Tax dispute likely to become Korea’s first ISD for arbitration


The National Tax Service has decided to reject Lone Star’s request for a refund of 391.5 billion won ($348 million) in tax on capital gains from its sale of Korea Exchange Bank, officials said Tuesday.

The U.S. buyout fund sold its 51.02 percent stake in KEB for about 3.9 trillion won ($3.5 billion) to Hana Financial Group in January. The NTS imposed a 10 percent withholding tax on the proceeds from the sale, which Hana Financial paid out of the agreed price.

“We are checking the facts regarding Lone Star’s claim for rectification, but there seems to be no reason to return to Lone Star the withholding tax that Hana paid,” an NTS official said.

Lone Star filed a complaint in early May, arguing that it should be exempted from taxes since the actual seller of KEB was its subsidiary (LSF-KEB Holdings) based in Belgium, with which Korea has a double-taxation avoidance deal. Belgium exempts taxes on income from overseas equity investment. The private equity company noted it no longer had a business establishment in Korea after it shut down its Seoul office in 2008.

“Taxing Lone Star was a matter of course as the buyout fund operated for a long period of time in Korea and made a significant amount of capital gains here,” another NTS official said.

Once the tax agency officially turns down Lone Star’s claim for rectification, the case is likely to be handled as Korea’s first investor-state dispute for international arbitration.

Lone Star already informed the Korean Embassy in Belgium in late May that it will take steps for ISD arbitration and requested consultations with the Seoul government over its claims.

The tax dispute is expected to be dealt at the International Center for Settlement of Investment Disputes under the World Bank from late November. Such international arbitrations usually take between three and four years.

Lone Star said it suffered losses due to arbitrary and discriminative measures by the Financial Services Commission as well as the NTS in the sale process of KEB.

The Korean government accepted Lone Star’s request for consultations, but believes it will be difficult to reach an agreement due to major differences.

The Korean Supreme Court recently ruled in favor of the tax imposed by the NTS on Lone Star’s capital gains from selling the Star Tower building in southern Seoul in 2005. 

By Kim So-hyun (sophie@heraldcorp.com)