The evolution of the interplay between Voluntary Disclosure and late payment penalties in UAE Tax Law

The 2020 Decision: affirmation of dual penalties

In Decision No. 227 of 14 October 2020, the Federal Supreme Court affirmed that the penalties for voluntary disclosure (VD) and late payment are cumulative and apply concurrently to the same tax difference. The Court reasoned that each penalty pursues a distinct legislative purpose:

1. The voluntary disclosure penalty addresses the taxpayer’s initial failure to file an accurate return and the subsequent delay in correcting that inaccuracy. It “chases the mistake”, penalizing the taxpayer for allowing an understatement of liability to persist unrectified until the moment of disclosure.
2. The late payment penalty, by contrast, sanctions the delay in settling the tax due, which remains outstanding from the date the obligation first arose under the law.

Both penalties are thus computed on the same tax difference (the amount of underpaid tax revealed by the voluntary disclosure), but arise from two independent breaches: one substantive (the misreporting) and one temporal (the late settlement).

The Court reasoned that the source of tax liability lies in the law, not in the tax return. The statutory obligation to pay tax arises when the law fixes the due date, and the amounts disclosed in a VD merely reflect the taxpayer’s correct liability. Hence, a VD does not generate a new obligation or a new due date; it merely corrects a pre-existing one.

The Court therefore held that late payment penalties apply equally to tax disclosed voluntarily, as failure to pay the correct tax by its statutory due date constitutes a distinct violation. It triggers the statutory sanction irrespective of the later correction through voluntary disclosure. The VD penalty does not absorb or replace the late payment penalty. Rather, it supplements it, reflecting the taxpayer’s dual noncompliance: first in declaring an incorrect amount, and second in delaying the payment of the correct liability.

Furthermore, the Court emphasized that the legislative intent of Item 9 did not distinguish between unpaid tax arising in an original return and unpaid tax revealed in a voluntary disclosure. To exempt voluntarily disclosed amounts would, in the Court’s view, permit deferral of payment at will, undermining fiscal discipline and the mandatory character of tax compliance.

The 2023 Decision: clarifying the temporal scope of penalties

In Decision No. 39 of 8 November 2023, the Supreme Court revisited the issue, focusing specifically on the starting point for calculating late payment penalties. The Court reaffirmed that the VD penalty and the late payment penalty were distinct in nature and scope, each addressing separate taxpayer conduct. The Court further clarified that the late payment penalty accrues from the statutory due date of tax, irrespective of the later filing of a VD.

The Court reiterated that the relationship between the FTA and the taxpayer is regulatory rather than contractual. The submission of returns, assessments, or disclosures serves as procedural mechanisms for determining tax liability but does not affect the legislatively prescribed due date for payment. Accordingly, where the taxpayer failed to settle the tax by its due date and subsequently filed a VD, both penalties applied.

Legislative Reform: from Cabinet Decision No. 40/2017 to No. 49/2021

The above rulings were grounded in the penalty framework of Cabinet Decision No. 40 of 2017, which has since been repealed and replaced by Cabinet Decision No. 49 of 2021 for VAT and Excise Tax, and later by Cabinet Decision No. 75 of 2023 for Corporate Tax. The comparative placement (line) of the relevant offences in the schedules (tables) is as follows:

Under Decision No. 40 (2017), Line No. 9 imposed a penalty for “the failure of the Taxable Person to settle the Payable Tax stated in the submitted Tax Return or Tax Assessment he was notified of, within the timeframe specified in the Tax Law’. As per column 2 of this Line, ‘the Taxable Person shall be obligated to pay a late payment penalty consisting of:

• (2%) of the unpaid tax is due immediately once the payment of Payable Tax is late;
• (4%) is due on the seventh day following the deadline for payment, on the amount of tax which is still unpaid’.

Decision No. 49 (2021), however, introduced a more structured and liberalized mechanism, incorporating a specific definition of “due date of payment” in the context of voluntary disclosures and tax assessments.

The amount of penalty is defined in this way: “The Taxable Person shall be obliged to pay the penalty applicable to late payment of Payable Tax up to a maximum of 300%, pursuant to the following:

• 2% of the unpaid Tax is shall be due immediately once the payment of Payable Tax is late on the day following the due date of payment, where the settlement of Payable Tax is late
• 4% monthly penalty is due on the seventh day following the deadline for payment after one month from the due date of payment, and on the same date monthly thereafter, on the amount of tax which is still unpaid unsettled Tax amount to date”.

On top, a new paragraph is added into right column: ‘For the purposes of this penalty, the due date of payment in the case of the Voluntary Disclosure and Tax Assessment, shall be as follows:

• 20 business days from the date of submission, in the case of a Voluntary Disclosure.
• 20 business days from the date of receipt, in the case of a Tax Assessment’.

This addition has also been replicated verbatim in Decision No. 75 of 2023 for Corporate Tax.

