Lone Star wins Korea tax lawsuit

The firm has won a tax refund from when it sold the Korea Exchange Bank in 2012

Dallas-based buyout firm Lone Star Funds has won its long-running tax lawsuit with the Korean government, PEI sister-publication Private Funds Management has reported, citing local media.

Lone Star paid KRW351 billion (€264 million; $348 million) in withholding taxes after the contentious $3.5 billion sale of the Korea Exchange Bank to Hana Financial Group back in 2012. 

In 2003, the private equity firm acquired a 64.6 percent stake in KEB in 2003 for KRW2.1 trillion. The deal was marred by scandal and became politically contentious. In December 2011, South Korea's financial regulator ordered Lone Star to sell most of its stake in the Korea Exchange Bank within six months. It finally sold to Hana.

The firm originally agreed to pay a withholding tax of 10 percent but challenged the payment claiming that it did not have to pay the taxes as the Belgium-based holding company, LSF-KEB, which acquired the Korea Exchange Bank was not a Korean company.

The judges in the administrative court said, “For this case, the Korea-US tax treaty must be the criteria for judging legality, not the Korea-Belgium tax treaty. That’s because it was Lone Star US that would ultimately take the profit, not LSF-KEB that was established as a special-purpose company for the purpose of tax avoidance.”

“In accordance with the Korea-US tax treaty, Lone Star US is eligible for tax exemption privileges in Korea and thus doesn’t have tax-paying obligations in the case of a stock ownership transfer.”