US private equity firm victorious in legal battle with SK National Tax Service

Posted on : 2017-10-25 17:51 KST Modified on : 2017-10-25 17:51 KST
Supreme Court rules that Lone Star was not subject to a tax on foreign corporations
John Grayken
John Grayken

The US private equity firm Lone Star, which has been accused of “eat and run” tactics in South Korea, won a legal battle with the National Tax Service (NTS) over more than 170 billion won (US$150 million) in corporate taxes from the sale of Korea Exchange Bank (KEB) stocks. In the case filed by Lone Star against the NTS, the Supreme Court’s first division, with Hon. Park Sang-ok presiding, ruled on Oct. 24 to dismiss the NTS’s appeal and uphold an original court ruling overturning the assessment of corporate taxes from Lone Star’s primary sale of 13.6% of its KEB shares in June 2007.

In its ruling, the Supreme Court accepted the lower court’s reasoning that corporate taxes did not apply to Lone Star Funds’ top investors, including Lone Star US and Hudco Partners, because they were foreign corporations without anything that could be considered a fixed workplace in South Korea.

“For a foreign corporation to be viewed as having a fixed workplace in South Korea, it must repeatedly exercise essential and important rights to business activity, such as the periodic domestic exercise of contract signing rights in the corporation’s name by an agent in a subordinate position,” the court concluded.

“All important decisions in Lone Star Funds’ profit generation process were made in the US, including those related to fundraising, investment

decisions, and asset disposal,” it continued.

“As there is no evidence that it exercised essential and important rights through a domestic agent, it cannot be regarded as having a ‘fixed domestic workplace.’”

Lone Star US previously acquired shares of KEB, Kuk Dong Engineering and Construction, and Star Tower between 2002 and 2005 through a

holding company founded in Belgium. Lone Star Funds earned hundreds of billions of won in divided profits from the companies, as well as trillions of won in profits when it sold all of them off between 2007 and 2012.

Following a tax audit from Aug. 2007 to May 2008, the NTS charged Lone Star US and other top Lone Star Funds investors with over 800 billion won (US$708 million) in income and corporate taxes, prompting Lone Star to file suit to have the taxes overturned. During the ensuing legal battle, Lone Star scored a victory in a suit filed over 387.6 billion won (US$343.1 million) in transfer income tax withheld by the NTS after KEB shares acquired by Lone Star Funds subsidiary LSF-KEB Holdings SCA for 1.38 trillion won (US$1.22 billion) were sold (secondary sale) in 2012 to Hana Financial Group for 3.9156 trillion won (US$3.47 billion).

In an appellate trial in July after top Lone Star investors filed suit to have income taxes overturned, the Supreme Court ruled that 117.2 billion won (US$103.8 million) in income taxes should be returned to Lone Star US, as transfer income that it earned as a top investor in LSF-KEB Holdings SCA was tax-exempt according to the South Korea-US tax treaty.

The court further ruled to cancel as “mistaken” the NTS’s assessment of transfer income taxes on 245.1 billion won (US$217.0 million) in profits from the sale of the Star Tower building in Seoul’s Yeoksam neighborhood three years after Lone Star purchased it for around 100 billion won (US$88.5 million), but to accept the assessment of corporate taxes on the same transfer profits. In a 2012 appellate trial after Lone Star filed suit to have 100.2 billion won (US$88.7 million) in transfer taxes overturned, the Supreme Court sided with the company, saying it was “inappropriate to assess income taxes on a party subject to corporate taxes.”

In a Dec. 2016 appellate trial after Lone Star filed suit to have 104.0 billion won (US$92.1 million) in corporate taxes on transfer profits from Star Tower overturned, the court upheld an original ruling accepting the assessment of 64.0 billion won (US$56.7 million) in corporate taxes, but not including additional taxes of 39.2 billion won (US$34.7 million) due to procedural flaws with a failure to list the type and basis of calculation.

The latest verdict brings an end to Lone Star’s local legal battle over taxes with the NTS since pulling out of South Korea. The International Centre for Settlement of Investment Disputes (ICSID) is currently hearing an investor-state dispute (ISD) case filed by Lone Star in May 2012 to demand US$4.6795 billion in compensation (around 5.5 trillion won) from the South Korean government for unjustified taxation and delays in the KEB sale process in violation of the South Korea/Belgium/Luxembourg investment treaty.

By Yeo Hyun-ho, senior staff writer

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