In April 2021, Office Depot Korea Holdings (“ODK Holdings”) (the withholding agent), received a tax audit notice from the Korean tax authority (“NTS”) in relation to the capital gains tax (“CGT”) on the purchase of Office Depot Korea (“ODK”) shares from Office Depot Inc. (“Office Depot”) in 2017, through its Luxembourg holdings company (“OMLH”). At the time of 2017 sale, ODK Holdings did not withhold any CGT as the sale was reported as a loss, and the NTS wanted to audit this transaction.
During the tax audit, the NTS argued, among other things, that the cost basis of ODK shares at the time of 2017 sale could not be respected as the entire series of transactions leading up to the 2017 sale (i.e., internal reorganization by seller and related party transactions in 2016 (“prior 2016 transaction”)) was implemented for tax avoidance purposes. Therefore, the NTS wanted to impose Korean tax on the 2017 sale by re-characterizing or disregarding the prior 2016 transaction. In the worst case scenario, the tax assessment could have been around KRW 6 billion (around US $5.5 million) including penalties.
Lee & Ko argued very strongly to the NTS that there were business substance and non-tax reasons for respecting the 2017 sale. Ultimately, after numerous meetings and submission of position paper, we were successful, and the NTS accepted our explanations, and assess no tax on OMLH/Office Depot.