diff --git a/core/racing/domain/entities/LeagueMembership.ts b/core/racing/domain/entities/LeagueMembership.ts
index ffdaff56d..6344bd1a8 100644
--- a/core/racing/domain/entities/LeagueMembership.ts
+++ b/core/racing/domain/entities/LeagueMembership.ts
@@ -7,10 +7,10 @@
 import type { IEntity } from '@core/shared/domain';
 import { RacingDomainValidationError } from '../errors/RacingDomainError';
 import { LeagueId } from './LeagueId';
-import { DriverId } from '../value-objects/DriverId';
 import { MembershipRole, MembershipRoleValue } from './MembershipRole';
 import { MembershipStatus, MembershipStatusValue } from './MembershipStatus';
 import { JoinedAt } from '../value-objects/JoinedAt';
+import { DriverId } from './DriverId';
 
 export interface LeagueMembershipProps {
   id?: string;
diff --git a/core/racing/domain/entities/Penalty.test.ts b/core/racing/domain/entities/Penalty.test.ts
new file mode 100644
index 000000000..1fb1dff45
--- /dev/null
+++ b/core/racing/domain/entities/Penalty.test.ts
@@ -0,0 +1,231 @@
+import { Penalty } from './Penalty';
+import { RacingDomainValidationError, RacingDomainInvariantError } from '../errors/RacingDomainError';
+
+describe('Penalty', () => {
+  describe('create', () => {
+    it('should create a penalty with required fields', () => {
+      const penalty = Penalty.create({
+        id: 'penalty-1',
+        leagueId: 'league-1',
+        raceId: 'race-1',
+        driverId: 'driver-1',
+        type: 'time_penalty',
+        value: 5,
+        reason: 'Speeding',
+        issuedBy: 'steward-1',
+      });
+
+      expect(penalty.id).toBe('penalty-1');
+      expect(penalty.leagueId).toBe('league-1');
+      expect(penalty.raceId).toBe('race-1');
+      expect(penalty.driverId).toBe('driver-1');
+      expect(penalty.type).toBe('time_penalty');
+      expect(penalty.value).toBe(5);
+      expect(penalty.reason).toBe('Speeding');
+      expect(penalty.issuedBy).toBe('steward-1');
+      expect(penalty.status).toBe('pending');
+      expect(penalty.appliedAt).toBeUndefined();
+      expect(penalty.notes).toBeUndefined();
+    });
+
+    it('should create a penalty with all fields', () => {
+      const issuedAt = new Date('2023-01-01');
+      const appliedAt = new Date('2023-01-02');
+      const penalty = Penalty.create({
+        id: 'penalty-1',
+        leagueId: 'league-1',
+        raceId: 'race-1',
+        driverId: 'driver-1',
+        type: 'disqualification',
+        reason: 'Unsafe driving',
+        protestId: 'protest-1',
+        issuedBy: 'steward-1',
+        status: 'applied',
+        issuedAt,
+        appliedAt,
+        notes: 'Applied after review',
+      });
+
+      expect(penalty.id).toBe('penalty-1');
+      expect(penalty.type).toBe('disqualification');
+      expect(penalty.value).toBeUndefined();
+      expect(penalty.protestId).toBe('protest-1');
+      expect(penalty.status).toBe('applied');
+      expect(penalty.issuedAt).toEqual(issuedAt);
+      expect(penalty.appliedAt).toEqual(appliedAt);
+      expect(penalty.notes).toBe('Applied after review');
+    });
+
+    it('should throw error for invalid id', () => {
+      expect(() => Penalty.create({
+        id: '',
+        leagueId: 'league-1',
+        raceId: 'race-1',
+        driverId: 'driver-1',
+        type: 'time_penalty',
+        value: 5,
+        reason: 'Speeding',
+        issuedBy: 'steward-1',
+      })).toThrow(RacingDomainValidationError);
+    });
+
+    it('should throw error for invalid type', () => {
+      expect(() => Penalty.create({
+        id: 'penalty-1',
+        leagueId: 'league-1',
+        raceId: 'race-1',
+        driverId: 'driver-1',
+        type: 'invalid_type',
+        value: 5,
+        reason: 'Speeding',
+        issuedBy: 'steward-1',
+      })).toThrow(RacingDomainValidationError);
+    });
+
+    it('should throw error for missing value on time_penalty', () => {
+      expect(() => Penalty.create({
+        id: 'penalty-1',
+        leagueId: 'league-1',
+        raceId: 'race-1',
+        driverId: 'driver-1',
+        type: 'time_penalty',
+        reason: 'Speeding',
+        issuedBy: 'steward-1',
+      })).toThrow(RacingDomainValidationError);
+    });
+
+    it('should throw error for zero value', () => {
+      expect(() => Penalty.create({
+        id: 'penalty-1',
