Brokerage fees paid in excess of the legal cap cannot be treated as corporate expenses under the Corporate Tax Act, the Supreme Court has ruled.
The second division of the Supreme Court, with Justice Oh Kyung-mi as the presiding judge, recently finalized a ruling against the plaintiffs in a lawsuit filed by KB Financial Group and KB Capital against the competent tax office seeking to cancel a corporate tax assessment, according to legal circles Monday.
KB Capital had paid loan brokerage fees to affiliated dealers and others that recruit and arrange loan products in the course of its auto installment financing business. In the process, KB Capital was found to have made roundabout payments of brokerage fees exceeding the legal cap under names such as inventory financing fees and additional promotional costs.
In a comprehensive audit in 2018, the Financial Supervisory Service (FSS) found that this fee structure violated the brokerage fee cap under the Lending Business Act and issued a corrective order. Based on the FSS audit, the tax authorities also disallowed the fees KB Capital paid in excess of the cap during the 2017-2018 fiscal years as deductible expenses and imposed corporate tax. Disallowance of deductible expenses refers to a practice in which costs are not recognized as deductible expenses under tax law even if they are recognized as expenses in corporate accounting. This increases taxable income accordingly, raising the corporate tax burden. KB Capital filed the lawsuit seeking to cancel the 3.6 billion won corporate tax assessment.
The first and second trial courts held that the fees paid by KB Capital were costs spent in violation of the loan brokerage fee cap and could not be included as deductible expenses.
The Supreme Court also upheld the lower court's judgment. The Supreme Court ruled that excessive loan brokerage fees lead to higher loan interest rates, increasing the burden on ordinary people and potentially causing high-interest lending, and therefore cannot be recognized as deductible expenses. "For a lending business operator or a credit finance institution to pay brokerage fees in violation of the cap system is an act that directly contravenes the purpose of the former Lending Business Act, which seeks to protect financial consumers," the Supreme Court said. "Such brokerage fees constitute costs spent in violation of social order." The Supreme Court added that the fees "cannot be regarded as ordinary costs generally recognized under the former Corporate Tax Act or as costs directly related to revenue."
