Korean court favors Lone Star in $159m KEB tax case

Lone Star, which acquired KEB in 2003, made a partial exit in 2007 via a block sale worth KRW1.19 trillion and sold the rest of its holding to Hana Financial Group for KRW3.92 trillion in 2011. Local tax authorities withheld 10% of the proceeds in capital gains taxes.

The Seoul Administrative Court has ruled that the monies should be returned because capital gains tax should be levied on the beneficiary of the proceeds of the sale. It therefore ignored the Belgium-incorporated affiliate through which the investment was made, and identified US-based Lone Star as one of the beneficiaries. Under the South Korea-US double taxation treaty, the authorities in one country cannot tax capital gains made by residents of the other.

Lone Star had challenged the tax authorities' move on the grounds that the transaction should be exempted from tax because the Belgium-based entity is covered by the South Korea-Belgium tax treaty. The European nation does not levy taxes on passive income from overseas equity investments.

In discarding this claim, the court deemed that investors not protected by the US-South Korea or any other treaty would be liable for capital gains tax. Other investors were identified as corporations registered in Bermuda.

This follows a separate ruling in June that the tax authorities should return KRW119.2 billion to Lone Star, according to Yonhap News Agency. This means the private equity firm's payout could come to more than KRW300 billion if the two rulings are upheld by the Supreme Court.

Lone Star's investment in KEB was nothing if not controversial. In 2011, the PE firm was found guilty of manipulating the bank's stock price around the time of its purchase, and was ordered to pay damages and sell down its stake to less than 10%. This followed several failed attempts to exit the asset dating back to 2006. Hana was originally going to pay $4.2 billion for the stake in KEB but regulators withheld their approval until the stock manipulation court case was resolved.

In 2012, Lone Star initiated arbitration of its claim for damages suffered as a result of alleged unlawful intervention by the Korean government with the private equity firm's rights as a major shareholder in KEB and other companies acquired in the early 2000s.

It cited regulators' unwillingness to approve a string of prospective buyers of the KEB stake - thereby forcing it hold the asset for longer than necessary - as well as the arbitrary, unlawful and confiscatory taxation of exit proceeds from its investments.

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• Topics
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• South Korea
• Lone Star Funds
• regulation
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