Implications of the new definition of “Due Date of Payment”

• This legislative development represents a significant conceptual shift. The newly codified 20-business-day payment window decouples the late payment penalty from the original statutory due date of the tax period, replacing it with a fresh due date triggered by the VD submission or tax assessment. Consequently, the tax becomes “unpaid” and subject to penalty only if it remains unsettled after this new 20-day period.
• Under this framework, the late payment penalty (Offence No. 9) is no longer automatically triggered upon the discovery of an underpayment through a VD. Instead, timely settlement within 20 business days prevents its accrual, thereby integrating a degree of leniency absent from the earlier regime.

Implications of the new definition of “Due Date of Payment”

This legislative development represents a significant conceptual shift. The newly codified 20-business-day payment window decouples the late payment penalty from the original statutory due date of the tax period, replacing it with a fresh due date triggered by the VD submission or tax assessment. Consequently, the tax becomes “unpaid” and subject to penalty only if it remains unsettled after this new 20-day period.

Under this framework, the late payment penalty (Offence No. 9) is no longer automatically triggered upon the discovery of an underpayment through a VD. Instead, timely settlement within 20 business days prevents its accrual, thereby integrating a degree of leniency absent from the earlier regime.

Reassessment of judicial precedents

Given the introduction of this statutory change, the rationale of the 2020 and 2023 Supreme Court decisions (both rendered under Decision No. 40 of 2017) has lost its direct applicability. The previous rulings assumed that the due date of payment was fixed by law at the time the original tax was due, and not affected by a later disclosure. The legislative amendments now expressly redefine this due date for voluntary disclosures, thereby legislatively overruling the earlier judicial interpretation.

Consequently, if a taxpayer files a voluntary disclosure and pays the resulting tax difference within the stipulated 20 business days, the late payment penalty should not apply. The compensatory function for the delay is already embedded in the percentage-based VD penalty under Offence No. 11 (for Corporate Tax – No. 10).

Comparative penalty framework

The current regime differentiates between timely and untimely voluntary disclosures as follows:

A timely voluntary disclosure, that is, one submitted before the taxpayer has been notified of a forthcoming audit, is subject to the following penalties:

• VAT and Excise: 5–40% of the tax difference, increasing by year of delay.
• Corporate Tax: 1% per month on the tax difference from the original due date until VD submission.

A late voluntary disclosure, that is, one submitted after the taxpayer has been notified of a forthcoming audit or where no voluntary disclosure has been filed at all, is subject to the following penalties:

• Fixed penalty: 15% (Corporate Tax) or 50% (VAT and Excise) on the tax difference.
• Monthly penalty: 1% (Corporate Tax) or 4% (VAT/Excise) until VD submission or Tax Assessment.

For timely VDs (Offence No. 11 for VAT/Excise; No. 10 for Corporate Tax), the penalty period commences from the due date of submission of the Tax Return (VAT/Excise) and from the day following the due date of the relevant Tax Return (Corporate Tax).

For untimely or non-filed VDs Corporate Tax measured from the same return due date ti file original Return (Offence No. 11). For VAT/Excise, the penalty period commences from the date the payment is due for the relevant Tax Period (Offence No. 12). In each case, the start point is effectively the original return/payment due date, i.e. the date on which the tax difference would have fallen due had it been correctly declared, thereby ensuring the penalty period covers the entire interval of underpayment.

After the VD penalty is imposed, a separate late-settlement penalty applies if the same tax difference remains unpaid beyond 20 business days from the submission of the VD (or from receipt/issuance of a Tax Assessment).

This sequencing ensures that the two penalties do not intersect:

• the VD penalty addresses the pre-VD understatement and its belated correction,
• while the late-settlement penalty addresses non-payment after that period.

The same tax difference therefore is the base for both penalties without duplication, as each accrues in a distinct temporal segment: first the VD penalty; then - the late-settlement penalty.

This design also answers the Supreme Court’s concern that interpreting the due date for Offence No. 9 as the day after VD submission could leave earlier non-payment unsanctioned. Under the current regime, the stand-alone VD penalty captures the pre-VD (or pre-assessment) delay, and the late-settlement penalty is triggered to cover the further delay.

Conclusion

The reform introduced by Cabinet Decision No. 49 of 2021 and Cabinet Decision No. 75 of 2023 marks a clear policy shift toward a more balanced and equitable penalty system. By defining a new “due date of payment” for voluntary disclosures, the legislature has mitigated the harshness of automatic dual penalties that characterized the earlier jurisprudence.

This evolution underscores the dynamic interaction between judicial interpretation and legislative refinement in UAE tax administration. In our opinion, future judicial practice should, accordingly, recognize that under the current framework, the late payment penalty does not accrue if the taxpayer discharges the additional liability within the 20-business-day window following a voluntary disclosure. The compensatory effect of delay is now embedded in the design of the VD penalty itself, reflecting a more proportionate and compliance-oriented approach to tax enforcement.

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 I have tried my best to avoid. If you find any inaccuracies or errors, please let me know so that I can make corrections.