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The offshore investment firm Lone Star is likely to slip out of Korea quietly without paying any tax from selling its stakes in Korean firms worth W2.15 trillion (US$1=W937). The fund has apparently been scaling down its investment in Korea by selling off its stake in Kukdong Engineering & Construction Co., STARLease Co., and a 13.6 percent stake in Korea Exchange Bank on June 21 and 22. Since the U.S. firm is for the purpose of these transactions based in Belgium, it will probably be spared capital gains tax due to a dual taxation agreement between Seoul and Brussels.
The National Tax Service says Lone Star held and sold its stake in the three Korean companies through Belgian subsidiaries called LSF-KEB Holdings, KC Holdings and HL holdings. The NTS slapped W140 billion in 2005 on Lone Star’s earnings from the sale of the Star Tower building in Seoul, also through a Belgium-based company, Star Holdings. At the time, the NTS, following the Finance ministry's decision to ignore a double taxation agreement with Belgium since the firm is deemed to be a paper company without any substantial role in the Korean investment, applied a taxation agreement with the U.S. instead, referring to an exceptional provision that Korea can levy taxes on earnings from stock transactions by a company in which real estate accounts for more than 50 percent of its assets.
The NTS is now considering taxing Lone Star by proving that Lone Star Korea, the fund’s Korean branch, played the key role in the sale of Kukdong Engineering and Construction, which would make Lone Star a de-facto resident company. In a parliamentary hearing to confirm his nomination last July, NTS Commissioner Jeon Goon-pyo expressed confidence that Lone Star can be taxed on its stellar earnings. But it is proving far from easy to show that Lone Star has a place of business here since offshore funds including Lone Star make major decisions at their headquarters. An NTS official admitted the agency is finding it difficult to tax Lone Star.
(englishnews@chosun.com )
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