Lone Star loses retrial after remand over 168.2 billion won tax refund claim; government and Seoul win

[Financial News] U.S.-based private equity fund Lone Star Funds has lost the retrial after remand in its lawsuit seeking the return of about 168.2 billion won in unjust enrichment from the South Korean government, the Seoul Metropolitan Government and others. The ruling finally freed the government and Seoul from the threat of a major outflow of public funds—nearly 200 billion won including delayed interest—after more than eight years of legal battles. In line with the Supreme Court’s decision to overturn the rulings in Lone Star’s favor in the first and second trials and send the case back, the court ultimately sided with the South Korean government and local governments.
The Seoul High Court’s Civil Division 16-1, presided over by Judge Jae-Oh Jeong, held a hearing on the 22nd to issue its ruling in the retrial after remand of a lawsuit seeking the return of unjust enrichment. The suit was brought by nine entities affiliated with Lone Star, including Lone Star Fund (US), against the government of the Republic of Korea, the Seoul Metropolitan Government, Seoul’s Gangnam-gu and others. The court said, “The portion of the judgment against the defendants is vacated.”
After acquiring a stake in Korea Exchange Bank in 2003, Lone Star Funds made a huge profit when it sold the stake to Hana Financial Group Inc. (now Hana Bank) in 2012. As the buyer, Hana Bank withheld 391.5 billion won in capital gains tax at source when paying the sale proceeds and remitted it to the National Tax Service (NTS).
After receiving the sale proceeds net of taxes, Lone Star Funds filed a request with the tax authorities for a correction, arguing that it was exempt under the tax treaty between South Korea and Belgium for the avoidance of double taxation. When the authorities rejected the request, it filed an administrative lawsuit. In 2017, the Supreme Court ruled that the tax authorities’ corporate tax assessment should be definitively revoked, citing, among other things, the absence of a permanent establishment for the special-purpose company Lone Star had established in Belgium.
The tax authorities, however, did not refund some of the canceled tax, excluding amounts applied to other tax liabilities. In 2017 and 2018, Lone Star Funds filed successive civil lawsuits against the government, the Seoul Metropolitan Government, Gangnam-gu and others, demanding the return of “168.2 billion won in taxes that should rightfully be refunded, along with damages for delay.”
The first- and second-instance courts had previously accepted most of Lone Star’s claims, reasoning that Lone Star was the actual bearer of the tax burden. The first-instance court ordered the government to pay about 153 billion won and the Seoul Metropolitan Government and Gangnam-gu to pay about 15.2 billion won. In September 2024, the second-instance court also dismissed the appeals by both the government and Lone Star, leaving in place the ruling in Lone Star’s favor.
The Supreme Court’s decision in April last year completely reversed the tide. The First Petty Bench of the Supreme Court of Korea, with Justice Rho Tae-ak, overturned the lower-court ruling and sent the case back to the Seoul High Court, saying, “Under tax law, the right to claim a refund of unjust enrichment belongs not to the taxpayer but to the withholding agent—the party that directly withholds the tax and pays it to the state.” The court’s reasoning was that even if a tax assessment is invalidated or canceled, the party to whom the government must legally refund the tax is Hana Bank, the withholding agent, not Lone Star, the taxpayer whose tax was withheld.
The court hearing the retrial after remand fully accepted the Supreme Court’s legal reasoning and dismissed all claims by Lone Star.
[email protected] Chang-hun Lee Reporter