Lone Star loses retrial in W168.2b tax refund case against government, Seoul

US private equity fund Lone Star has lost a retrial in its 168.2 billion won ($127 million) tax refund lawsuit against the South Korean government and the Seoul Metropolitan Government.

The Seoul High Court's Civil Division 16-1, presided over by Judges Jeong Jae-o, Kim Seon-hui and Lee Won-seok, ruled against Lone Star Fund and eight other Lone Star-affiliated entities Wednesday in the retrial of their unjust enrichment lawsuit against the government and Seoul.

"All primary and ancillary claims filed by Lone Star are dismissed," the court said, adding that Lone Star would also bear the litigation costs.

The case traces back to Lone Star's acquisitions of Korea Exchange Bank, Keukdong Engineering & Construction and Star Lease, among others, between 2002 and 2005, and its subsequent sale of some of those assets in 2007, which generated hundreds of billions of won in dividends and trillions of won in capital gains.

At the time, Lone Star invoked the Korea-Belgium tax treaty to pay less in taxes than domestic companies. When the so-called "hit-and-run" investment controversy erupted, tax authorities determined that Lone Star was the true beneficiary of the dividend and capital gains income and levied corporate taxes accordingly.

Lone Star challenged the assessments in court, and in October 2017 the Supreme Court finalized a ruling canceling the taxes, finding the levies unlawful on the grounds that Lone Star had no permanent establishment in South Korea.

Lone Star then filed a new lawsuit against the government, claiming it had not received back a portion of the canceled corporate taxes. It also filed a similar suit against Seoul and other local governments seeking the return of canceled local income taxes.

The first and second instance courts had sided with Lone Star, ruling that because the corporate taxes had been deducted and offset against withheld amounts, they had to be returned — ordering the government to refund 153 billion won in corporate taxes and Seoul to refund 15.2 billion won in local income taxes, for a combined total of 168.2 billion won.

The Supreme Court reversed those rulings last April, finding that the right to claim a refund of withheld taxes belonged not to Lone Star but to the financial institutions that had actually paid the taxes, and remanded the case to the Seoul High Court in favor of the government.

The central question in the retrial was whether any "special circumstances" existed that would justify recognizing Lone Star's right to claim the refund.

Lone Star argued that it had been assigned the refund claim rights through an agreement between the parties. The government countered that the agreement concerned only the economic allocation of any refund, not an actual transfer of the refund claim rights themselves.

The Seoul High Court sided with the government.

Meanwhile, the government won a separate case last November when a court granted its application to annul an international investment dispute arbitration award against it, extinguishing a payment obligation — including principal and interest — of around 400 billion won at the time.