Supreme Court Rules Commissions Paid to Rival Insurers' Agents Are Not Tax-Deductible

The Supreme Court has ruled that commissions paid by an insurance agency to insurance agents affiliated with other insurance companies in exchange for soliciting insurance cannot be treated as deductible expenses under the Corporate Tax Act.

The Second Division of the Supreme Court (Justice Oh Kyung-mi presiding) recently upheld a lower court ruling against Company A, an insurance agency, in its lawsuit filed against the Commissioner of the Seoul Regional Tax Office to cancel the imposition of corporate tax.

Company A, which sells insurance products through insurance agents, had been outsourcing insurance solicitation to agents belonging to other insurance companies or agencies and paying them commissions in return.

The process involved Company A paying a portion of the commission—which would otherwise go to its own agents—to agents from other companies when those agents introduced customers to Company A's agents to sell non-life insurance.

Company A reported these commissions as deductible expenses (tax-deductible) when filing its corporate tax. However, tax authorities determined that these payments did not qualify as legitimate business expenses, excluded them from deductions, and imposed additional corporate tax.

Company A filed a lawsuit in protest, but the Supreme Court, following the decisions of the first and second trials, ruled in favor of the tax authorities.

The Corporate Tax Act stipulates that "losses or expenses incurred or spent in connection with a business that are generally recognized as ordinary or directly related to revenue" can be included as deductible expenses.

It is a long-standing Supreme Court precedent that expenses incurred in violation of social order are excluded from what the Corporate Tax Act defines as "generally recognized ordinary expenses or expenses directly related to revenue."

In this case, the Supreme Court, citing provisions of the Insurance Business Act, determined that "commissions paid to agents of other companies in exchange for insurance solicitation" are expenses incurred in violation of social order and therefore do not qualify as deductible expenses.

The Insurance Business Act states that "insurance companies or insurance agencies may not entrust solicitation to insurance agents affiliated with other insurance companies, and insurance agents may not solicit for anyone other than the insurance company to which they are affiliated."

Furthermore, if an insurance agency violates legal regulations regarding solicitation, the Financial Services Commission may order a business suspension of up to six months or revoke its registration.

Accordingly, the Supreme Court pointed out that insurance companies paying commissions to agents of other companies for solicitation "directly violates and disrupts the fundamental order of insurance solicitation, and constitutes an act that runs counter to the sound management of the insurance business and the protection of the rights and interests of policyholders and the insured."

The court concluded, "Regardless of whether the agreement to pay such compensation is valid under civil law, money paid pursuant to such an agreement is spent in violation of social order; therefore, it does not constitute a 'generally recognized ordinary expense' and cannot be included as a deductible expense."
※ Please note: This article was translated by AI and may contain errors.