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The offshore fund Lone Star, already with its back to the wall due to a tax audit and a tax evasion probe by the prosecution, needs to sell Korea Exchange Bank fast if it wants to avoid another W500 billion (US$500 million) in withheld tax under new regulations.
Under the double taxation agreement with Belgium, where the Lone Star subsidiary that owns KEB is domiciled, there is a chance of a refund later on, but Lone Star may not be in the mood to wait that long. The six-month tax audit last year resulted in the fund being charged W140 billion in tax and four of its former and current executives being investigated by the prosecution. Now negotiations to sell off KEB are in stalemate.
New tax laws passed last year means foreign companies domiciled in tax havens as identified by the Finance Ministry will from July 1 have to pay withholding tax here and can then get a refund later if they are deemed to come under a dual taxation agreement. So far firms from countries with which Korea has double taxation agreements have simply been exempt.
Officially, the largest shareholder in KEB is LSF-KEF Holdings, the Lone Starr subsidiary headquartered in Brussels, with a 50.53 percent stake. Under the double taxation agreement of 1979, the fund is thus not subject to tax.
But if the ministry designates Belgium a tax haven under the new rules and KEB is sold after July 1, Lone Star will have to pay withholding tax. The fund would then have to persuade the National Tax Service that the double taxation agreement applies before it gets its refund.
KEBĄ¯s market capitalization stands at W9.318 trillion, according to share closing prices on Monday. If Lone Star, which became the bankĄ¯s largest shareholder in October 2003 by investing W1.38 trillion, sells its KEB shares at that price, it will make a profit of W3.77 trillion from the transaction. It will then have to pay 10 percent of the selling price or 25 percent of the capital gain, whichever is the smaller. Capital gains tax would come to W943.2 billion, so it would have to pay W515.3 billion on the selling price and hope for the best.
Tax havens will be identified soon, but it is unclear if Belgium will be included, a ministry official said. Belgium is not on the list of international tax havens, and if Korea designates the country a tax haven, it could cause friction in the bilateral relationship. But if the ministry does not include Belgium, it will find itself in trouble because an enraged public would say the government favors the fund, an NTS official points out. It therefore remains to be seen if Lone Star would ever see its refund. The NTS says it will have to take a closer look at a dual taxation agreement, which does not bode well for the fund.
(englishnews@chosun.com )
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