By Kim Jae-won
Lone Star Funds Chairman John Grayken looked happy when he signed the $4.1 billion deal with Hana Financial Group Chairman Kim Seung-yu at the Grosvenor House JW Marriott Hotel in London Thursday for the sale of the Korea Exchange Bank (KEB).
The 54-year-old Harvard Business School alumnus wore a striped gray suit with cobalt tie celebrating the Texan private equity firm’s longtime wish to come true.
Maybe impressed with the joyful atmosphere, the Lone Star founder mentioned what he did not say before.
“We’ll pay whatever tax is required,” Grayken was quoted as saying.
The remark seems to indicate Lone Star’s changed stance on tax issues, but experts say it is no more than lip service.
In June 2007, the National Tax Service (NTS) levied 119 billion won of corporate taxes on the fund’s capital gains of 1.2 trillion won from selling a 13.6 percent stake in KEB.
Lone Star then filed a complaint with the tax tribunal over the taxation. It argued that since LSF-KEB Holdings was based in Belgium, it was not subject to taxation under the Korea-Belgium tax treaty. The KEB stake is held by LSF-KEB Holdings, a Belgian subsidiary of Lone Star.
A tribunal rejected the claim, saying that LSF-KEB Holdings was a “paper company” established by Lone Star primarily for tax evasion. The fund took the case to court, and the case is still under review.
There is no sign that Lone Star will give up the case, so Grayken’s remarks may mean, if the company loses the case, it will pay the taxes.
“We don’t think that we have to pay taxes on gains from the sale of KEB because we made the investment through a tax haven under the Korea-Belgium tax treaty,” said a source close to the U.S. fund, asking not to be named.
The source said that local companies are doing same thing. “You have to remember that many Korean companies are also taking advantage of such tax benefits by making investments overseas through tax havens,” he added.
Lone Star’s stance will be same with other capital gains of $4.1 billion, which it is supposed to collect through the end of March from Hana. The NTS plans to impose taxes on the capital gains and the amount of tax is estimated to reach about between 400 billion won and 500 billion won.
“The NTS is considering ways of imposing taxes on Lone Star,” an industry source, familiar with the situation, said on condition of anonymity referring to the sensitivity of the issue.
“The tax agency has many documents on Lone Star and KEB. It is watching out carefully for the move of Lone Star. The real battle has just begun.”
Besides, Grayken has promised to donate 100 billion won for charity but he has not delivered. Will he keep his promise when he is paid and pays taxes?