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South Korean Tax Authorities Raid Lone Star Fund's Seoul Office

by Mary Swire,, Hong Kong

23 August 2007

US-based Lone Star Funds has once again had its office in the South Korean capital, Seoul, raided by the country's tax authorities, in connection with the sale of stakes in three companies.

According to Lone Star, tax investigators arrived at the company's offices unannounced at 10.30 local time on Wednesday morning and did not leave until midnight. They took away 11 boxes of documents and copies of computer files.

It is believed that the tax authorities are interested in Lone Star's sale of majority stakes in local firms Kukdong Engineering and Construction and Star Lease, in addition to the sale of a 13.6% stake in Korean Exchange Bank, already the subject of ongoing controversy. It is said that the disposal of these shares has earned Lone Star in the region of US$1 billion.

Lone Star is currently fighting a back tax bill imposed on earnings derived from the sale of the Star Tower office building. Last month, a South Korean tax tribunal upheld the right of the National Tax Service (NTS) to seek US$110 million in tax from the US fund company relating to the sale of the building. Lone Star argued that since the building was held by its Belgian subsidiary, the company was only liable for Belgian taxes under tax treaty terms.

Last year, Lone Star was also raided by investigators after local prosecutors accused the firm of irregularities concerning its acquisition of KEB in 2003. It is alleged by the authorities that Lone Star executives made false statements about KEB's credit card business to drive down the eventual purchase price of the bank, charges which Lone Star denies.

South Korea is also determined to tax the proceeds from Lone Star's disposal of its 51% stake in KEB, despite the company's insistence that it owes no taxes to the South Korean government under the terms of the tax treaty with Belgium, where its Star Holdings subsidiary, which conducted the sale, is based.

Lone Star said that it was "disappointed" to be on the wrong end of another investigation by the NTS, but added that it would, nevertheless, "cooperate fully" with the authorities in the course of the probe.

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