The Federal Tax Authority (FTA) is introducing a simplified and significantly reduced penalty structure effective April 14, 2026, marking a shift toward fairer enforcement and risk-based audits across VAT, Corporate Tax, and Transfer Pricing compliance.
The new framework streamlines penalties that previously varied between VAT and Corporate Tax rules, bringing greater consistency across the tax system. Most notably, late payment penalties have been reduced and standardized: instead of the previous 2% upfront charge plus 4% monthly interest (capped at 300%), businesses will now face a flat 14% per annum calculated monthly—a substantial reduction for many. Similarly, incorrect tax return penalties have been lowered from AED 1,000–2,000 to AED 500, with relief available if corrections are made before the deadline or through voluntary disclosure.
This shift reflects the FTA's evolution from an introductory compliance phase to a risk-based audit regime. Rather than applying uniform penalties across all violations, the new approach allows the FTA to focus enforcement resources on high-risk cases while offering relief to businesses that correct errors promptly or voluntarily disclose issues. The simplified structure also aligns UAE penalties more closely with global tax standards, reducing complexity for multinational firms operating in the emirate.
The changes apply to violations under VAT and excise tax (Cabinet Decision No. 129 of 2025) and Corporate Tax (Cabinet Decision No. 75 of 2023).
What this means
- Review your compliance schedule now: With simpler, lower penalties for honest mistakes, the FTA is incentivizing voluntary disclosure. If you've identified any tax errors from prior years, consider filing a corrected return before April 14—the relief provisions may significantly reduce your exposure.
- Document everything: Risk-based audits mean the FTA will scrutinize high-risk transactions and entity structures more closely. Strengthen your record-keeping and ensure invoices, transfer pricing documentation, and VAT calculations are contemporaneous and audit-ready.
- Plan for cash flow impact: The new 14% monthly late payment interest is steep. Ensure your finance team has clear payment deadlines and systems in place to avoid unintended delays—the cost of missing a payment deadline has not changed in real terms.