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?
[1]https://tax.gov.ae/Datafolder/Files/Legislation/2025/Cabinet%20Decision%20No.%2040%20of%202017%20and%20its%20amendments%20-%20publishing%2011%202025.pdf
Illustration - Practical Audit Scenario
The issue becomes clearer when viewed through a typical audit timeline.
Assume that the Federal Tax Authority conducts a tax audit covering the 2024 tax period, and the audit concludes in May 2026 with the issuance of a Tax Penalty Assessment identifying underpayment of VAT.
The VAT in question became due during 2024, meaning the payment deadline, and the initial breach - occurred well before the entry into force of Cabinet Decision No. 129 of 2025 on 14 April 2026.
The practical question then arises:Which late-payment penalty regime applies when the penalty assessment itself is issued after the new framework has already entered into force?
The Cabinet Decision 129 of 2025 does not contain any explicit transitional provisions dealing with: (i) tax liabilities that arose before 14 April 2026; (ii) penalties imposed after that date for earlier violations; or (iii) any redetermination or recalculation mechanism for historical penalties. Further, the Federal Tax Authority has not yet issued any public clarification addressing this issue.
The issue therefore sits at the intersection of two established principles in UAE constitutional jurisprudence:
- the prohibition of retroactive application of laws and
- the immediate and direct effect of new legislation.
The Constitutional Architecture
Immediate Application v/s Prohibited Retroactivity
The Federal Supreme Court has consistently affirmed the principle of non-retroactivity. New legislation does not alter the legal consequences of situations that were fully completed under the previous framework. A rule applies to circumstances arising after its enforcement and does not extend to legal positions that had already crystallised before its issuance.[1]
At the same time, the Court recognises the principle of the immediate and direct effect of new legislation. Under this doctrine, new rules govern the legal consequences that arise after their effective date, even where the underlying situation originated earlier.[2] In other words, while completed situations are protected from retroactive change, ongoing legal relationships may fall under the new regime from the moment it enters into force.
The VAT late-payment context precisely occupies this boundary and consequently two possible interpretations emerge:
- The split (prospective) approach. The penalty accrues under the old regime from the original VAT due date until 14 April 2026. From that date onward, the new penalty percentage applies prospectively until settlement.
- The procedural (ongoing relationship) approach. Only the new penalty applies because (i) penalty assessment is a part of the procedural framework, (ii) the Supreme Court does not treat the application of procedural rules to an ongoing (continuous) legal relationship as retroactive application of a new rule. For example, if a new procedural rule changes the details that must be included in a penalty assessment decision, those details should appear in any decision issued after the new regulation becomes effective, even if the assessment relates to an earlier offence. That should not be regarded as retrospective application of the new rules. On this approach, the same logic also applies to the amount of the penalty.
There can be a third interpretation as well: the complete exclusion of the new regime. This means that the penalty framework in force on the original VAT due date governs the entire period of non-payment, regardless of when the assessment is issued.
Why Complete Exclusion is No-Go?
A third theoretical interpretation would be that the penalty regime applicable on the original VAT due date governs the entire period of non-payment, regardless of when assessment occurs. In other words, the old penalty percentage would continue to apply, even after 14 April, to the amount carried forward from the earlier period into the post-14 April period.
In practice, this position is difficult to maintain.
Late payment of VAT does not end on the due date. The state of non-payment continues until settlement, and the legal relationship between the taxpayer and the Authority remains active during that period. Treating the violation as permanently fixed at the moment of default sits uneasily with the Supreme Court’s doctrine of immediate legislative effect, which allows new law to regulate future consequences of ongoing situations.
In addition, Cabinet Decision No. 129 of 2025 does not expressly preserve exclusive application of the previous penalty framework for historical liabilities.
For these reasons, the practical debate appears to lie between a split application model and a procedural application model.
The Split Approach
The split approach starts from a cautious constitutional premise. It accepts that late payment may continue over time, but treats the effective date of the new Cabinet Decision as the legally appropriate dividing line between two penalty regimes.
Under this interpretation, penalties would accrue:
- under the previous regime up to 14 April 2026, and
- under the new regime only from that date onward until settlement.
Several arguments may support this interpretation:
1. Protection of completed legal consequences
The Supreme Court’s non-retroactivity doctrine suggests that legal consequences already attached under prior law should not later be altered. From this perspective, penalty accrual linked to periods before 14 April 2026 may be viewed as consequences that had already attached under the former framework. Applying a different penalty rate to that earlier period could therefore be characterised as backward-looking and interference with completed legal effects.
2. The effective date as a natural constitutional boundary
Legislative reforms commonly operate prospectively from their effective date where no transitional mechanism is provided. Decision No. 129 of 2025 provides a clear temporal marker. Treating that date as the point at which penalty calculation changes offers a structured and legally conservative solution in the absence of explicit transitional rules. This approach minimises constitutional risk while still giving operational effect to the reform.
3. Separation between past and future accrual
Even if late payment continues over time, penalty amounts relate to specific periods during which non-payment existed. Under the split approach:
- past accrual remains governed by the law applicable at that time;
- future accrual follows the law currently in force.
