Clearly explaining our tax contribution is a priority

Inspections

Periods open for inspection by the Tax Authorities

• In Spain, at the end of the 2023 business year, the Endesa Group's Tax Consolidation Group (no. 572/10) had the Income Tax Expense for the 2006, 2019 and following business years open for inspection. Moreover, Consolidated Tax Group no. 21/02, with parent company Empresa de Alumbrado Eléctrico de Ceuta, S.A. and of all other of Endesa's subsidiaries, had the Income Tax Expense for the 2019 and following business years open for inspection. Likewise, the financial statements of Endesa and most of its controlled subsidiaries are open for inspection for the years 2019 and the following with regard to the taxes that apply.
• The branches and controlled subsidiaries of the Endesa Group in Portugal, France, the Netherlands and Germany have the financial years 2020 and the following, 2021 and the following, 2020 and the following and 2020 and the following open for general review, respectively.

Inspections in progress

• In Spain, 547 inspection processes are being conducted by the state, regional and local Tax Inspection Bodies at the beginning of 2024.
• On 23 October, we were informed of the opening of a General Inspection process on the main companies of the Group for the years 2019 to 2022 with regard to Income Tax Expense and 2020 to 2022 for the rest of Taxes (VAT and Withholdings on account of IRPF and IRNR). 13 companies have been included in the inspection perimeter, although it is not ruled out that some more could be incorporated throughout the process. This process is expected to take about 2 years.
• On 25 January 2024, a partial inspection process for the new energy levy was opened with regard to Endesa for the 2023 business year, which will aim to verify that the levy was paid in accordance with the data recorded in the financial statements of the tax group in which the obliged entity is integrated.

Inspections closed during 2023

In Spain, 602 local, environmental and special tax inspection processes were closed during 2023. These processes ended with the signing of minutes of non-conformity for an amount of €7.7 million, mainly linked to the Value of Production Tax and the Catalan Water Canon; and minutes in agreement that represent €31.8M to be paid, mainly linked to adjustments arising from the operation of the Tax itself, as is the case of the Value of Production Tax for units outside the mainland and the Tax on constructions, installations and works.

Abroad, during 2023, there have been no open or finalized processes.

Litigation processes

Most of the litigation processes of a tax nature existing within the Endesa Group result from a process for the refund of undue payments, where the Endesa Group made the relevant tax payments in a timely manner, but subsequently requested the refund of what had been paid. This refund is generally rejected by the Administration and the Endesa Group challenges the act of refusal, thus initiating legal proceedings.

This generally affects cases where the Endesa Group understands that the regulations in question do not comply with the Spanish Constitution or European regulations, as well as cases where it does not agree with the criteria followed by the Administration. By following this procedural strategy, the Endesa Group avoids the generation of contingencies in its accounts, but without losing the legitimate interest of defending its position in court.

Among the most relevant processes are the following:

A)    Litigation with an active stance:

      I.  The taxes of Law 15/2012 (Tax on the value of electricity production, Tax on used nuclear fuel and Tax on radioactive waste in centralised installations and the so-called State Water tax).

• With regard to the Tax on the Value of the Production of Electricity, in 2023 the Supreme Court concluded that certain remuneration concepts that companies including Endesa had been arguing should not be included, should actually be included in the taxable base for the Tax. This Judgment does not rule on all the concepts that were being appealed by Endesa, so the litigation continues its course with respect to the remaining concepts.
• With regard to the Tax on Used Nuclear Fuel, following the favourable resolution of the TEAC of 22 February 2022 relating to the application of the retroactivity coefficient provided for in the tax regulations, Endesa initiated procedures for the refund of overpaid taxes and the AEAT has initiated a tax inspection procedure to verify that this is still appropriate. This is still ongoing.
• The State Hydraulic Levy currently in force is regulated by Law 7/2022, of 8 April, and there is currently no litigation with regard to this.

     II. Certain regional taxes of a purported environmental nature (taxes on emissions, taxes on waste, certain hydraulic charges, taxes on installations that have an impact on the environment, etc). The appeals are pending in different stages of judicial processes.

   III. Certain special taxes that levy fuel consumption for the production of electricity (Hydrocarbon Tax and Tax on Carbon) with a questionable environmental purpose. On 20 December 2021, the National High Court referred a question to the Court of Justice of the European Union for a preliminary ruling in relation to the Coal Tax. In 2023, the Court ruled that the tax complies with European regulations when it has been established for environmental policy reasons. A ruling with regard to this issue is pending a sentence by the High Court.

