Supreme Court tears up Lone Star’s big tax bill

The long legal dispute between Korea’s tax authorities and the American private equity fund Lone Star has finally come to a close after three years, with the latter claiming victory.

The Supreme Court upheld a verdict Tuesday by a lower court that dismissed a 170 billion won ($150 million) corporate tax bill levied against nine Lone Star-linked companies in tax havens three years ago.

The Supreme Court concluded it was difficult to determine that Lone Star has a fixed business in Korea. The court said a foreign company is only recognized to have a local office only when all or parts of it have a fixed establishment like a building, office or a plant.

The court also backed up the lower court’s ruling that Lone Star was right in arguing that levying corporate taxes against it was a violation of the law.

In the two court rulings in 2013 and in 2014, lower courts concluded that the local manager of Lone Star only played a supportive role in the company’s Korean business and major decisions were made in the U.S. As a result, it was difficult to conclude that the American fund had a fixed establishment in Korea.

The companies that were billed by the National Tax Services are based in Luxembourg, Belgium and Bermuda.

In 2005, Lone Star bought a 51-percent stake in the beleaguered KEB Bank for 2.15 trillion won, which it sold to Hana Financial Group for 3.9 trillion won in 2012.

The U.S. investor did not pay Korean tax on the sale, which prompted the National Tax Service to conduct a tax audit in 2007 and slap a 173.3 billion won corporate tax bill on the company in 2012, which it immediately protested.

The only tax the U.S. investor paid was a 15 percent income tax on behalf of its unit in Belgium, which was in accordance with the tax treaty between Korea and Belgium.

Since it started investing in Korea in the early 2000s, when companies were selling assets off cheaply in the wake of the Asian financial crisis of the late 1990s, Lone Star was frequently lambasted for profiteering in Korea and using its influence with the Korean government.

It bought Kukdong E&C for 170 billion won between 2003 and 2004 and sold its stake to Woongjin Holdings in 2007 for 660 billion won. When including 220 billion won it pocketed in dividends from the construction company, the fund was believed to have made 710 billion won on the investment, four times its initial investment.

The situation was similar when it bought a local leasing firm Star Lease, which it paid 150 billion won for in December 2002. It sold its 94.9 percent stake for 302.3 billion won in 2007.

Yet Lone Star did not pay taxes on the profits it made from the deals because it was protected by Korea’s tax treaty with Belgium.

KEB was the final investment the U.S. investor made in Korea.

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]