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October 08, 2005

Korea fines five US Private Equity firms

Korea Times reports that the Korean National Tax Service (NTS) has fined five foreign funds - The Carlyle Group, Lone Star, Goldman Sachs, AIG and Westbrook - a total of 214.8 billion won ($209 million) for evading capital gains taxes on profitable exits in the country. The agency also plans to refer several high-ranking officials at these funds for prosecution.

The NTS imposed a 147.3 billion won in taxes on foreign funds with regard to their capital gains from sales of local assets by operating through tax havens abroad and evading taxes by abusing the double taxation avoidance treaty.

Currently, Korea has signed with 62 foreign countries to avoid double taxation. The majority of foreign private equity funds have invested in local equities and real estate properties through their subsidiaries in tax havens, including Malaysia’s Labuan, even though the country is signatory to the international treaty, to avoid paying capital gains and other taxes.

It also imposed 67.5 billion won in penalties, as the funds did not properly pay stock transaction fees and illegally transferred capital gains realized here to their overseas affiliates.

The investigation was prompted largely by public criticism that foreign funds did not pay taxes after they took billions of dollars in capital gains from the acquisition of distressed financial institutions and corporations following the 1997 currency crisis.

Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.