Applying the New Late-Payment Penalty to Pre-Effective Date VAT: Immediate Effect or Retroactivity?
Co-authored by Vanshika Jain and Andrey Nikonov, PGP Tax Consultancy L.L.C
Cabinet Decision No.129 of 2025, published on 10 November 2025 and effective from 14 April 2026, introduces significant amendments to the administrative penalty framework under Cabinet Decision No. 40 of 2017. Among its most notable features is the recalibration and in many cases reduction of late-payment penalties.
Key penalties reduced by virtue of CD No. 129 of 2025:[1]
- Failure to submit requested information in Arabic – Penalty reduced from AED 20,000 to AED 5,000.
- Failure to update tax record kept by the FTA – First violation penalty reduced from AED 5,000 to AED 1,000; Repeated violation penalty reduced from AED 10,000 to AED 5,000 within 24 months.
- Failure to notify appointment of Legal Representative – Penalty reduced from AED 10,000 to AED 1,000.
- Failure to pay Payable Tax on time – New flat penalty at an annualised 14% rate, accrued monthly on outstanding tax, replacing the previous 2% penalty on due day and 4% monthly penalty.
- Incorrect Tax Return – Penalty reduced to AED 500 (first violation) and AED 2,000 (repeated violation); Waiver applies if the tax return is corrected by the due date or via Voluntary Disclosure (VD) that does not impact the tax due.
- Voluntary Disclosures after audit notification is issued – Fixed penalty reduced from 50% to 15%.
- Failure to calculate tax on behalf of another person – Flat penalty of 14% annual rate, accrued monthly on outstanding tax, replacing previous 2% daily penalty and 4% monthly penalty.
While the reform has been widely welcomed, it also raises an important interpretative question. The difficulty arises where VAT became due under the previous penalty regime, but the administrative penalty assessment is issued only after the new regime has entered into force. In that scenario, does the new rule govern? Or would its application amount to a prohibited retrospective effect?