It would mean Lone Star will have to pay no so-called withholding tax on profits from the KEB sale, which are forecast to be astronomical, regardless of the outcome of a battery of other investigations hanging over the fund. However, the National Tax Service is unhappy and has written to the ministry to review its decision.

An official on Wednesday said the ministry had decided to designate Malaysia’s Labuan, where Newbridge Capital was based for the purpose of selling Korea First Bank last year, and the Cayman Islands will be designated tax havens. That suggests Belgium, with which Korea has a double taxation agreement, will not.

The financial industry had expected a different decision. Pundits have speculated that Lone Star is hurrying the sale of KEB since new tax laws coming into force in July this year would make tax haven-based funds liable to withholding tax. Given the many investigations Lone Star faces, this could be a drawn-out process.

In the worst-case scenario, if the ministry does deem Belgium a tax haven and Lone Star completes the KEB sale after July this year, the fund will owe 10 percent of the selling price -- estimated at W600 billion (US$600 million) -- in taxes. But the ministry is reluctant to lump respectable Belgium with the likes of the Cayman Islands. A ministry official said such a drastic step could have a negative impact on overseas investment in Korea by international financial funds that base themselves “in countries like Belgium.”

Meanwhile, an NTS official said all foreign-owned companies have left Labuan. “The place looks like an abandoned film set,” he said. He added it was of no practical use designating Labuan a tax haven now, when the funds that entered the Korean market via Labuan -- Newbridge Capital and the Carlyle Group, which took over Koram Bank -- have pulled out.

(englishnews@chosun.com )