Lone Star To Appeal Seoul Tax Decision

by Mary Swire, Tax-News.com, Hong Kong

08 June 2006

Lone Star Funds has announced that it intends to appeal 25.3 billion won ($26.6 million) of registration taxes and penalties recently assessed by the City of Seoul, relating to its acquisition of the Star Tower office block in southern Seoul in 2001.

According to the US fund, which has been under the spotlight of the country's tax authorities for a number of months, the acquisition was conducted "in full compliance with the local tax law" and all applicable taxes were duly paid.

Lone Star added that this transaction had already been audited by the City of Seoul in 2003, and stated that in that audit, the Ministry of Government and Home Affairs had issued a written ruling confirming that these additional taxes were not due.

Under the Local Tax Law, the real estate registration tax of 3.6% in force at the time of the acquisition would have been trebled (to 10.8%) if the property was located in the Seoul Metropolitan Area, unless the property was acquired by a corporation incorporated more than five years before acquiring the property.

Since Star Tower Corporation, an affiliate of Lone Star, was incorporated more than five years before it purchased the Star Tower office block, Lone Star argues that it was obliged to pay only the basic registration tax. This was confirmed by the ruling from The Ministry of Government Administration and Home Affairs in 2003.

The Seoul tax authorities however, claim that Star Tower Corporation was inactive before it acquired the Star Tower, and therefore it should be treated as newly incorporated for purposes of the Local Tax Law.

John P. Grayken, Chairman of Lone Star Funds stated that he was "surprised and disappointed" at the decision, and expressed concern that the Ministry of Finance has decided to commit a u-turn on the matter.

"We are very surprised that, having previously reviewed and decided on this matter in 2003, the City of Seoul now claims that additional registration taxes are due on the 2001 Star Tower acquisition," Mr Grayken said.

"Even more troubling is the Ministry's complete reversal of its previous written ruling, as well as its own interpretive and administrative precedent, which has been established over many years," he added.

Mr Grayken revealed that the company will appeal the assessment, and is confident that the courts will find that the application of the law should be the same for all investors, whether foreign or domestic.

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