Lone Star-Government 160 Billion Won Tax Lawsuit 'Second Round', Disputes Over Claims and Delay Interest

The second round of the civil lawsuit between the U.S.-based private equity firm Lone Star and the South Korean government and Seoul Metropolitan Government over a tax refund of 168.2 billion won will begin on the 4th. Having lost in the first trial, the government's main task will be to prove the claim that "Lone Star has no right to claim a tax refund," while Lone Star's key objective will be to secure additional recognition of delay damages (interest) due to the late refund.

원본보기 아이콘

According to the legal community on the 2nd, the Seoul High Court Civil Division 14-1 will hold the first hearing of the second trial on the 4th at 10 a.m. for the unjust enrichment refund lawsuit filed by nine Lone Star-related entities, including Hudco Partners for Korea Limited and Lone Star Fund for (US) L.P., against the government and Seoul Metropolitan Government. The principal amounts claimed by Lone Star against the state and Seoul Metropolitan Government are approximately 153 billion won and 15.2 billion won, respectively.

Previously, Lone Star acquired domestic companies such as Korea Exchange Bank and Far East Construction between 2002 and 2005 and sold them in 2007. During this process, they earned dividends worth several hundred billion won and capital gains worth trillions of won. However, Lone Star was able to pay less tax by applying the "Korea-Belgium Tax Treaty" because each transaction was conducted through holding companies established overseas, such as in Belgium. Accordingly, Lone Star paid only 11-15% of the dividends and sale proceeds as withholding tax. Withholding tax is a system where financial institutions (banks or securities firms) that pay income earned by foreign companies in Korea withhold a certain amount in advance and pay it to the tax authorities.

The tax authorities, after a tax audit, imposed about 800 billion won in income tax and corporate tax, arguing that Lone Star used the Belgian company to pay less tax, but the company that actually earned the income was Lone Star. Lone Star filed an objection lawsuit. In 2017, the Supreme Court ruled that "the investment was made by the headquarters in the U.S., and there is no fixed place of business in Korea," and decided that about 170 billion won in corporate tax should be canceled.

However, the tax authorities refunded only about 22.8 billion won of the canceled corporate tax. Lone Star filed this lawsuit against the government, demanding a full refund of the canceled corporate tax. They also filed a lawsuit against Seoul Metropolitan Government and others, arguing that local income tax should also be refunded since the corporate tax imposition was canceled.

During the first trial, the government argued that "regarding the cancellation of corporate tax payment, Lone Star can only claim a refund for taxes paid under their name. The refund of withholding tax can be claimed by the withholding agent, the financial institution." On the other hand, Lone Star argued that "since the corporate tax imposition was canceled, they are only seeking a refund of the corporate tax paid, not the withholding tax."

The first trial court ruled in favor of Lone Star, stating that "the government and Seoul Metropolitan Government must refund corporate tax and local tax, respectively." The court explained, "With the cancellation of corporate tax imposition, withholding tax becomes invalid, and ultimately, Lone Star paid corporate tax." It further stated, "The refund claim arising from the cancellation of corporate tax is not a matter of refund claims related to withholding tax but a corporate tax refund claim by Lone Star." The court added, "If the government's argument that the refund claim of the withholding agent such as financial institutions is revived were accepted, it would be unfair as the government would have deducted and offset the refund amount of the withholding agent, not Lone Star's right."

The government appealed the first trial loss. Accordingly, the government must prove the premise that the claim right belongs to the withholding agent to have the claim that "Lone Star has no claim" recognized or persuade the appellate court with new arguments.

Similarly, Lone Star, which also appealed, is expected to focus its arguments to receive a larger refund. Lone Star demanded a total of 300 billion won, including delay damages, in addition to the refund amount requested in the first trial. However, the first trial court ruled that "delay damages until the judgment date should be calculated and paid at the civil law rate of 5% per annum, not the 12% per annum rate stipulated by the Act on Promotion of Litigation."

Considering that the previous withholding tax ruling was finalized during this lawsuit, there is room to dispute the existence or scope of the government's obligation to refund.

Meanwhile, Lone Star acquired Korea Exchange Bank in 2003 for 1.3834 trillion won and engaged in sale negotiations with several companies before selling it to Hana Financial Group in 2012 for 3.9157 trillion won. Lone Star filed an international investment dispute (ISDS) with the International Centre for Settlement of Investment Disputes (ICSID), demanding compensation of 4.6795 billion dollars (about 6.1 trillion won), claiming that the government unfairly intervened to lower the price. In 2022, ICSID ordered the government to pay about 4% of the damages claimed by Lone Star. As both parties requested cancellation of the ruling, last year ICSID decided to indefinitely maintain the suspension of enforcement of the ruling until the final conclusion on the cancellation application is reached.

원본보기 아이콘

© The Asia Business Daily(www.asiae.co.kr). All rights reserved.