[Edaily Reporter BAEK JU-A ] The government has won its case in its entirety in the retrial of a lawsuit filed by the U.S.-based private equity fund Lone Star seeking the return of approximately 280 billion won in corporate tax overpayments. Although Lone Star’s claims were partially upheld in the first and second trials, the Supreme Court overturned those rulings, and the retrial also ruled in favor of the government, thereby preventing more than 280 billion won from flowing out of the national treasury.

On the 22nd, the Ministry of Justice announced that in the retrial of the lawsuit filed by the Lone Star Fund against the state seeking the return of unjust enrichment from corporate income tax, the court dismissed all of the plaintiffs’ claims.

The total amount in dispute in this lawsuit is approximately 280 billion won, consisting of the principal of about 153.4 billion won plus an estimated 128 billion won or more in refund surcharges and late payment damages.

The case stemmed from corporate tax assessment and refund issues that arose during Lone Star’s investment in Korea Exchange Bank.

From 2004 to 2007, entities subject to withholding tax obligations—including Korea Exchange Bank—withheld the relevant national taxes from dividends and other payments made to Lone Star Fund’s subordinate intermediate holding companies and remitted them to the tax authorities.

Subsequently, from 2008 to 2012, the tax authorities determined that the Lone Star Fund, as the beneficial owner of the relevant source income, maintained a permanent establishment in Korea and imposed approximately 176.3 billion won in corporate income tax. In this process, the previously refunded withholding tax was offset against and applied to Lone Star’s prepaid tax liability.

However, in 2017, the Supreme Court overturned the corporate income tax assessment, ruling that it was difficult to view the Lone Star Fund as having a permanent establishment in Korea, which brought the refund issue to the forefront.

The tax authorities refunded the remaining amount, excluding the portion that had been offset against Lone Star’s previously paid taxes using the existing withholding tax refund. In response, Lone Star filed a lawsuit against the government in December of that year, seeking the return of approximately 153.4 billion won that it had not received as a refund, on the grounds of unjust enrichment.

Initially, the lower court’s ruling favored Lone Star. In June 2023, the court of first instance recognized Lone Star’s right to a refund equivalent to the withholding tax and ruled that the government must pay approximately 153.4 billion won, along with some refund surcharges and late payment damages. In September 2024, the appellate court upheld the first-instance ruling, dismissing both parties’ appeals.

However, the situation took a turn last April when the Supreme Court overturned the lower court’s ruling and remanded the case for retrial.

The Supreme Court ruled that, barring exceptional circumstances, the right to claim a refund for taxes paid in the name of the withholding agent belongs to the withholding agent—such as Korea Exchange Bank—rather than to the taxpayer, the Lone Star Fund.

The key issue was who had the right to recover the withholding tax that had already been paid. The outcome of the litigation hinged on whether the right to claim a refund should be granted to the taxpayer—who actually bore the tax burden—or to the withholding agent—who withheld and paid the tax.

On that day, the court in the remand hearing also ruled that, contrary to Lone Star’s argument, there were no special circumstances to suggest that the right to claim a refund belonged to Lone Star, and thus dismissed the claim in its entirety.

During the retrial process, the Ministry of Justice coordinated the litigation strategy with the Seoul Metropolitan Prosecutors’ Office, the Seoul Regional Tax Office, and legal counsel, while reviewing the relevant legal principles. In particular, the Ministry explained that it focused on proving there were no grounds to conclude that the right to claim a refund of the withheld tax belonged to Lone Star.

With this ruling, the government has avoided having to pay over 280 billion won in refunds, a liability that could have arisen from its partial defeats in the first and second trials. However, since there remains the possibility of an appeal against the ruling in the retrial, the final outcome will depend on future proceedings.

Lee Jin-soo, Acting Minister of Justice, stated, “Through this ruling, we were able to prevent more than 280 billion won from flowing out of the national treasury,” adding, “We will spare no effort in taking follow-up measures and will do our utmost to protect the national interest in future cases involving the same or similar issues.”