Supreme Court: Commissions Paid to Other Firms' Insurance Planners Not Recognized as Corporate Tax Expenses

GA Korea Processes Commissions to External Planners as Deductible Expenses
Tax Authorities Impose Taxes, Citing "Violation of Insurance Business Act"
Both Lower Courts Side with the Authorities
Supreme Court Also Rules Expenditures "in Violation of Social Order"

The Supreme Court has issued a final ruling that commissions paid to insurance planners affiliated with other companies, rather than one’s own, in exchange for soliciting insurance contracts cannot be recognized as deductible expenses under the Corporate Tax Act. The court explained that such payments constitute expenditures in violation of social order, undermining sound insurance solicitation practices, and thus cannot be regarded as ordinary expenses.

Supreme Court, Seocho-gu, Seoul. Yonhap News Agency

According to the legal community on June 15, the Supreme Court (Presiding Justice Oh Kyungmi) recently upheld the lower court's decision, which ruled against the plaintiff in the appeal trial filed by GA Korea, an insurance agency, seeking to overturn the corporate tax assessment imposed by the tax authorities.

Previously, GA Korea had conducted its business by having insurance planners from other companies introduce clients to its own affiliated planners, then diverting a portion of the commission that should have been paid to its own planner to the external planner via branch manager Mr. A. The company subsequently reported these commissions as "deductible expenses" under the Corporate Tax Act in its tax filings.

However, the Seoul Regional Tax Office, during a 2020 tax audit, concluded that this expenditure violated the Insurance Business Act, which prohibits entrusting solicitation or paying commissions to planners not affiliated with one’s own company. Accordingly, the tax authorities excluded these expenses from deductible costs and issued a tax reassessment notice, increasing corporate tax by amounts ranging from 9,683,000 won to approximately 405,290,000 won per year, including additional taxes. The authorities also notified branch manager Mr. A of an increase in his reported income. The company filed a lawsuit contesting these actions.

Both the first and second instance courts found the tax authorities’ actions to be justified. In particular, the appeals court pointed out that, even if part of the commission was actually paid as compensation for solicitation, commissions paid in violation of the Insurance Business Act cannot be considered as "generally accepted ordinary expenses or those directly related to revenue," which is the standard for expense recognition under the Corporate Tax Act.

The Supreme Court also accepted the lower court's reasoning and finalized the ruling against the plaintiff. The Supreme Court emphasized that, given the nature of insurance transactions, regulations to ensure sound solicitation practices must be strictly applied.

The court stated, "When an insurance company or similar entity causes a planner affiliated with another insurance company to engage in solicitation and pays a commission or other compensation for this activity, such expenditures violate social order. Therefore, these cannot be regarded as generally accepted ordinary expenses or costs directly related to revenue."

This content was produced with the assistance of AI translation services.