Will Adequate Taxes Be Levied on Lone Star?

Amid mounting criticism against Lone Star Funds likely to reap huge profit from the sale of the nation's property, South Korea's National Assembly recently passed a bill to force the U.S.-based equity fund to pay due taxes before exiting this country.

The revised tax bill passed on Tuesday would allow the government to impose taxes on any gains earned through a paper company established in a tax haven with which South Korea has a contract to prevent double taxation.

The finance minister is expected to announce the list of regions which will be subject to the exception of the double taxation rule in late June. The bill will take effect in July, which would enable the government to pursue taxation on earnings that Lone Star would make through the sale of Korea Exchange Bank (KEB).

Lone Star has been at the center of alleged tax evasion on earnings that it would reap from the planned sale of the nation's fifth-largest lender, a deal which is expected to bring a jackpot to the Texas-based turnaround fund. Lone Star purchased the lender in 2003 at an allegedly below-market price.

The U.S.-based fund has argued that it does not need to pay taxes on its earnings here since the business transaction in 2003 was made through LSF-KEB Holdings, the fund's holding company based in Belgium with which South Korea has a taxation treaty to prevent double taxation.

Sources say that Belgium could not be included in the list when the finance minister makes the official announcement. Several tax havens, such as the Cayman Islands, will be included on the list, sources said.

Even with the passage of the bill, the government is still racing against the clock as Lone Star is stepping up its race to sell KEB before the end of July, observers say. Last month, the U.S. fund picked South Korea's top lender Kookmin Bank as a final bidder for its controlling stake in KEB.

If every such requirement is met, the government will be able to impose 25 percent of tax on earnings even before the money ends up with the U.S. fund.

Even if Lone Star Korea is deemed as a fixed business operator here, experts say that the government will be able to levy corporate taxes on profits that Lone Star will reap through the sale of the Korean lender. The taxation is valued at around 1.63 trillion won in the case, they added.

The Ministry of Finance and Economy, however, dismissed the allegation that the passage of the bill is directly targeted at Lone Star. “The regulatory change has nothing to do with Lone Star and its planned sale of KEB,” a Finance Minister official said.

Kwon Tae-ho, [e-mail]