The Supreme Court sends the case back for retrial, complicating the U.S. private equity firm’s efforts to recover disputed funds. (Image created by ChatGPT)
SEOUL, April 26 (Korea Bizwire) — South Korea’s Supreme Court has overturned a lower court ruling that ordered the government and the Seoul Metropolitan Government to refund 168.2 billion won (approximately $116 million) in taxes to U.S. private equity firm Lone Star Funds, sending the case back for retrial.
According to legal sources on April 25, the Supreme Court’s First Division, presided over by Justice Noh Tae-ak, set aside the appellate court’s partial ruling in favor of Lone Star and eight related companies in their lawsuit against the South Korean government and Seoul City, and remanded the case to the Seoul High Court.
At the center of the dispute is whether Lone Star itself, or the withholding agents — such as Korea Exchange Bank — are entitled to reclaim previously withheld taxes after the cancellation of a corporate tax assessment.
Between 2002 and 2005, Lone Star invested in companies including Korea Exchange Bank, Keukdong Construction, and Starlease, later earning substantial dividends and capital gains through asset sales in 2007. Under the Korea-Belgium tax treaty, dividends paid to Lone Star were subject to withholding at the source, allowing the firm to avoid direct domestic taxation.
Subsequently, the Seoul Regional Tax Office imposed approximately 800 billion won in additional corporate taxes on Lone Star, asserting that the firm maintained a permanent establishment in South Korea. In response, the withheld taxes were applied as credits against the new tax assessments.
South Korea’s Supreme Court (Yonhap)
However, in 2017, the Supreme Court ruled that Lone Star did not maintain a permanent establishment in Korea, invalidating the additional tax demands. Following the decision, Lone Star initiated lawsuits seeking the return of 153.5 billion won in withheld national taxes and related local taxes, arguing that the previously credited amounts should now be refunded directly to the firm.
Both the trial and appellate courts initially sided with Lone Star, ordering the government to refund 153 billion won in national taxes and Seoul City to return 15.2 billion won in local taxes.
The Supreme Court, however, disagreed. It held that because the underlying corporate tax assessments were annulled, the crediting of withheld taxes against those assessments likewise lost legal effect. Therefore, the refunded amounts should belong not to Lone Star, but to the withholding agents who originally remitted the taxes.
The court emphasized that the original tax collection assumed Lone Star was the taxpayer, but with that premise overturned, Lone Star never acquired the right to claim refunds on withheld amounts.
“Since the corporate tax imposition against the plaintiffs (Lone Star and affiliates) was void from the beginning, the refund rights for the withheld taxes must be understood to belong to the withholding agents,” the court stated, ordering a new round of deliberations at the Seoul High Court.
The retrial will likely have significant implications for the protracted legal battle between Lone Star and South Korean authorities, a dispute that has drawn international attention since the firm’s controversial exit from the Korean market nearly two decades ago.
M. H. Lee (mhlee@koreabizwire.com)
