Lone Star loses $127 million tax refund fight against Korean gov't

U.S. private equity firm Lone Star has lost its bid to recover 168.2 billion won ($127 million) in taxes from Korea.

The Seoul High Court ruled against nine entities affiliated with Lone Star Funds on Thursday in a retrial ordered by the Supreme Court. The firms had sought the return of what they claimed were improperly retained taxes by the Korean government, Seoul Metropolitan Government and other authorities.

Lone Star filed the suit to recover part of the taxes levied on dividends and capital gains from its investments in Korean companies, including Korea Exchange Bank.

The private equity firm sought about 153 billion won in corporate taxes and 15.2 billion won in local income taxes, for a total of 168.2 billion won.

Lone Star wins round 1 and 2

The dispute dates back to the early 2000s when Lone Star entities bought a combined roughly 450.55 million shares in Korea Exchange Bank, construction company Kukdong and credit finance firm StarLease — worth about 2.22 trillion won in total.

Lone Star received about 491.6 billion won in dividends between 2006 and 2007 before selling the shares for capital gains.

The dividends were paid to companies based in Belgium, with about 15 percent withheld in taxes under the Korea-Belgium tax treaty on avoiding double taxation and preventing tax evasion.

When Lone Star sold its stake in Korea Exchange Bank, an 11 percent withholding tax was applied. But no taxes were paid on the sales of shares in Kukdong and StarLease based on the Korea-Belgium tax treaty.

However, Korean tax authorities later concluded that Lone Star — not its Belgian holding companies — was the real beneficiary of the dividends and capital gains, and imposed corporate taxes accordingly.

Lone Star fights for more

The Supreme Court finalized a ruling in October 2017 that canceled the corporate tax assessment on the grounds that Lone Star did not maintain a permanent establishment in Korea.

Still, the dispute did not end there.

Lone Star later argued that it had not received a full refund of the canceled corporate taxes. It filed a suit against the Korean government in December 2017 seeking about 153.5 billion won.

A month later, the firm separately sued Seoul Metropolitan Government and Gangnam District for refunds of local taxes.

The district and appeals courts both sided with Lone Star. The court found that the central government, Seoul and other authorities should return a total of 168.2 billion won because previously withheld taxes had been credited against the corporate tax assessment.

However, the Supreme Court reversed those rulings in April 2025.

The Supreme Court found that once the corporate tax assessment was canceled, the legal effect of crediting the withheld taxes against that assessment also disappeared. It concluded that the right to claim the refund belonged to the companies that had actually withheld and paid the taxes, such as Korea Exchange Bank — not to Lone Star.

The case was sent back to the Seoul High Court with instructions pointing toward a government victory.

“Once the corporate tax assessment was canceled, the effect of crediting or offsetting the withholding tax refund against the corporate tax also ceased to exist,” the Supreme Court said at the time. “The refund that had been credited or offset should therefore be considered to belong to the withholding agents [including Korea Exchange Bank], in whose names the taxes were paid.”

The court further questioned Lone Star’s claim to the refund.

“The corporate tax assessment in this case was based on the premise that the plaintiffs [including Lone Star] were the actual beneficiaries and therefore liable for the tax,” the court said. “The crediting and offsetting merely treated the plaintiffs as though their corporate taxes had been collected using a withholding tax refund claim that did not originally belong to them, which raises substantial grounds to conclude that the arrangement was never legally effective in the first place.”

Lone Star argues refund rights were transferred

The key issue in the retrial was whether special circumstances could still give Lone Star the right to claim the refund.

Lone Star argued that Korea Exchange Bank and the other withholding agents had agreed to transfer the refund claim to Lone Star.

The government pushed back, arguing that the agreement only determined who would ultimately receive the economic benefit of any refund and did not transfer the legal right to claim it.

The government's argument prevailed. The Seoul High Court again ruled against Lone Star and rejected the U.S. fund's claim for a 168.2 billion won tax refund against the Korean government, Seoul and other authorities.

The loss adds to a string of legal setbacks for Lone Star. Last November, the Korean government also prevailed in proceedings to annul an investor-state dispute settlement, or ISDS, award tied to Lone Star’s sale of Korea Exchange Bank.

The ruling wiped out Korea’s obligation to pay roughly 400 billion won in principal and interest at the time.

BY HAN YOUNG-HYE [[email protected]]