Lone Star handed $208M tax penalty

The local tax authority is within its rights to impose corporate taxes on Lone Star Fund III for reaping a profit of 245 billion won ($208 million) on its sale of an upscale building in Yeoksam-dong, southern Seoul, in 2004, the Supreme Court of Korea ruled yesterday.

The verdict comes after Hudco Partners Korea, one of the three subsidiaries of the global buyout firm, filed a lawsuit against the Yeoksam District Tax Office for slapping the company with a 1.6 billion won tax bill.

It lost its initial suit but found favor on appeal with the Seoul High Court, which decided that, “Hudco should not be subject to corporate tax because the volume of its investment in Star Tower was just 2 percent [of the total amount].”

The Yeoksam tax office also imposed a 61.3 billion won income tax bill on Lone Star Fund III’s U.S. limited partnership, which had a 60 percent stake in the building as well as 38.8 billion won invested in a limited partnership with connections to Bermuda.

This owned a 38 percent share in the building.

However, the Supreme Court overturned the verdict.

“The [Seoul High Court] ruling stated that it is unlawful to impose corporate tax [on Lone Star] because the profit it obtained from the capital gain does not meet all the requirements of the old tax law, but the court misunderstood the legal principles at play,” the judge said.

Lone Star Fund III established Star Holdings SH, a Belgium-based paper company, in 2001 and acquired Star Tower, which has since been renamed Gangnam Finance Center.

It then reaped 245 billion won in profit from selling the property in 2004.

The tax agency ordered it to pay 100 billion won in income tax, but the Supreme Court ruled this invalid based on the rationale that the buyout firm is a foreign corporation.

In Korea, foreign corporations are only subject to corporate taxes.

As the Supreme Court has ruled in favor of the tax office, all eyes are now centered on whether corporate taxes will also be imposed on the U.S. buy out fund’s U.S. and Bermuda limited partnership.

By Lee Eun-joo [angie@joongang.co.kr]