[Focus on This Law Firm] Taepyungyang Overturns Ruling, Secures 250 Billion KRW Victory for Korea Against Lone Star

Government Overturns Loss in Supreme Court Appeal
Prevents 250 Billion KRW Loss Including Interest and Additional Refunds
Tax Expert Yu Cheolhyeong: "This Will Be an Important Precedent"

The Taepyungyang Law Firm Building, Jongno-gu, Seoul.

Taepyungyang LLC, a law firm, succeeded in overturning the lower courts’ decisions in the Supreme Court appeal of a lawsuit filed by the U.S.-based private equity fund Lone Star against the Korean government for the return of unjust enrichment worth over 150 billion KRW, leading to a remand decision that was effectively a complete victory for the government.

Initially, in 2017, Lone Star claimed approximately 153.5 billion KRW in its lawsuit. However, nearly eight years passed during the first trial (six years and six months) and the appeal (one year and two months), causing the amount the government would have had to pay Lone Star in the event of a final loss to exceed 250 billion KRW when including accrued interest and additional refund amounts (interest paid by the government when returning wrongly collected taxes).

Through this ruling, Taepyungyang not only prevented a national treasury loss of over 250 billion KRW, but also achieved the first Supreme Court clarification regarding the legal relationship that arises when corporate tax previously credited or offset with paid taxes is canceled.

Government lost in lower courts... Risk of 250 billion KRW national treasury loss including interest and additional refund amounts

This lawsuit was filed by Lone Star after it won a separate suit in 2017 to cancel a corporate tax assessment of over 170 billion KRW imposed by the government, subsequently demanding the return of approximately 153.5 billion KRW in corporate tax that had not been refunded following the cancellation.

Lone Star and related entities established holding companies such as KEB Holdings L.P. in Bermuda and LSF-KEB Holdings SCA in Belgium to invest in shares of Korea Exchange Bank, Kukdong Construction, and Starlis.

After acquiring Korea Exchange Bank, Kukdong Construction, and Starlis between 2002 and 2005 and selling part of their stakes in 2007, they earned billions of KRW in dividends and trillions of KRW in capital gains. However, by invoking the Korea-Belgium tax treaty, they paid less tax than domestic companies.

However, following a tax audit from August 2007 to May 2008, the Seoul Regional Tax Office determined that the real recipients of the dividend and capital gains from shares in Korea Exchange Bank and others were not the Belgian intermediate holding companies, but Lone Star and eight other companies, and that Lone Star had a permanent establishment in Korea. Accordingly, it imposed over 800 billion KRW in taxes.

Lone Star objected and filed a lawsuit seeking cancellation of the 176.3 billion KRW corporate tax assessment. In 2017, the Supreme Court ruled that Lone Star did not have a permanent establishment in Korea and ordered the cancellation of the corporate tax assessment.

After winning in the Supreme Court, Lone Star claimed the return of 176.3 billion KRW in corporate and additional taxes wrongfully collected by the government. The government, however, refunded only around 20 billion KRW that Lone Star had paid directly, and did not refund the approximately 150 billion KRW that had been offset by previously withheld taxes. This was based on the determination that, when a corporate tax assessment is canceled, the right to claim a refund for taxes withheld and credited does not belong to Lone Star.

Previously, during the process in which Lone Star earned dividend and capital gains from shares in Korea Exchange Bank and others, the National Tax Service withheld corporate tax from the withholding agents such as Korea Exchange Bank. When collecting over 170 billion KRW in corporate tax from Lone Star, the tax authorities credited around 150 billion KRW of the previously paid amount and required Lone Star to pay only the remaining 20 billion KRW directly. The government considered that only the 20 billion KRW paid directly by Lone Star was subject to refund.

The core issue in the trial was whether, when a corporate tax assessment is canceled, the right to claim a refund for taxes withheld and credited belongs to the withholding taxpayer (Lone Star) or to the withholding agent (such as Korea Exchange Bank).

Both the first and second instance courts ruled in favor of Lone Star. They held that, when previously paid taxes are credited or offset in a corporate tax assessment, the withholding is ultimately and definitively extinguished, and the actual payment of corporate tax is deemed to have occurred. Therefore, if the corporate tax assessment is canceled, only the issue of refunding the already paid corporate tax remains.

Because there were mutually exclusive overlapping actions?both withholding and corporate tax assessment?on the same taxable event (capital gains from stock transfer), the courts held that the corporate tax assessment effectively canceled the prior withholding. In such cases, the right to claim a refund for the withheld amount credited or offset does not revert to the withholding agent (such as Korea Exchange Bank), but instead to the withholding taxpayer (such as Lone Star).

Taepyungyang actively argued existing Supreme Court legal principles... Complete victory and remand

When the government appealed the second instance decision last September, some critics argued that the government was causing massive national treasury losses by delaying payment of the refund to Lone Star without any special reason, resulting in annual delay damages of 12% on the principal of about 160 billion KRW, and called for the government to drop the appeal and promptly pay the refund to minimize losses.

However, Han Wisoo, Cho Ilyoung, Yu Cheolhyeong, Jo Muyeon, and Lee Donghun, attorneys of the Taepyungyang tax group, represented the government and actively argued that the lower court decisions were unlawful because they contradicted firmly established legal principles regarding withholding relationships in tax law, as well as the nature and holder of the national tax refund claim arising when previously paid taxes credited or offset are canceled.

The Supreme Court, in its ruling delivered on the 24th, accepted these appeal arguments in full, overturned the lower court decision that had recognized Lone Star Fund’s right to claim a refund for the withheld tax amount, and remanded the case to the Seoul High Court, effectively granting a complete victory to the government.

The Supreme Court held that, since the corporate tax assessment against Lone Star and others had been canceled, the effect of crediting or offsetting the withheld tax amount with previously paid corporate tax was extinguished. Unless there are special circumstances such as assignment, the right to claim a refund for the withheld tax credited or offset belongs to the withholding agents (such as Korea Exchange Bank) who paid it, not to Lone Star.

Tax specialist Yucheol Hyung, attorney at law at Bae, Kim & Lee LLC.

Yu Cheolhyeong, attorney at Taepyungyang Law Firm (Judicial Research and Training Institute, Class 23), who has played a leading role in this case since the first trial, stood out in the process of overturning the appellate court’s decision and securing a complete victory in the Supreme Court.

Attorney Yu is a tax specialist with over 20 years of experience providing tax advice, representing clients in tax audits, and handling tax litigation for major domestic and international companies and foreign investors. He has also served as an advisory attorney for the Ministry of Economy and Finance, the National Tax Service, and the Ministry of the Interior and Safety.

Attorney Yu commented, “Through this Supreme Court ruling, the legal relationship of withholding has been clarified. Regarding the refund claim for withheld taxes, only the withholding agent who paid the tax in their own name can claim a refund for unjust enrichment from the state, not the withholding taxpayer. In addition, if a corporate tax assessment is canceled after previously paid taxes have been credited or offset, the effect of such crediting or offsetting is extinguished, and the right that is revived is the original tax refund claim for the previously paid amount?in this case, the right of the withholding agents (such as Korea Exchange Bank) to claim a refund for the withheld tax amount, not the corporate tax refund claim of Lone Star Fund.”

He added, “With this Supreme Court ruling, the government has been able to prevent an outflow of approximately 250 billion KRW from the national treasury. The legal principles clarified by the Supreme Court in this decision will not only serve as a precedent in future international tax cases involving foreign corporations’ domestic-source income, where similar issues arise, but will also apply as precedent in domestic tax cases. This is the significance of this ruling.”