Top court orders Lone Star to pay W64.8b in corporate tax

Dallas-based Lone Star Funds must pay 64.8 billion won ($55 million) in corporate tax for its capital gains from a property sale in Seoul, South Korea’s Supreme Court ruled Thursday.

According to the court’s ruling that upheld the previous decision, the imposition of 104 billion won in corporate tax on the US buyout fund for taking a margin of 250 billion won from selling a building in southern Seoul in 2004 was legitimate, except for additional taxes of 39.2 billion won.

“Lone Star was the actual owner of all of the capital gains and the fund supplier of stock purchases here,” the Supreme Court said.

It was the first ruling by the Korean Supreme Court that clarified differences between local tax laws and the Income Tax Convention signed between Korea and the US.

Under the Korea-US tax treaty, the US has tax authority over Lone Star for its capital gains from the real estate sale, while Korean law stipulates that the country’s tax authority can impose taxes on foreign corporations if they own excessive amounts of domestic properties. 

Lone Star had its Belgian affiliate Star Holdings purchase Star Tower in Yeoksam-dong, Gangnam-gu in 2001 and sell it back in 2004.

Korea’s National Tax Service in 2005 slapped a capital gains tax of 100 billion won on Lone Star, judging that the US private equity firm was the actual profit-taker. Lone Star filed a revocation suit against the tax.

The Supreme Court in 2012 ruled in favor of the firm, saying it is against the law to impose the capital gains tax on a foreign business.

In the same year, the tax authority imposed the 104 billion won in corporate income tax, and Lone Star responded with another appeal suit.

The Seoul Administrative Court in the following year judged that all of the 104 billion won tax was legitimate at the first trial, saying Lone Star had made deliberate attempts, including establishment of the Belgian subsidiary, to avoid taxes.

But the Seoul High Court judged the corporate tax imposition had some “procedural mistakes,” including omitting the details of additional taxes and basis of calculation. So, the court ordered exemption of 39.2 billion won from the tax.

“Under an inter-country agreement, if the capital gains are considered part of domestic source incomes, the corporate tax imposition is valid,” the Supreme Court said.

By Song Su-hyun (song@heraldcorp.com)