The South Korean government and Seoul won a lawsuit Thursday against US private equity firm Lone Star Funds over 168.2 billion won ($127 million) in tax refunds, after the Seoul High Court rejected Lone Star’s claims in a retrial ordered by the Supreme Court.
The case involved nine Lone Star-affiliated entities, including Lone Star Funds, seeking the return of taxes imposed on their investments in Korea.
The ruling dismissed claims for refunds that lower courts had previously ordered the central government and Seoul to pay. The court also dismissed related claims against Gangnam-gu.
The dispute stemmed from taxes imposed on dividends and capital gains Lone Star earned from its investments in Korea Exchange Bank, Kukdong Engineering & Construction and Star Lease.
Between 2003 and 2005, Lone Star acquired approximately 416.75 million shares in Korea Exchange Bank through holding companies established in Bermuda and Belgium.
In 2007, the firm received 416.75 billion won in dividends and sold 87.7 million shares for 1.19 trillion won. It also earned dividends and proceeds from the sale of shares in Kukdong Engineering & Construction and Star Lease.
Lone Star argued that its investments were covered by a tax treaty between South Korea and Belgium and that taxes on dividend payments and share-sale proceeds had already been withheld at source.
Korean tax authorities, however, determined that Lone Star, rather than its overseas holding companies, was the actual beneficiary of the income and imposed corporate taxes on the dividends and capital gains.
In October 2017, the Supreme Court finalized a ruling that the taxes had been unlawfully imposed because Lone Star did not have a permanent establishment in Korea.
The government later determined that only taxes paid directly by Lone Star were eligible for refunds, excluding amounts collected through withholding arrangements.
It refunded approximately 22.8 billion won to the firm. Lone Star sued to recover the remaining taxes and brought additional claims against Seoul and Gangnam-gu for refunds of local income taxes.
The lower courts initially sided with Lone Star, finding that the firm had effectively paid the disputed taxes through withholding arrangements and tax credits.
They ordered the central government to return 153 billion won in corporate taxes and Seoul to refund 15.2 billion won in local income taxes, totaling 168.2 billion won.
The Supreme Court overturned those rulings in April 2025, finding that the right to claim refunds of taxes withheld at source generally belonged to the companies that had withheld and paid the taxes, rather than Lone Star.
It sent the case back to the Seoul High Court to determine whether special circumstances nevertheless entitled Lone Star to claim the refunds.
At Thursday’s retrial, Lone Star argued that agreements with the companies had transferred the refund rights to the firm.
The government countered that the agreements concerned only who would ultimately receive the economic benefits of the refunds, rather than a legal transfer of the right to claim them. The Seoul High Court rejected Lone Star’s claims.
seungku99@heraldcorp.com
