Lower Courts: "Government and Seoul City Must Return 168.2 Billion Won to Lone Star"
Supreme Court: "Corporate Tax Cancellation Nullifies Effect of Withholding Tax Refund Deduction"
The Supreme Court has sent back to the High Court a lower court ruling that ordered the government and the Seoul Metropolitan Government to return 168.2 billion won in taxes to the U.S.-based private equity fund Lone Star.
According to the legal community on the 25th, the First Division of the Supreme Court (Presiding Justice Noh Taeak) overturned the appellate court's ruling, which had partially sided with the plaintiffs in a lawsuit filed by Lone Star Fund and eight other companies against the government of the Republic of Korea and the Seoul Metropolitan Government seeking the return of unjust enrichment, and remanded the case to the Seoul High Court.
The Supreme Court indicated that, unless there are special circumstances, the refund of taxes withheld at source and paid when companies such as Korea Exchange Bank distributed dividends to Lone Star should belong to the withholding agent (the party obligated to withhold), not to Lone Star.
Between 2002 and 2005, Lone Star invested in Korea Exchange Bank, Kukdong Construction, Starris, and others, and by selling part of its holdings in 2007, it earned dividend income in the hundreds of billions of won and capital gains amounting to several trillion won.
At the time, under the Korea-Belgium tax treaty, Korea Exchange Bank and others withheld and paid national taxes on the dividends paid to Lone Star, so Lone Star did not pay additional taxes separately.
Subsequently, the Seoul Regional Tax Office imposed additional taxes, including corporate tax totaling over 800 billion won, on the grounds that Lone Star had a permanent establishment in Korea. The taxes previously withheld at source were deducted and offset against this amount.
Lone Star filed a lawsuit challenging the imposition of corporate tax, and in 2017, the Supreme Court ruled that "the investment was made from the U.S. headquarters, so there is no permanent establishment in Korea," and ordered the cancellation of the corporate tax assessment.
Following this, in December 2017, Lone Star filed another lawsuit against the government, claiming that, as a result of the Supreme Court's decision, it should be refunded not only the canceled corporate tax but also the 153.5 billion won in previously deducted and offset withholding tax.
Similarly, in January 2018, Lone Star filed an additional lawsuit against the Seoul Metropolitan Government and Gangnam District Office, seeking the return of local taxes that had been canceled on the same grounds.
The courts of first and second instance held that, since the corporate tax had been deducted and offset from the withholding tax, the government should return 153 billion won in corporate tax and the Seoul Metropolitan Government should return 15.2 billion won in local income tax to Lone Star.
However, the Supreme Court ruled, "Once the corporate tax assessment has been canceled, the effect of deducting and offsetting the withholding tax refund against the corporate tax also ceases," and stated, "Accordingly, the refund amount that was deducted and offset should be considered as belonging to the withholding agent, who is the payer on record."
The Court further explained, "The corporate tax assessment in this case was based on the premise that the plaintiffs (including Lone Star) were the actual taxpayers," and added, "The deduction and offset were merely an arbitrary process that treated the plaintiffs as having a right to claim the refund of the withholding tax, which they never had in the first place, and as if their corporate tax had been collected. Therefore, it is highly likely that this process was invalid from the outset," and ordered a retrial and reconsideration of the case.
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