+        leagueId: 'league-1',
+        raceId: 'race-1',
+        driverId: 'driver-1',
+        type: 'time_penalty',
+        value: 0,
+        reason: 'Speeding',
+        issuedBy: 'steward-1',
+      })).toThrow(RacingDomainValidationError);
+    });
+  });
+
+  describe('isPending', () => {
+    it('should return true for pending status', () => {
+      const penalty = Penalty.create({
+        id: 'penalty-1',
+        leagueId: 'league-1',
+        raceId: 'race-1',
+        driverId: 'driver-1',
+        type: 'warning',
+        reason: 'Warning',
+        issuedBy: 'steward-1',
+      });
+      expect(penalty.isPending()).toBe(true);
+    });
+
+    it('should return false for applied status', () => {
+      const penalty = Penalty.create({
+        id: 'penalty-1',
+        leagueId: 'league-1',
+        raceId: 'race-1',
+        driverId: 'driver-1',
+        type: 'warning',
+        reason: 'Warning',
+        issuedBy: 'steward-1',
+        status: 'applied',
+      });
+      expect(penalty.isPending()).toBe(false);
+    });
+  });
+
+  describe('markAsApplied', () => {
+    it('should mark penalty as applied', () => {
+      const penalty = Penalty.create({
+        id: 'penalty-1',
+        leagueId: 'league-1',
+        raceId: 'race-1',
+        driverId: 'driver-1',
+        type: 'warning',
+        reason: 'Warning',
+        issuedBy: 'steward-1',
+      });
+      const applied = penalty.markAsApplied('Applied successfully');
+      expect(applied.status).toBe('applied');
+      expect(applied.appliedAt).toBeInstanceOf(Date);
+      expect(applied.notes).toBe('Applied successfully');
+    });
+
+    it('should throw error if already applied', () => {
+      const penalty = Penalty.create({
+        id: 'penalty-1',
+        leagueId: 'league-1',
+        raceId: 'race-1',
+        driverId: 'driver-1',
+        type: 'warning',
+        reason: 'Warning',
+        issuedBy: 'steward-1',
+        status: 'applied',
+      });
+      expect(() => penalty.markAsApplied()).toThrow(RacingDomainInvariantError);
+    });
+  });
+
+  describe('overturn', () => {
+    it('should overturn the penalty', () => {
+      const penalty = Penalty.create({
+        id: 'penalty-1',
+        leagueId: 'league-1',
+        raceId: 'race-1',
+        driverId: 'driver-1',
+        type: 'warning',
+        reason: 'Warning',
+        issuedBy: 'steward-1',
+      });
+      const overturned = penalty.overturn('Appealed successfully');
+      expect(overturned.status).toBe('overturned');
+      expect(overturned.notes).toBe('Appealed successfully');
+    });
+
+    it('should throw error if already overturned', () => {
+      const penalty = Penalty.create({
+        id: 'penalty-1',
+        leagueId: 'league-1',
+        raceId: 'race-1',
+        driverId: 'driver-1',
+        type: 'warning',
+        reason: 'Warning',
+        issuedBy: 'steward-1',
+        status: 'overturned',
+      });
+      expect(() => penalty.overturn('Reason')).toThrow(RacingDomainInvariantError);
+    });
+  });
+
+  describe('getDescription', () => {
+    it('should return description for time_penalty', () => {
+      const penalty = Penalty.create({
+        id: 'penalty-1',
+        leagueId: 'league-1',
+        raceId: 'race-1',
+        driverId: 'driver-1',
+        type: 'time_penalty',
+        value: 5,
+        reason: 'Speeding',
+        issuedBy: 'steward-1',
+      });
+      expect(penalty.getDescription()).toBe('+5s time penalty');
+    });
+
+    it('should return description for disqualification', () => {
+      const penalty = Penalty.create({
+        id: 'penalty-1',
+        leagueId: 'league-1',
+        raceId: 'race-1',
+        driverId: 'driver-1',
+        type: 'disqualification',
+        reason: 'Unsafe',
+        issuedBy: 'steward-1',
+      });
+      expect(penalty.getDescription()).toBe('Disqualified from race');
+    });
+  });
+});
\ No newline at end of file
diff --git a/core/racing/domain/entities/Penalty.ts b/core/racing/domain/entities/Penalty.ts
index e69de29bb..b3a24ca06 100644
--- a/core/racing/domain/entities/Penalty.ts
+++ b/core/racing/domain/entities/Penalty.ts
@@ -0,0 +1,195 @@
+/**
+ * Domain Entity: Penalty
+ *
+ * Represents a penalty applied to a driver for an incident during a race.
