Manufacturing cosmetics through subcontracting: DGT ruling

The classification of business activity in the Business Activity Tax (IAE) is a determining factor for the correct taxation of companies. Recently, the Directorate General of Taxes (DGT) has resolved a key issue regarding whether companies that design cosmetic products but subcontract their material manufacturing to third parties should be taxed as manufacturers or as traders.

What the DGT has ruled

The query analyzed whether a cosmetic activity with a private label, whose production is entrusted to other entrepreneurs following a prior design, should be registered under a manufacturing heading or a trade heading. The DGT has ruled that manufacturing activity can be carried out in two ways: through direct material execution or by entrusting said execution to other entrepreneurs based on a prior design.

The criterion establishes that, although subcontracting is not textually mentioned in the Tariffs, it must be classified under the heading of the first section that corresponds to the manufacturing of the class of products in question. Likewise, it is clarified that registration in a manufacturing heading also empowers the entity to carry out complementary activities such as wholesale, retail, and export.

What it means for you

This criterion has direct relevance for companies operating under private label models where physical production is not carried out in their own facilities. If your business model consists of the design and development of cosmetic products, and manufacturing is subcontracted following your specifications, the regulations allow the use of manufacturing headings.

This clearly differentiates the activity of a mere distributor from that of a manufacturer who manages the creation of their product, allowing for the correct alignment of the economic activity with the actual business model.

What you should do

It is necessary to analyze your company's operational structure to determine whether control over the design and the entrusting of material production justify registration under a manufacturing heading. Since incorrect classification can lead to tax contingencies, it is recommended to assess each particular case to ensure that the registration in the Business Activity Tax (IAE) matches the reality of the activity being developed.