The UAE is set to introduce a sweeping, pro-taxpayer reform of its administrative tax penalties, effective 14 April 2026. This new framework, ushered in by Cabinet Decision No. 129 of 2025, signals a significant policy shift from a highly punitive model to one that encourages voluntary compliance and rapid error correction.
The most impactful change is the complete replacement of the severe late payment penalty. The old model, which imposed a 2% initial fine followed by a 4% monthly penalty, is abolished. It is replaced by a simple, non-compounding 14% per annum rate, offering substantial relief to businesses managing cash flow. This new, lower rate also applies to errors in calculating tax, such as under the Reverse Charge Mechanism.
The regime for Voluntary Disclosures (VDs) is also fundamentally reformed. The previous "yearly bracket" model, which imposed penalties from 5% to 40% based on the age of the error, is gone. In its place is a linear 1% per-month penalty, calculated from the original due date. This incentivizes speed; an error corrected within three months will now attract a 3% penalty, versus 5% under the old rules.
Furthermore, the "cost of being caught" by an audit is dramatically reduced. The fixed penalty for errors discovered by the FTA (where no VD was filed) is slashed from 50% to just 15%.
This comprehensive reform, which also includes reductions in fixed penalties for administrative lapses like record-keeping, lowers the financial risk of non-compliance. Businesses are urged to immediately review their tax risk strategies and update provision models to align with this new, more favorable landscape.
Table and Clause Reference | Issue/ Clause | Old Version (per CD No. 49 of 2021) (Amt in AED)
| New Version (per CD No. 129 of 2025) (Amt in AED) | Difference (Amount in AED) |
(Table 1, Cl. 1) | Failure to keep records | 10,000 for the first time. 20,000 in case of repetition. | 1,000 for each violation. 20,000 in each case of repeated violation within 24 months. | "First time" (10k) replaced with "each violation" (1k)."Repetition" clarified to mean "within 24 months". |
(Table 1, Cl. 2) | Failure to submit records in Arabic | 20,000/- | 5,000/-
| Penalty reduced by 75% (from 20k to 5k). |
(Table 1, Cl. 5) | Failure to inform authority of any case that may require amendment of the information | 5,000 for the first time. 10,000 in case of repetition.
| 1,000 for each violation. 5,000 in each case of repeated violation within 24 months. | "First time" (5k) replaced with "each violation" (1k).Repetition penalty halved (10k to 5k) and clarified ("within 24 months"). |
(Table 1, Cl. 6) | Legal Rep failure to inform of appointment | 10,000
| 1,000
| Penalty reduced by 90% (from 10k to 1k).
|
(Table 1, Cl. 9) | Failure to pay tax
| 2% of unpaid Tax due on the day following the due date.4% monthly penalty due after one month, on the unsettled amount. Max 300%.
| 14% per annum, for each month or part thereof, on the unsettled amount from the day after the due date.
| Entire penalty model replaced. Aggressive (2% + 4% monthly) model replaced with a simple 14% annual rate.
|
(Table 1, Cl. 10) | Incorrect Tax Return (Fixed Penalty) | Fixed penalty: 1,000 (first time), 2,000 (repetition). Exception: If tax difference < penalty, pay difference (min 500).
| Fixed penalty: 500. New Exclusion: No penalty if a VD is submitted without a tax difference.
| Fixed penalty reduced to a flat 500.New "safe harbor" added for VDs that correct non-tax-related errors.
|
(Table 1, Cl. 11) | Voluntary Disclosure (VD)
| Percentage-based "cliff" model on tax difference: 5% (Year 1), 10% (Year 2), 20% (Year 3) 30% (Year 4), 40% (After Year 4) | Monthly accrual model on tax difference: 1% on the Tax Difference, for each month (or part thereof) from the due date until the VD submission date.
| Complete change from a "yearly bracket" model to a "monthly accrual" model.
|
(Table 1, Cl. 12) | Failure to VD before audit
| 50% penalty on the amount of error. PLUS 4% for every month on the unpaid tax, from due date to assessment.
| 15% fixed penalty on the Tax Difference. PLUS 1% for every month on the Tax Difference, from due date to VD/Assessment.
| Fixed penalty cut from 50% to 15%.Monthly penalty cut from 4% to 1%.
|
(Table 1, Cl. 14) | Failure to calculate tax (RCM) | 2% of unpaid Tax due on the day following the due date.4% monthly penalty due after one month. | 14% per annum (~1.167% per month), for each month or part thereof. | Identical change to Item 9 (Failure to pay tax). |
Not Applicable | Transitional Provisions | Article 3 of CD 49/2021 offered a redetermination of old penalties to 30% if paid by 31 Dec 2021. | No equivalent amnesty provision is included in the amending decision (CD 129/2025). | The 2021 amnesty has expired and is not replaced. |
Contributor
CA Mustafa G Daudi is a Fellow Chartered Accountant (FCA) with over 10 years of experience in indirect taxation, corporate tax, ERP integration, and compliance across India, UAE, and Saudi Arabia. He specializes in UAE VAT, KSA VAT, Excise, GST, and Corporate Tax, with proven expertise in risk mitigation, ERP-based tax automation, and strategic tax planning. Mustafa has held senior roles at Andersen UAE, Leighton India, and EY, and currently serves as Tax Manager at ALTAF Consigliere Fiscale in Dubai.
Related Posts
The UAE Federal Tax Authority (FTA) has announced a fundamental shift in how it taxes Sweetened Drin...
Read More
Author: Mustafa G DaudiThis is a short update on recent requirement of submitting Declaration o...
Read More
Executive Summary The United Arab Emirates (UAE) Ministry of Finance has initiated a comprehens...
Read More