Lone Star employs ISD clause to sue gov’t
This is the first investor-state dispute (ISD) to be filed under the ISD clause in the Korea-U.S. free trade agreement that went into effect in March. The ISD clause allows foreign companies and investors to file for arbitration in the event of a dispute with a foreign government. It is seen as a form of insurance against governments that are protectionist or anti-foreign investor.
“Though we sought discussions with the South Korean government following our May 2012 notice, an amicable resolution to this dispute has not been possible,” Michael Thomson, general counsel for Lone Star Funds, said in a statement. “Given our duties to our investors, we are obliged to proceed to arbitration with the claims set out in our notice.”
Lone Star notified the Korean government in May that it would initiate arbitration proceedings if it failed to reach an agreement with the government within six months. Lone Star sold its 51 percent stake in KEB to Hana Financial Group for about 3.9 trillion won ($3.6 billion) in January.
The National Tax Service subsequently withheld a 10 percent capital gains tax amounting to 391.5 billion won on the proceeds of the sale. Lone Star says the tax should not be charged on the sale because KEB was sold by its subsidiary in Belgium, a country with which Korea has a double-taxation avoidance deal.
The National Tax Service says it is a tax dodge. Lone Star also filed suit yesterday against the Namdaemun Tax Office in the Seoul Administrative Court seeking a refund of the 391.5 billion won tax withheld.
Lone Star also says the Korean government was responsible for its failed attempts to sell KEB in 2006 and 2008, and could be suing for compensation.
“The government doesn’t recognize Lone Star’s argument,” said Jeong Moo-kyung, an official at the Prime Minister’s Office. Legal experts say it will take at least three years to reach a final ruling.
By Kim Mi-ju [email@example.com]