Introduction
Since 14 April 2026, every UAE business carrying a VAT, Excise Tax, or Corporate Tax liability has been operating under a fundamentally different penalty structure. Cabinet Decision No. 129 of 2025 replaced one of the more punishing features of the UAE’s tax system — and while the change is now a few months old, many businesses still haven’t adjusted their internal processes to reflect it.
Out With the Old Compounding Model
When VAT was introduced in 2018, the penalty framework was built to shock businesses into compliance quickly. Under the old rules, late payment triggered an immediate 2% penalty on the unpaid amount, followed by a further 4% penalty for every month — or part of a month — the tax remained unpaid, capped at 300% of the original liability.
In practical terms, a business that paid AED 50,000 in VAT twelve months late could face roughly AED 150,000 in penalties alone — three times the original tax bill.
Cabinet Decision No. 129 of 2025, issued by the Cabinet in October 2025 and effective 14 April 2026, replaces that compounding structure with a flat 14% annual rate, calculated monthly on the outstanding tax balance. Using the same example, twelve months of delay on an AED 50,000 liability now costs roughly AED 7,000 — still a real cost, but no longer capable of tripling the underlying tax bill.
The decision also harmonises how VAT and Excise Tax penalties are calculated with the logic already used for Corporate Tax, replacing the previous framework under Cabinet Decision No. 108 of 2021 and aligning terminology with the Tax Procedures Law (Federal Decree-Law No. 28 of 2022).
Voluntary Disclosure Now Carries a Real Incentive
Perhaps the most practically important change is how the regime treats businesses that catch their own mistakes. Under the new structure:
Voluntary disclosure filed before an FTA audit notice carries the lower, more favourable penalty tier
Voluntary disclosure filed after an audit notice attracts an additional fixed surcharge on top of the monthly charge
Errors with zero tax difference no longer require a formal voluntary disclosure at all — they can simply be corrected in the next return
The message from the FTA is fairly direct: businesses that self-correct early are treated materially better than those that wait to be caught. That makes reviewing historic VAT, Excise, or Corporate Tax positions before an audit notice arrives one of the more valuable compliance exercises a business can do right now.
Let MNK Group Review Your Exposure Before the FTA Does
A more proportionate penalty regime doesn’t mean a more forgiving one — it simply rewards businesses that act early. If your business has any outstanding VAT, Excise, or Corporate Tax uncertainty, MNK Group’s tax advisors can review your position, quantify the realistic exposure under the new rules, and file any necessary voluntary disclosure while the favourable window is still open.
Contact MNK Group for a confidential review of your tax compliance position.