In this sense, the model attempts to reconcile both Supreme Court principles simultaneously, avoiding retroactive interference while permitting prospective legislative operation.
4. A constitutionally cautious interpretation in the absence of guidance
Decision No. 129 contains no express transitional mechanism, and the FTA has not yet issued clarification addressing historical late-payment situations. In such circumstances, adopting a prospective switch from the effective date may be viewed as the interpretation least likely to conflict with the non-retroactivity principle until judicial or administrative guidance emerges.
5. Legal certainty and predictability of obligations
Taxpayers organise their compliance by reference to the legal framework in force when the relevant tax obligation arises. Where penalties start accruing under an existing regime, preserving that regime for the pre-amendment period supports legal certainty and keeps the consequences of non-compliance predictable. From this perspective, the new penalty rate should apply only from its effective date, so that taxpayers are not retroactively exposed to a different penalty framework for a period during which another regime governed their obligations.
6. Fairness and equal treatment
A further argument is based on fairness and equal treatment. Taxpayers who committed the same violation on the same date should not, in principle, be subject to different penalties solely because the tax authority issued the assessment at different times. If the applicable penalty turns entirely on the date of assessment rather than the date of the underlying non-compliance, the result may appear arbitrary and inconsistent with the principle that comparable cases should be treated alike.
The Procedural Approach
The procedural approach proceeds from a different analytical starting point. Rather than focusing on when the VAT originally became due, it asks which legal moment determines the applicable penalty regime.
Several arguments may be advanced in support of this interpretation.
A. Penalty Assessment as the legally decisive moment
An administrative penalty does not become enforceable merely because a VAT deadline was missed. It is formally established, quantified, and rendered payable through the issuance of a tax penalty assessment. Until that point, there is an exposure. Upon assessment, there is crystallised liability. If the assessment is issued after 14 April 2026, it may be argued that the penalty regime in force at that time governs the determination.
Under this reasoning, constitutional analysis may depend on how the relevant legal event is characterised:
- the missed VAT due date; or
- the administrative act that converts exposure into enforceable liability.
If liability crystallises only upon assessment, and that assessment occurs after the new regime has entered into force, applying the current rule may represent ordinary operation of the law rather than retrospective application.
B. Immediate application to an ongoing legal relationship
The Supreme Court’s doctrine allows new legislation to be applied immediately to an ongoing legal relationship, particularly where the new rule is procedural in nature. In such cases, the Court does not necessarily distinguish between the pre-effective-date and post-effective-date elements of the same continuing situation. Late payment of VAT is not exhausted once the original statutory deadline passes. Until the outstanding tax is settled, the relationship between the taxpayer and the FTA remains ongoing. On that view, applying the new penalty rule at the assessment stage can be characterised not as retroactive alteration of past legal consequences, but as immediate application of a new procedural rule to an existing and continuing legal relationship.[3]
C. Retroactivity concerns arise only where settled penalties are disturbed.
Retroactive effect is typically engaged where liabilities already determined under a previous regime are reopened, recalculated, or replaced. Under the procedural approach, previously assessed penalties remain untouched. The new regime operates only in situations where no penalty assessment had yet been issued before the legislative change. This distinction attempts to preserve the boundary between prohibited retroactivity and permissible immediate application.
[1] Federal Supreme Court No. 627/2023, Administrative-Tax. https://waselandwasel.com/articles/october-2025-amendments-to-the-uae-tax-procedures-law-and-relevant-federal-supreme-court-case-law/?print=print
[2] Ibid. Federal Supreme Court Nos. 1480/2022 and 1/2023, Administrative-Tax.
[3] Ibid.
Conclusion
The interpretations outlined above are not free from doubt. One view treats the missed VAT due date as the decisive legal event and emphasises protection against backward-looking legislative effects. The other focuses on the continuing nature of non-payment and the procedural moment at which liability becomes legally enforceable.
The issue therefore sits in a genuine grey zone between the constitutional protection of completed legal situations and the Court’s acceptance that new legislation may govern ongoing relationships and future procedural steps from the moment of its effectiveness.
The precise boundary between impermissible retroactivity and permissible immediate application in the context of administrative tax penalties has not yet been directly delineated by the Federal Supreme Court. Further judicial clarification would therefore provide certainty as to where that line should be drawn for taxpayers and administration alike.
The disclaimer
Pursuant to the MoF’s press-release issued on 19 May 2023 “a number of posts circulating on social media and other platforms that are issued by private parties, contain inaccurate and unreliable interpretations and analyses of Corporate Tax”.
The Ministry issued a reminder that official sources of information on Federal Taxes in the UAE are the MoF and FTA only. Therefore, analyses that are not based on official publications by the MoF and FTA, or have not been commissioned by them, are unreliable and may contain misleading interpretations of the law. See the full press release here.
You should factor this in when dealing with this article as well. It is not commissioned by the MoF or FTA. The interpretation, conclusions, proposals, surmises, guesswork, etc., it comprises have the status of the author’s opinion only. Furthermore, it is not legal or tax advice. Like any human job, it may contain inaccuracies and mistakes that we have tried my best to avoid. If you find any inaccuracies or errors, please let us know so that we can make corrections.