   IV. The amendments introduced in the Law on Income Tax Expense by Royal Decree-Laws 2/2016 and 3/2016. In 2020, the Constitutional Court declared Royal Decree Law 2/2016 to be unconstitutional, which led to the end of the discussion with regard to the 2016 and 2017 business years, although Endesa continues to challenging its impact with respect to 2018 onwards.

The Constitutional Court issued a judgment of 18 January 2024 declaring the unconstitutionality of certain amendments introduced by Royal Decree Law 3/2016. Prior to that date, the Fiscal Consolidation Group, of which Endesa is a member, had challenged the settlements or requested the rectification of the self-assessments, so that from 2016 it would be entitled to a refund of the amounts paid in excess and the corresponding late payment interest.

It has become known that on April 3 the High Court of Justice of the Valencian Community raised questions of unconstitutionality considering that Royal Decree Law 2/2016 could violate the principle of economic capacity contained in the Spanish Constitution. It remains to be seen whether the Constitutional Court will admit these questions.

    V. Goodwill Aid: Although in the case of Endesa these are not significant amounts, in June 2019 inspections linked to the procedure for the recovery of state aid were initiated in cases affected by EU Decision 2015/314, i.e. cases where the financial goodwill for the acquisition of "indirect" foreign shareholdings had been amortised for tax purposes. After receipt of the Liquidation Agreement, in February 2021, it was challenged before the Tax Tribunal. This is pending resolution. During the legal appeal, the Ruling of the General Court of the EU (GCEU) of 27 September 2023 annulling Commission Decision (EU) 2015/314 of 15 October 2014 on State Aid SA.35550 (13/C) (ex 13/NN) (ex 12/CP) was brought to light, which could mean that the adjustments made could be declared inadmissible.

   VI. Tax on the Energy Sector, after the approval of this patrimonial provision, the Endesa Group filed a Judicial Review with the High Court against Order HFP/94/2023, of 2 February, which approves the models for the tax because of the possible unconstitutionality of the standard. Having been admitted, the proceedings are ongoing.

If the courts do not rule in the Group's favour in all of these processes, this would not have a negative impact on the cash flows and in terms of losses for the Endesa Group, since these taxes have already been settled and paid. If successful, they would result in a favourable outcome for the Group.

B)   Defence litigation:

With regard to all other processes, which may have a negative impact on the Group, most of them refer to proceedings initiated by the Inspection Bodies, with the corresponding notices of disapproval signed by the Endesa Group and that have not been paid, currently being suspended during the litigation process.

In any litigation process of this nature, the probability of loss in the last judicial instance is assessed. A provision will be created for the contingency in the processes where the probability of losing is higher, but not for all other processes. The most significant are the following:

I. Litigation process in relation to the proceedings initiated by the Tax Office in 2017 against ENEL Green Power España, S.L.U. (EGPE) with regard to Income Tax Expense for the 2010 to 2013 business years.

With to Income Tax Expense for 2011 (as far as the position of EGPE as successor to EUFER is concerned), a contentious-administrative appeal was filed with the High Court. In 2020, a partial estimated resolution was received with regard to Income Tax Expense for the 2010 to 2013 business years, where the effects of the application of the tax neutrality regime in that period are discussed, and which in the same way has been appealed before the High Court which has not yet issued a Sentence.

The contingency associated with the process cannot be determined beforehand, insofar as the impacts associated with the asset revaluations that would take place as a result of the acceptance of the Administration's criteria must be assessed. A guarantee is available to ensure cancellation of the debt.

II. Litigation process with regard to the proceedings initiated by the Tax Office in 2018 against Endesa and its main subsidiaries with regard to Income Tax Expense for the 2011 to 2014 business years.

The items under discussion originate mainly from the differing criteria regarding the deductibility of costs of dismantling plants, certain financial expenses and certain losses from transfers of holdings during the period inspected.

In 2018, the corresponding appeals were filed with the Central Economic Court, and were resolved in 2022. When our arguments were rejected, an appeal was filed with the National High Court, which has not yet issued a judgment.

The amount under discussion is €48M; a €17M provision has been created with regard to this.

