South Korea Cannot Apply New Tax Treaty Laws To Lone Star

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

16 May 2006

US fund Lone Star is unlikely to be hit by new laws designed to prevent firms taking huge tax free profits out of the country, according to a South Korean government official, although an investigation by state auditors may yet scupper the company's controversial sale of its controlling stake in the Korea Exchange Bank.

Kim Yong-Min, director general for the Tax and Customs division at the Ministry of Finance and Economy, stated in a radio interview on Friday that because it takes up to three years to amend bilateral tax treaties, the changes cannot be applied to Lone Star.

Lone Star stands to make a 4 trillion won (US$4.4 billion) in capital gains on the sale of its majority stake in Korea Exchange Bank to Kookmin Bank after a deal agreed in March. The company may not have to pay any tax on the gain, as the deal is being arranged through its Belgian subsidiary, a country which has a double tax avoidance agreement with South Korea.

Nonetheless, Kim added that the government "will determine how to tax Lone Star, according to current tax treaties and local tax rules".

Lone Star has stated its intention to deposit 725 billion won at a local bank until South Korea makes a final decision on taxation on the sale of its KEB holding, and in a gesture of good will, the company has also offered to donate 100 billion won to social programmes in South Korea.

However, it has also emerged that the South Korean state auditor, the Board of Audit and Inspection of Korea (BAI), may determine that Lone Star was "unqualified" to have acquired its majority stake in KEB in the first place.

According to a report in the Dong-A Daily newspaper, a BAI official was quoted as saying that the board had reached a preliminary conclusion that Lone Star was unqualified to make the acquisition because KEB's capital adequacy ratio, at 8%, was at normal levels and too high to qualify KEB as a distressed company.

A subsequent statement issued by the BAI has reportedly denied that officials have already reached a conclusion, and explained that "auditors are still studying the adequacy of the deal".

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