Supreme Court of Korea affirms Bermuda private equity fund’s share of US$55 million tax liability

The Supreme Court of Korea ruled on 15 December 2016 that the Dallas-based private equity firm Lone Star must pay 64.8 billion won ($54.9 million) in corporate tax, a final ruling in a controversial case that has dragged on for more than a decade.

Lone Star Real Estate Fund III (U.S.) and Lone Star Real Estate Fund III (Bermuda) – collectively referred to as Lone Star Real Estate Fund III – filed an appeal against a previous ruling that they must pay corporate tax on their sale of the Gangnam Finance Center, formerly known as Star Tower, in Gangnam District, southern Seoul, in 2004.

Lone Star Real Estate Fund III brought Gangnam Finance Center in 2001 via its company Star Holdings in Belgium, and then sold it in 2004, making some 245 billion won in profit. It did not pay tax on the sale.

In 2005, the National Tax Service’s Yeoksam branch ordered Lone Star Real Estate Fund III to pay some 100 billion won in tax on the profit it made selling the building in Gangnam. It objected, saying it shouldn’t be subject to income tax as a foreign company.

The case made it to the Supreme Court, which in 2012 ruled in favor of the Lone Star Real Estate Fund III, ruling that while it is subject to corporate tax, it is not subject to income tax.

The Yeoksam tax office then imposed a corporate tax of 104 billion won on Lone Star, which said it was not liable due to a tax treaty between Belgium and Korea, as it bought and sold the building via its company in Belgium.

The first trial ruled in favor of the Yeoksam tax office, saying the bilateral tax treaty contains agreements on preventing tax evasion.

“Star Holdings appears to be a company built solely for the purpose of avoiding paying taxes and the regulation that waives taxes on foreign companies therefore cannot be applied to it,” the court said.

The second trial resulted in a similar judgement, but said that some 39.2 billion won imposed on Lone Star as additional tax should be cancelled because the Yeoksam tax office did not provide an explanation on why and how it was calculated. The Supreme Court’s ruling on Thursday upheld this judgement, and ruled that the company pay 64.8 billion won in corporate tax.

Before the Supreme Court’s final judgement, Lone Star had filed an appeal to the Constitutional Court, arguing Clause 7 of Article 93 of the Corporate Tax Act violates the Constitution. In November 2015, the Constitutional Court ruled against it.

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