South Korea's tax tribunal on Thursday rejected appeals by the U.S. fund Lone Star to nullify US$110.7 million in penalty taxes imposed on its profits from the sale of a Seoul office building.

Lone Star Funds filed the complaints in March 2006 against the tax authorities' decision to impose the back taxes on the fund's gains from the 900 billion won ($979.3 million) sale of the Star Tower building in December 2004.

Lone Star submitted the appeal, arguing that it is exempt from the taxes since its Belgium-based Star Holdings conducted the sale.

Seoul and Belgium have signed a double taxation avoidance agreement.

"We have decided unanimously to turn down Lone Star's appeals," the National Tax Tribunal said in a statement.

"We have concluded that the fund's Belgian unit has been set up primarily to avoid taxes, not to do normal business activities." Lone Star said it would appeal the ruling in the Korean courts.

"Lone Star respects the National Tax Tribunal's view but is disappointed in this decision and will appeal it in the Korean courts," the fund said in a statement.

The tribunal's decision could widen the ongoing friction between the Dallas-based fund and South Korea's government.

South Korea's tax officials are digging into the fund's sale of Kukdong Engineering & Construction Co., a local builder, to a business group last month to tax the profits from the sale.

The fund is believed to have made a combined 1.5 trillion won in profits by selling shares in Kukdong Engineering & Construction, Starlease and the Korea Exchange Bank (KEB) at the end of last month.

The Seoul court is also looking into claims that there was wrongdoing by the government and former bank officials during the KEB sale to Lone Star in 2003.

The U.S. fund says it is looking for strategic investors for its remaining 51.02 percent stake in KEB, speeding up its move to dispose of its investment in South Korea before the Seoul court rules on the case.

SEOUL, July 5 (Yonhap News)