US private equity fund company Lone Star has reportedly announced that it will pay no South Korean taxes on the gains accruing from the sale of its stake in Korea Exchange Bank (KEB).
According to South Korean daily Chosun Ilbo, Lone Star Chairman John Grayken said on Tuesday that since it was the company's Belgian subsidiary that invested in KEB, the terms of double taxation avoidance agreement between Belgium and South Korea should determine how much tax is paid on the deal.
Lone Star recently sold a 13.6% stake in KEB for 1.19 trillion won (US$1.28 billion) and is looking for buyers for its remaining 51.02% stake in the bank.
Lone Star's involvement in South Korea has been mired in controversy since it acquired KEB in 2003, a purchase that government investigators are saying broke securities laws. Prosecutors believe that Lone Star exaggerated the extent of KEB's debt to drive down the price of the bank by more than $900 million below its true value, and that this was done in collusion with a Finance Ministry official. Moreover, the tax department has said that the deal was structured in such a way that Lone Star would avoid South Korean taxes when it sold the banks for what is expected to be a huge profit.
Last year Lone Star terminated an agreement to sell its controlling stake in Korea Exchange Bank (KEB) to Kookmin Bank for US$7.3 billion, citing continuing interference from the Korean authorities surrounding the sale. Its decision came after the Korean Special Prosecutor's Office issued arrest and detention warrants against Ellis Short, the vice chairman of Lone Star, and Michael Thomson, its general counsel, in an ongoing investigation into alleged illegalities surrounding the purchase of the KEB stake
The prospect that Lone Star would make several billion dollars when it sold the KEB stake caused political and public outrage, and led to charges that foreign companies are 'profiteering' from the sale of national assets snapped up cheaply on the back of the Asian financial crisis. This anger has been compounded by reports that foreign fund companies have avoided taxes by conducting deals through units based offshore. Lone Star itself was made to pay a 140 billion won (US$150 million) bill for back taxes and fines in 2005, to placate a government that many observers feel is becoming increasingly hostile towards foreign investors.
Lone Star however, has maintained that its activities in the country are fully compliant with the nation's laws.
Although Lone Star says that it has lined up buyers for its remaining stake in KEB, the authorities have said that the sale will not be able to go ahead before regulatory approval has been granted, which could delay it for another six months.
A comprehensive report in our Intelligence Report series looking at offshore and onshore corporate structures and their tax implications is available in the Lowtax Library at http://www.lowtaxlibrary.com/asp/subs_reports.asp and a description of the report can be seen at http://www.lowtaxlibrary.com/asp/description_report7.asp
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