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Court upholds partial return of Lone Star tax

Dec 29,2017
Korea’s top court on Thursday upheld the partial cancellation of 100 billion won ($93.2 million) in corporate taxes levied on the U.S. private equity fund Lone Star for dividends from its formerly held major stake in a local bank.

The Supreme Court upheld the lower court’s ruling that the National Tax Service should return 38.3 billion won in corporate taxes from Citibank Korea, Lone Star’s trustee bank, of the 103.1 billion won it imposed for shareholder returns from Korea Exchange Bank, now known as KEB Hana Bank.

Lone Star had owned 329 million shares in Korea Exchange Bank before gradually selling them off to Hana Bank in a years-long takeover process that ended in 2012. It reportedly gained 1.29 trillion won in dividend income from April 2008 to July 2011 and paid 176.3 billion won in taxes.

Citibank Korea filed a lawsuit against Seoul’s Namdaemun district tax office, claiming that the additional 103.1 billion won levied was not fair and demanded it be revoked. It said that since Lone Star’s unit that controls Korea Exchange Bank is based in Belgium, its client is subject to the limited tax rate of 13.64 percent for dividend income, citing the tax treaty signed between Korea and Belgium.

The National Tax Service refuted the claim, saying that the Belgian firm is a mere conduit set up to evade taxes and that the limited tax rate cannot be applied.

The lower courts agreed with the National Tax Service’s argument, judging that the levy was in line with the corporate tax law.

However, the courts ordered that a partial amount should be returned because it is fair to apply the tax treaty with the United States, given that a considerable number of Lone Star investors are U.S. residents.

The U.S. tax treaty imposes a limited rate of 15 percent.

The Supreme Court ruled in line with that decision.

Lone Star was at the center of public scrutiny for purchasing Korea Exchange Bank at a low price and reselling it to a local rival before pulling out of the country with a massive profit in 2012.

A series of litigations are still under way in the case of Lone Star versus local tax authorities. YONHAP