U.S. private equity firm Lone Star lost a retrial of its roughly 170 billion won ($118 million) tax refund lawsuit against the South Korean government and the Seoul Metropolitan Government.
Division 16-1 of the Seoul High Court, presided over by Chung Jae-oh, Kim Seon-hee and Lee Won-seok, ruled against the plaintiffs on the 22nd in a remanded case in which nine companies including Lone Star Funds sought the return of unjust enrichment from the South Korean government and the Seoul city government.
The dispute dates back to Lone Star's purchases of Korea Exchange Bank, Kukdong Engineering & Construction and Star Lease between 2002 and 2005. The firm collected hundreds of billions of won in dividends and trillions of won in capital gains when it sold some of those holdings in 2007. Lone Star had paid less tax than domestic companies by invoking the Korea-Belgium tax treaty, and when tax authorities imposed about 800 billion won in corporate and other taxes on the grounds that the firm maintained a permanent establishment in South Korea, Lone Star contested the assessment in court. The Supreme Court ruled that Lone Star could not be considered to have had a domestic permanent establishment and ordered the corporate tax assessment canceled.
Lone Star then filed a fresh suit against the government and the Seoul city government, arguing that it should also recover taxes paid by withholding agents. The lower courts in the first and second trials found that the corporate tax had been offset against the withheld amounts and should therefore be returned, ordering the government to pay Lone Star 153 billion won in corporate tax and the Seoul city government 15.2 billion won in local income tax.
The Supreme Court, however, held that absent special circumstances the right to claim a refund of withheld tax belongs to the financial institutions that paid it, not to Lone Star, and sent the case back to the Seoul High Court. "Once the corporate tax assessment was canceled, the effect of offsetting the withheld tax refund against the corporate tax also lapsed," the court said. "Accordingly, the refund that was offset must be regarded as belonging to the withholding agent in whose name it was paid."
In the remanded proceedings, Lone Star argued that the parties had agreed that Lone Star was the party that substantively bore the withheld tax that was offset. The government countered that accepting Lone Star's argument would allow the firm to reap enormous profits in South Korea without bearing any tax burden, contrary to the relevant legal principles and to tax justice. The court sided with the government.