Slim chance of Lone Star tax refund

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Slim chance of Lone Star tax refund

Korea’s tax agency will likely refuse Lone Star Funds’ request to refund a large withholding tax on its sale of Korea Exchange Bank (KEB), officials said yesterday.

In January, Lone Star sold its 51 percent stake in KEB, the No. 5 lender in Korea, to Hana Financial Group for about 4 trillion won ($3.5 billion).

The National Tax Service (NTS) imposed a 10 percent withholding tax on the proceeds from the sale.

The tax bill came to 391.5 billion won.

However, the U.S. private equity fund filed a complaint in May arguing that the tax should be exempted as the actual seller of KEB was its subsidiary based in Belgium, a country which Korea has a double-taxation avoidance deal with.

Belgium exempts taxes on income from overseas equity investments.

Lone Star Korea closed its office here in Seoul in April 2008 and claimed that therefore it has had no regular business operation to be subjected to taxation.

“There is no problem imposing the tax as Lone Star had been running its business for a long period of time and has made a significant amount of capital gains here,” said an NTS official.

The NTS separately confirmed it is still reviewing the claim by Lone Star, but noted there are “few reasonable grounds” to accept its request for a refund.

Despite the tax agency’s stance, the controversy is not likely to die down any time soon as Lone Star is reportedly preparing to resort to the investor-state dispute mechanism to resolve the tax issue, which can drag on for years.

It also filed a complaint with the financial regulator here, arguing that it suffered losses due to what it calls the arbitrary and discriminatory actions of the Seoul government in the process of the KEB sale.

John Grayken, Lone Star’s chairman, issued a statement expressing his disappointment at how the Korean government failed to protect the fund’s investment.

He said the government, driven by negative public sentiment regarding foreign investments, took a series of “illegal” actions that resulted in a huge financial loss for its investors.

Korea’s financial regulator said the sale of KEB proceeded in line with Korean law, meaning there should be no problem if the issue is brought to the international court.

The case has been much in the spotlight as the company has frequently been criticized here for pocketing large profits then exiting the country without paying due taxes.
The Texas-based private equity company pocketed almost 2 trillion won from the KEB sale after buying the embattled bank for about 2.15 trillion won in 2003.


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