Supreme Court Rules Commission Paid to Rival Insurers' Agents Cannot Be Deducted as Business Expense

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 that had filed a lawsuit against the Commissioner of the Seoul Regional Tax Office to cancel a corporate tax assessment.

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 practice involved Company A paying a portion of the commission—which would otherwise have been paid to its own agents—to agents from other companies whenever those agents introduced customers to Company A's agents to sell non-life insurance.

Company A reported these commissions as deductible expenses (losses) 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 challenged the decision and filed a lawsuit, but the Supreme Court, like the first and second trial courts, 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 customary or directly related to revenue" may 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 customary 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 other companies' insurance agents in exchange for insurance solicitation" are expenses incurred in violation of social order and therefore do not qualify as deductible business 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 the regulations regarding solicitation, the Financial Services Commission may order a business suspension of up to six months or revoke the agency's registration.

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

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 customary expense' and cannot be included as a deductible expense."
※ Please note: This article was translated by AI and may contain errors.