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Lone Star Must Pay South Korean Tax On Tower Sale

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

06 July 2007


A South Korean tax tribunal has upheld the right of the National Tax Service (NTS) to impose US$110 million in tax on the US fund company Lone Star relating to the sale of an office building in Seoul.

A Finance Ministry statement released on Thursday said that the tribunal unanimously rejected Lone Star's appeal against a 101.7 billion won tax bill imposed after the sale of the 45-storey Star Tower in the South Korean capital.

The case centred on the double taxation avoidance agreement in force between South Korea and Belgium. Lone Star had argued that since the building, which was bought from the Government of Singapore Investment Corp. (GIC) for an undisclosed sum in 2001, was purchased by its Belgian subsidiary, the company was only liable for Belgian taxes under the bilateral tax treaty.

However, the tribunal decided that: "Star Holdings in Belgium is a conduit company established for tax evasion, without regular business activities or the right to manage and have control over earnings."

A Finance Ministry statement added: "When it comes to Lone Star, which is based in the United States, capital gains from property and stock trading can be taxable in the country where it happens, according to the tax treaty between South Korea and the United States."

A statement from Lone Star, quoted by Reuters, countered that: "Lone Star's affiliate in Belgium that sold the shares in Star Tower Corp. is not obliged to pay taxes in Korea, but instead is subject to tax only in Belgium."

Lone Star has said it intends to appeal the decision.

The latest case is one of 25 disputes currently being contested by the company and the tax authorities, three of which relate to the sale of the Star Tower.

The tax authorities are also reviewing Lone Star's sale of a 13.6% stake in the Korea Exchange Bank for US$1.28 billion last month. The company has insisted that it owes no capital gains taxes on the deal because the stake was held by its Belgian affiliate, but this is not likely to go uncontested by the government. A regulatory probe into Lone Star's purchase of the KEB shares is also set to hold up the sale of its remaining 51.02% stake in the bank, even though the fund says it has buyers lined up and is proceeding with the transaction.

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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