Lone Star Wins Lawsuit to Recover 160 Billion KRW in Unjust Profits from Government and Seoul City (Comprehensive)

U.S.-based private equity firm Lone Star-related corporations have effectively won a lawsuit demanding the return of 170 billion KRW in taxes canceled by a Supreme Court ruling against the government and Seoul Metropolitan Government.

The Seoul Central District Court Civil Division 17 (Presiding Judge Lee Seung-won) ruled partially in favor of the plaintiffs in a lawsuit filed by nine Lone Star fund-related corporations against the Republic of Korea government and Seoul Metropolitan Government, seeking the return of unjust enrichment. The court recognized the obligation to return the full principal amount of the unpaid tax and the additional refund amount claimed by the plaintiffs. However, the lawsuit filed against Gangnam-gu, Seoul, was dismissed in favor of the defendant.

The court determined that the government must return 153 billion KRW in corporate tax, and Seoul Metropolitan Government must return 15.2 billion KRW in local income tax to Lone Star. This means the court acknowledged the full return of the principal amount of taxes Lone Star paid but did not receive back.

However, in calculating delayed damages, the court applied the civil law delay interest rate of 5% per annum instead of the 12% annual rate stipulated by the Act on Promotion of Litigation until the date of judgment.

Lone Star acquired Korea Exchange Bank, Geukdong Construction, Staris, and others between 2002 and 2005, and after partially selling them in 2007, earned dividends worth several hundred billion KRW and capital gains worth trillions of KRW, but paid less tax than domestic companies under the Korea-Belgium tax treaty.

However, the Seoul Regional Tax Office, after a tax audit, judged that Lone Star used Belgian companies as fronts to pay less tax, but the holding companies listed as shareholders of Korea Exchange Bank and others were merely conduit companies established for tax avoidance purposes, and the actual income beneficiaries were Lone Star fund-related corporations as the ultimate investors.

They also found that these entities had a fixed place of business in Korea and acquired such income, imposing taxes amounting to around 800 billion KRW.

Some of this was received by deducting and offsetting amounts withheld and paid on dividends and capital gains from shares such as Korea Exchange Bank.

However, in 2017, the Supreme Court ruled in favor of Lone Star in a lawsuit requesting the cancellation of 173.3 billion KRW in corporate tax imposed, stating that "the investment was made at the U.S. headquarters, so it cannot be considered that there is a fixed place of business in Korea."

Subsequently, Lone Star filed a lawsuit against the government in December 2017, claiming it had not received back 153.5 billion KRW of corporate tax canceled by the Supreme Court decision. They also filed an additional lawsuit against Seoul Metropolitan Government and others in January 2018, seeking the return of local taxes imposed and canceled through the same process.

In court, the government and Seoul Metropolitan Government argued, "With the cancellation of the corporate tax imposition, the effect of the deduction and offsetting made by withholding tax at the time of the corporate tax imposition is extinguished, and the withholding tax relationship remains intact. The plaintiffs, as withholding tax obligors, cannot claim the return of the withheld tax, and only the original withholding agents can claim the return of the withheld tax."

On the other hand, Lone Star argued, "The plaintiffs' claim for the return of unjust enrichment is only for the return of corporate tax paid by the plaintiffs due to the corporate tax imposition, not for the return of withheld tax."

The court ruled, "The right to claim a refund arising from the cancellation of the corporate tax imposition is, contrary to the defendant's claim, the plaintiffs' right to claim a corporate tax refund."

This content was produced with the assistance of AI translation services.