By Lee Hyo-sik
Lone Star Funds has lodged a complaint with tax authorities seeking the return of capital gains taxes withheld since the time of its sale of Korea Exchange Bank (KEB) to the Hana Financial Group in March.
The National Tax Service (NTS) said Thursday that the Texas-based buyout fund filed a petition early this month, demanding it refund 391.5 billion won ($348 million) in withheld tax. At the time of the KEB sale, the NTS imposed the tax bill on Lone Star, equivalent to 10 percent of KEB’s price tag of 3.91 trillion won.
On March 5, Hana Financial paid 10 percent of the sales proceeds to the tax agency as part of withheld tax, while the remaining 90 percent was given to the U.S. private equity fund in payment for a 51-percent stake in Korea’s fifth largest commercial bank.
“We are currently reviewing Lone Star’s claims filed early this month,” an NTS spokesman said. Under the law, the NTS is required to make a decision within 60 days after a petition is filed.
Lone Star reportedly plans to take the matter to the Tax Tribunal if the NTS denies the request. A lawyer at Kim & Chang representing the U.S. fund was not available to confirm the petition or comment on the issue.
Lone Star has been claiming that its Belgium-based subsidiary, LSF-KEB, was the seller in the deal, adding it does not have to pay capital gains taxes here under a double taxation avoidance treaty signed between Korea and Belgium.
Instead, it should pay taxes in Belgium. But the European nation does not impose any taxes on capital gains realized by corporations set up there. It means Lone Star does not have to pay any taxes on more than the 4 trillion won profits it generated from selling its KEB stakes over the years. Lone Star acquired the bank in 2003.
The NTS has been arguing that Lone Star should pay capital gains taxes under Korean law, saying its Belgium subsidiary is a paper company and that the real entity involved in the KEB sale is its unit established here.
The U.S. buyout fund is already in court with the NTS over the 119.2 trillion won in income tax it was charged after it executed a bloc sale of a 13.6 percent stake in KEB in 2007.
On Wednesday, the Supreme Court sided with the NTS, ruling that Lone Star should pay taxes on capital gains realized by disposing of the Star Tower in southern Seoul in 2005.
Hudco Partners Korea, one of Lone Star’s three subsidiaries that handled the sale of the upscale structure, was slapped with 1.6 billion won in capital gains taxes at the time. The fund was set up in Bermuda, one of the world’s tax havens.
Official records show that Lone Star raked in 245 billion won in profits from selling Star Tower after owning it for five years.