+ * Penalties can be applied as a result of an upheld protest or directly by stewards.
+ */
+
+import { RacingDomainValidationError, RacingDomainInvariantError } from '../errors/RacingDomainError';
+import type { IEntity } from '@core/shared/domain';
+import { PenaltyId } from './penalty/PenaltyId';
+import { LeagueId } from './LeagueId';
+import { RaceId } from './RaceId';
+import { DriverId } from './DriverId';
+import { PenaltyType } from './penalty/PenaltyType';
+import { PenaltyValue } from './penalty/PenaltyValue';
+import { PenaltyReason } from './penalty/PenaltyReason';
+import { ProtestId } from './ProtestId';
+import { StewardId } from './StewardId';
+import { PenaltyStatus } from './penalty/PenaltyStatus';
+import { IssuedAt } from './IssuedAt';
+import { AppliedAt } from './AppliedAt';
+import { PenaltyNotes } from './penalty/PenaltyNotes';
+
+export interface PenaltyProps {
+  id: PenaltyId;
+  leagueId: LeagueId;
+  raceId: RaceId;
+  /** The driver receiving the penalty */
+  driverId: DriverId;
+  /** Type of penalty */
+  type: PenaltyType;
+  /** Value depends on type: seconds for time_penalty, positions for grid_penalty, points for points_deduction */
+  value?: PenaltyValue;
+  /** Reason for the penalty */
+  reason: PenaltyReason;
+  /** ID of the protest that led to this penalty (if applicable) */
+  protestId?: ProtestId;
+  /** ID of the steward who issued the penalty */
+  issuedBy: StewardId;
+  /** Current status of the penalty */
+  status: PenaltyStatus;
+  /** Timestamp when the penalty was issued */
+  issuedAt: IssuedAt;
+  /** Timestamp when the penalty was applied to results */
+  appliedAt?: AppliedAt;
+  /** Notes about the penalty application */
+  notes?: PenaltyNotes;
+}
+
+export class Penalty implements IEntity<string> {
+  private constructor(private readonly props: PenaltyProps) {}
+
+  static create(props: {
+    id: string;
+    leagueId: string;
+    raceId: string;
+    driverId: string;
+    type: string;
+    value?: number;
+    reason: string;
+    protestId?: string;
+    issuedBy: string;
+    status?: string;
+    issuedAt?: Date;
+    appliedAt?: Date;
+    notes?: string;
+  }): Penalty {
+    if (!props.id) throw new RacingDomainValidationError('Penalty ID is required');
+    if (!props.leagueId) throw new RacingDomainValidationError('League ID is required');
+    if (!props.raceId) throw new RacingDomainValidationError('Race ID is required');
+    if (!props.driverId) throw new RacingDomainValidationError('Driver ID is required');
+    if (!props.type) throw new RacingDomainValidationError('Penalty type is required');
+    if (!props.reason?.trim()) throw new RacingDomainValidationError('Penalty reason is required');
+    if (!props.issuedBy) throw new RacingDomainValidationError('Penalty must be issued by a steward');
+
+    // Validate value based on type
+    if (['time_penalty', 'grid_penalty', 'points_deduction', 'license_points', 'fine', 'race_ban'].includes(props.type)) {
+      if (props.value === undefined || props.value <= 0) {
+        throw new RacingDomainValidationError(`${props.type} requires a positive value`);
+      }
+    }
+
+    const penaltyProps: PenaltyProps = {
+      id: PenaltyId.create(props.id),
+      leagueId: LeagueId.create(props.leagueId),
+      raceId: RaceId.create(props.raceId),
+      driverId: DriverId.create(props.driverId),
+      type: PenaltyType.create(props.type),
+      reason: PenaltyReason.create(props.reason),
+      issuedBy: StewardId.create(props.issuedBy),
+      status: PenaltyStatus.create(props.status || 'pending'),
+      issuedAt: IssuedAt.create(props.issuedAt || new Date()),
+      ...(props.value !== undefined && { value: PenaltyValue.create(props.value) }),
+      ...(props.protestId !== undefined && { protestId: ProtestId.create(props.protestId) }),
