Court orders gov’t, Seoul city to return 168.2 bln won in cancelled tax to Lone Star

A South Korean court ruled Friday that the government and the Seoul city government should return a combined 168.2 billion won (US$127.6 million) in tax levied on the U.S. private equity firm Lone Star Funds decades ago over a sell-off of local assets, which was later cancelled.

In a ruling partially in favor of the nine entities of Lone Star, the Seoul Central District Court said the government and the Seoul Metropolitan Government should return 153 billion won in corporate tax and 15.2 billion won in income tax, respectively.

The ruling aligns with the Supreme Court’s 2017 decision, which ordered local tax authorities to cancel the levied tax on the nine titular companies that belong to Lone Star.

However, the court only partially recognized the delayed interest worth hundreds of billions of won sought by the Texas-based firm.

Controversies surrounding Lone Star’s proceeds from purchasing and selling off local assets date back to the early 2000s, when the country faced economic difficulties in the wake of the Asian financial crisis in the late 1990s.

Lone Star and its firms purchased large shares of Korea Exchange Bank (KEB) and mid-sized builder Kukdong Engineering & Construction Co. between 2002 and 2005. They later made huge profits through dividend payouts from KEB but only paid 15 percent of the return as income tax in accordance with the Korea-Belgium tax treaty.

The National Tax Service later launched a probe into Lone Star and its entities, and levied taxes on them in 2007.

Lone Star claimed it should be exempt from taxes under investment treaties that South Korea has with European nations. However, South Korea argued the subsidiaries are paper companies and should not be protected by investment treaties.

In 2017, the Supreme Court approved the plaintiffs’ claim that the U.S. headquarters is in charge of key decision-making regarding investment and therefore it cannot be said that they have a fixed business footing in Korea.

Lone Star then filed a lawsuit against the Seoul government in December 2017 and additional suits against the Seoul metropolitan government in January 2018.

In a separate ruling last year, an international tribunal ordered South Korea to pay Lone Star $216.5 million plus interest over the sell-off of KEB. The ordered amount was recently decreased by $480,000 following the justice ministry’s application for amendment.