Private equity fund Lone Star file petition in Constitutional Court

[한겨레] US company protesting having to pay 1.6 billion won in corporate taxes on gains from property sale

By Lee Jeong-hun, staff reporter

After filing an investor-state dispute (ISD) arbitration claim against the South Korean government in November, the US private equity fund Lone Star Funds has now filed a petition with the Constitutional Court.

According to a Constitutional Court official, Lone Star's Bermuda-based subsidiary Hudco Partners Korea filed a constitutional complaint after losing the lawsuit it filed to protest the decision by the Yeoksam Branch of Gangnam District Tax Office to impose 1.6 billion won (about US$1.5 million) in corporate taxes on Lone Star in 2005. It is understood that Hudco Partners Korea maintained in the constitutional petition that the Corporate Tax Act failed to define tax requisition of capital gains while defining an object of taxation, which constitutes a violation of Article 59 of the Constitution, which stipulates that types and rates of taxes are determined by the Act.

Hudco Partners Korea was slapped with 1.6 billion won in taxes on capital gains from the sale of the Star Tower building (now known as the Gangnam Finance Center) in Seoul in 2004. In 2001, Star Holdings, which consists of Lone Star Fund Ⅲ (US), Lone Star Fund Ⅲ (Bermuda) and Hudco Partners Korea, acquired Star Tower and raked in 245 billion won (about US$22.9 million) in profit on its sale of the building in 2004. The National Tax Service (NTS) imposed capital gains taxes of around 100 billion won on Lone Star Funds and corporate taxes of 1.6 billion won on Hudco Partners Korea in 2005, claiming that Lone Star Funds set up a paper company of Star Holdings to evade taxes. Lone Star Funds filed a lawsuit to protest the decision and the Supreme Court sided with the company concerning the capital gains tax at the beginning of this year. However, the court ruled in October that imposing corporate tax on Hudco Partners Korea was lawful.

Concerning the constitutional complaint, Hongik University professor Jeon Sung-in said, "It's not easy to make a judgment at this point, but it seems as though Lone Star is aiming to put pressure on the South Korean judiciary in a situation where ISD arbitration has been lodged, while also evading danger in the midst of a recent lawsuit brought by fund investors."

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