). It is likely that the OTO will challenge the company’s approach.

As at the date of these financial statements, the company received no information or inquiries concerning the issuance of a final tax decision by the OTO for 2015–2016 and 2017–2019. As at December 31st 2021, the total amount of the provision for thin capitalisation liabilities was NOK 263m (PLN 121m).

In the twelve months ended December 31st 2021, there were no material settlements under court or other proceedings, save for those presented above.