III. Litigation process with regard to the proceedings initiated by the Tax Office in 2018 against Endesa and its main subsidiaries relating to Value Added Tax (VAT) for the 2012 to 2014 business years.

The main items under discussion refer to the deductibility of VAT in application of the pro-rata rule.

The corresponding appeals were filed with the Central Economic Court in 2018. A decision partially denying the claim was received on 28 January, which was appealed before the National High Court to obtain a complete estimate.

The Appeal Court rejected the precautionary measure requested to maintain the suspension of the debt, so the payment of the settlement was made.

The litigation continues and, if upheld, the amount paid will be refunded with interest for late payment, which amounts to €8M.

IV. Litigation process with regard to the proceedings initiated by the Tax Office in 2021 against Endesa and its main subsidiaries with regard to Income Tax Expense for the 2015 to 2018 business years.

The final Settlement Agreements have been appealed to the Central Economic-Administrative Court.

The claim regarding disagreement on the criteria for the deductibility of certain financial expenses for the period under review was rejected in February 2024, with the impact on the reserve pending analysis, although no changes in the probability of loss are foreseen. The appeal will continue at the High Court.

However, the claim which primarily concerns the rejection of part of the accredited deduction for Research, Development and Technological Innovation is still pending.

The amount under discussion is €53M; a €44M provision has been created with regard to this.

V. Litigation process with regard to the proceedings initiated by the Tax Office in 2021 against Endesa and its main subsidiaries relating to Value Added Tax (VAT) for the 2015 to 2018 business years.

The final Settlement Agreements were appealed to the Central Economic-Administrative Court.

The amount under discussion is €2M and a provision has been created for the entire amount.

VI. Litigation regarding the Proceedings initiated by the Tax Inspectorate in 2021 against Endesa and its main subsidiaries with regard to the Withholdings corresponding to Personal Income Tax for the 2015 to 2018 business years. Following receipt of the final Settlement Agreements, they were appealed to the Central Economic-Administrative Court. The resolutions were received on 26 March 2024, all of them unfavourable, and the appeal to the High Court continues.

The amount under discussion is €2M and a provision has been created for the entire amount.

VII. Litigation processes arising from proceedings initiated by different City and Town Councils in relation to Street works licences.

There are ongoing litigations that are pending and that have their origin in the demand by certain Town/City Councils for the tax in its general form (tax by concepts) when Endesa considers that this general form is incompatible with the special form (which involves the taxation of 1.5% of the turnover of energy supply and distribution companies). The amounts under discussion amount to € 7M that are provisioned because the Supreme Court has declared that both modalities are compatible.

With regard to the requirement of the fee in its general form (fee by concepts), we are appealing the settlements when the Town/City Council does not distinguish between use and occupation of the public domain and when reasonable criteria are not applied in the assessment of the usefulness of that use or occupation.

With regard to the inclusion by Town/City Councils of the revenues for value-added services and the fees for specific purposes, for the purposes of determining the taxable base, Endesa has been appealing these settlements. In February 2023, the Supreme Court resolved the appeals filed by Endesa, stating that value-added services should not be part of the taxable base of the Fee for Occupation of Public Roads. Consequently, the ongoing litigation to apply this jurisprudence continues.

In total, there are ongoing proceedings in which refunds amounting to €8M are claimed, with a total of €7M having been set aside as a provision.

Transactions between Group Companies

Related-party transactions carried out by Endesa Group companies comply with the arm's length principle set out in the OECD Guidelines, the European Union Joint Transfer Pricing Forum and the regulations of the Law on Income Tax Expense.

According to the applicable regulations and recommendations, the pricing method for determining whether a transaction complies with the arm's length principle is that which, based on the facts and circumstances of the transaction, can justify that the transaction has been carried out in accordance with what would have been agreed between independent parties at arm's length.

When it is possible to identify transactions with comparable market characteristics (e.g. indices, public markets, third party contracts), the Comparable Uncontrolled Price method (CUP) is used as it is the most direct and reliable method for applying the arm's length principle. When market comparables are not available, indirect methods such as the Cost Plus (Cost+) method are applied, which are confirmed by applying the Transactional Net Margin Method (TNMM).

When the circumstances of the transactions make it advisable, the Endesa Group promotes the signing of Advance Pricing Agreements ( APAs) with the tax authorities to define the methodology to be applied.