Lone Star ordered to pay billions in corporate tax

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Lone Star ordered to pay billions in corporate tax

The Seoul Administrative Court yesterday ordered the private U.S. equity firm Lone Star Funds to pay 104 billion won ($97.7 million) in corporate tax for gains it made from selling a skyscraper in 2004 in southern Seoul.

The ruling yesterday was a stinging defeat for the Dallas-based firm, which has sought for years to avoid paying the massive fee imposed by a local tax office.

In 2001, Lone Star purchased the high-rise Star Building in the business district of Yeoksam-dong, Gangnam District, for 100 billion won.

Riding the local real estate boom of the early 2000s, the property value of the building more than tripled over three years.

In 2004, the buyout fund raked in 251 billion won in profit by selling the building for 351 billion won.

In 2005, the Yeoksam branch of the Gangnam District Tax Office levied 100 billion won in capital gains tax on the foreign firm, which refuted the taxation, saying it shouldn’t be subject to income tax as a foreign company.

After years of legal disputes, the Supreme Court sided with Lone Star in 2012, ruling that the firm is not subject to income tax as it had claimed.

But the ruling raised the possibility for the tax authorities to come up with corporate taxes to be levied upon the company instead of capital gains tax.

The Yeoksam tax office did, in fact, levy the corporate tax in the months following the ruling. In protest, Lone Star brought the case before the court.

Lone Star managed the Star Tower through its Belgium-based subsidiary, which local authorities claimed was a “paper company.”

Tax officials claimed Lone Star was trying to take advantage of a Korea-Belgium tax treaty that does not contain a provision allowing capital gains tax from the transfer of shares on real estate property.

The court said in its ruling that the buyout firm set up its subsidiary in Belgium to process the purchase and sale of Star Tower only “as part of measures to dodge taxes in a systematic way, rather than for effective management strategy.”

It added that the company should be held accountable for its corporate tax duty.

BY KANG JIN-KYU [jkkang2@joongang.co.kr]
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