+      ...(props.appliedAt !== undefined && { appliedAt: AppliedAt.create(props.appliedAt) }),
+      ...(props.notes !== undefined && { notes: PenaltyNotes.create(props.notes) }),
+    };
+
+    return new Penalty(penaltyProps);
+  }
+
+  get id(): string { return this.props.id.toString(); }
+  get leagueId(): string { return this.props.leagueId.toString(); }
+  get raceId(): string { return this.props.raceId.toString(); }
+  get driverId(): string { return this.props.driverId.toString(); }
+  get type(): string { return this.props.type.toString(); }
+  get value(): number | undefined { return this.props.value?.toNumber(); }
+  get reason(): string { return this.props.reason.toString(); }
+  get protestId(): string | undefined { return this.props.protestId?.toString(); }
+  get issuedBy(): string { return this.props.issuedBy.toString(); }
+  get status(): string { return this.props.status.toString(); }
+  get issuedAt(): Date { return this.props.issuedAt.toDate(); }
+  get appliedAt(): Date | undefined { return this.props.appliedAt?.toDate(); }
+  get notes(): string | undefined { return this.props.notes?.toString(); }
+
+  isPending(): boolean {
+    return this.props.status.toString() === 'pending';
+  }
+
+  isApplied(): boolean {
+    return this.props.status.toString() === 'applied';
+  }
+
+  /**
+   * Mark penalty as applied (after recalculating results)
+   */
+  markAsApplied(notes?: string): Penalty {
+    if (this.isApplied()) {
+      throw new RacingDomainInvariantError('Penalty is already applied');
+    }
+    if (this.props.status.toString() === 'overturned') {
+      throw new RacingDomainInvariantError('Cannot apply an overturned penalty');
+    }
+    const base: PenaltyProps = {
+      ...this.props,
+      status: PenaltyStatus.create('applied'),
+      appliedAt: AppliedAt.create(new Date()),
+    };
+
+    const next: PenaltyProps =
+      notes !== undefined ? { ...base, notes: PenaltyNotes.create(notes) } : base;
+
+    return new Penalty(next);
+  }
+
+  /**
+   * Overturn the penalty (e.g., after successful appeal)
+   */
+  overturn(reason: string): Penalty {
+    if (this.props.status.toString() === 'overturned') {
+      throw new RacingDomainInvariantError('Penalty is already overturned');
+    }
+    return new Penalty({
+      ...this.props,
+      status: PenaltyStatus.create('overturned'),
+      notes: PenaltyNotes.create(reason),
+    });
+  }
+
+  /**
+   * Get a human-readable description of the penalty
+   */
+  getDescription(): string {
+    switch (this.props.type.toString()) {
+      case 'time_penalty':
+        return `+${this.props.value?.toNumber()}s time penalty`;
+      case 'grid_penalty':
+        return `${this.props.value?.toNumber()} place grid penalty (next race)`;
+      case 'points_deduction':
+        return `${this.props.value?.toNumber()} championship points deducted`;
+      case 'disqualification':
+        return 'Disqualified from race';
+      case 'warning':
+        return 'Official warning';
+      case 'license_points':
+        return `${this.props.value?.toNumber()} license penalty points`;
+      case 'probation':
+        return 'Probationary period';
+      case 'fine':
+        return `${this.props.value?.toNumber()} points fine`;
+      case 'race_ban':
+        return `${this.props.value?.toNumber()} race suspension`;
+      default:
+        return 'Penalty';
+    }
+  }
+}
+
+// Export types for external use
+export { PenaltyType } from './penalty/PenaltyType';
+export { PenaltyStatus } from './penalty/PenaltyStatus';
+export { PenaltyValue } from './penalty/PenaltyValue';
+export { PenaltyReason } from './penalty/PenaltyReason';
+export { PenaltyNotes } from './penalty/PenaltyNotes';
+export { PenaltyId } from './penalty/PenaltyId';
\ No newline at end of file