The remand trial for a 168.2 billion won tax refund lawsuit that U.S.-based private equity firm Lone Star filed against Korea and the Seoul city government began on the 19th.
The Civil Division 16-1 of the Seoul High Court (Presiding Judge Jeong Jae-o, high court judge) opened the first hearing of the remand trial in an unjust enrichment refund lawsuit that nine companies, including Hardco Partners for Korea, an entity related to Lone Star, filed against Korea and the Seoul city government.
In the original trial, the court ordered payments of 153.4 billion won to Korea and 15.2 billion won to the Seoul city government, but the Supreme Court overturned that ruling in Apr. last year and sent the case back to the Seoul High Court for reconsideration. The Supreme Court held that even if the corporate tax assessment was canceled, the right to claim a refund of taxes withheld at source belongs, absent special circumstances, not to Lone Star but to the withholding agent.
At the hearing, Lone Star maintained its position that because the corporate tax assessment itself was unlawful, the related taxes must also be returned. Lone Star's attorney argued that during the taxation process, prepaid taxes were credited and some refunds were made, so the disputed taxes should be regarded as taxes that Lone Star effectively paid.
Korea, however, countered that under the Supreme Court's ruling, Lone Star is confirmed to be a foreign corporation without a domestic permanent establishment, so the disputed taxes should be viewed as having been paid via withholding at source. The government also argued that even if the assessment was unlawful, the claim for return cannot be accepted because the statute of limitations on the claim has already expired.
The dispute stems from Lone Star's investment in Korea Exchange Bank and the dividends, sale, and exit process. After acquiring a 51% equity stake in Korea Exchange Bank in 2003, Lone Star sold it in 2010, reaping a gain of about 4.6 trillion won. In 2007, it disposed of part of its investment stakes in Geukdong Construction and Starlis, generating dividends worth several hundred billion won and capital gains worth several trillion won. When paying dividends to Lone Star under the Korea-Belgium tax treaty at the time, Korea Exchange Bank withheld and paid the related national taxes at source.
The Seoul Regional Tax Service subsequently assessed corporate taxes of about 800 billion won, finding that the substantive dividend income and capital gains accrued to Lone Star. But in 2017, the Supreme Court ruled that Lone Star's investments were made by its U.S. headquarters and could not be deemed to have a domestic permanent establishment, finding the corporate tax assessment unlawful.
The government refunded only 22.8 billion won, excluding taxes withheld at source, saying it would return only the amount Lone Star directly paid. Lone Star then filed a separate lawsuit, saying it had not received the full amount back, and the first and second instance courts ruled that because the taxes had been credited or offset through withholding, Lone Star should be deemed to have effectively paid the taxes, ordering a refund of 168.2 billion won.
However, the Supreme Court found that when a corporate tax assessment is canceled, the effect of crediting or offsetting the withheld tax refund against the corporate tax also extinguishes. It further held that the right to claim a refund belongs not to Lone Star but to the withholding agent, such as the financial institution that paid the taxes at the time of the initial withholding.
The court plans to conclude arguments on Jul. 9 and then deliver a ruling. If the remand trial reaches the same conclusion as the Supreme Court, the government and the Seoul city government will not have to return the amount to Lone Star.