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February 06, 2026

What is ZATCA phases 1 and 2?

What is ZATCA phases 1 and 2?

Today’s rapidly changing digital world has transitioned away from a paper-based invoicing system, which was not just costly, prone to errors, but also time-consuming. Businesses in KSA today rely on electronic invoicing, which has also become mandatory as a part of Saudi Arabia’s long-term digital innovation plans. E-invoicing is regulated and implemented by Zakat, Tax, and Custom Authority (ZATCA) and is named as FATOORAH. The aim behind E-invoicing is to elevate clarity, lower tax evasion, and transform the traditional taxation practices into a more modernized and internationally aligned system.

ZATCA made sure that businesses don’t face stress, specifically the small businesses, hence introduced it in two separate phases to simplify the process. Both phases are part of the same initiative and follow the same regulatory framework, yet the technical demands, scope, and compliance structures vary. This guide will explore both phases comprehensively and provide some general tips for businesses to stay compliant in KSA.

Understanding ZATCA and the FATOORAH Initiative

E-invoicing has replaced the old paper invoices with a more structured electronic format invoice that is readable by machines. Making it easy to validate, read, and store for both businesses and government. In KSA, ZATCA mainly supervises the E-invoicing, which is part of the Saudi Vision 2030 initiative. This Fatoorah initiative was launched with an aim to create transparency in taxation frameworks by tracking and auditing invoices digitally. The e-invoicing practices are obligatory for:

  • All the VAT-applicable taxable businesses in Saudi Arabia
  • A third party that issues a tax invoice in the name of the taxpayers

E-invoicing does not apply to non-resident taxable businesses for issuing invoices for exempt supplies. To clearly implement and integrate the FATOORA E-invoicing system, ZATCA divided it into two different parts. Each part has defined rules on how the invoices will be generated, transmitted, and archived. These two phases were named:

Phase 1: The Generation Phase

Phase 2: The Integration Phase

Both phases were effective from different dates, where Phase 1 laid the groundwork by digitizing invoicing, and Phase 2 elevates compliance through real‑time integration, validation, and transparency.

ZATCA Phase 1 – The Generation Phase

The first phase, which is the Generation phases came into effect on 4th December 2021. This phase mainly emphasized that all the taxable businesses were fully able to generate, issue, and save their invoices electronically. Since this was challenging for old-school businesses, ZATCA presents clear guidelines and established a digital foundation before the start of the more complex integration phase. The core needs for phase 1 were to stay compliant with the following:

  1. Electronic Invoice Generation: It was obligatory to provide all the invoices by using accounting software, ERP systems, and POS systems. This demands system upgrades as the handwritten notes of non-electronic software or Excel were completely non-compliant.
  2. Mandatory Invoice Fields: All the electronic invoices must have the name of the supplier with VAT registration number, date and time of invoice, the taxable amount, and the total value of the invoice. These are mandatory as per Saudi Laws
  3. QR Code: Having a QR code is a must on every B2C tax invoice; this QR code must have all the necessary data required for quick verification and to optimize the audit proficiency
  4. E-Storage: All the invoices are required to be stored electronically with full security for audit and inspections. These e-invoices must also be archived as per the compliance guidelines.

Along with all these essential requirements, Phase 1 gave businesses the flexibility by not enforcing integration with ZATCA systems, real-time reporting, or Cryptographic stamping. All the VAT-Registered businesses in KSA were required to adhere to phase 1 regulations from Dec 2021, despite their business scope and size. This phase made all the businesses ready digitally before the initiation of phase 2; any company that failed to stay compliant was exposed to financial penalties, official warnings, and strict scrutiny. This motivated the businesses to prepare their teams, upgrade their systems, and hire professionals to look after the basic e-invoicing obligation before phase 2.

ZATCA Phase 2 – The Integration Phase

ZATCA phase 2, which is the integration phase initiated on 1st January 2023 and implemented in waves to streamline the entire procedure. The goal behind it was to directly introduce system-to-system integration with ZATCA using the real-time invoice clearance and reporting systems. Phase 2 was a major transition from internal digital invoicing to e-invoicing, which was validated by the government. Phase 2 came with a goal to optimize the tax compliance by elevating transparency, reducing fraudulent activities like fake invoicing, enabling the real time reporting, and overall innovating the Saudi Taxation systems.  The core requirements mandated by phase 2 included:

  1. Merging of Systems with ZATCA: Businesses were required to merge their invoicing system with their ZATCA platforms by using the verified APIs, which allowed them to validate and report the invoices in real time.
  2. Reporting Structures: All the B2B invoices needed to be legally cleared in real time with ZATCA before they were shared with the customers. While B2C invoices were required to be reported to ZATCA in real time or near real time.
  3. XML Invoice Format: Invoices are required to be generated through the UBL-based XML format that is readable by the machine
  4. Cryptographic Requirements: For advanced security requirements, cryptographic stamps, invoice hash, e-signatures, and Universally Unique Identifier (UUID) are necessary. These measures not only verified authenticity but also guarded from tampering.
  5. Tamper-Proof Storage: All the invoices must be guarded from any alteration to make sure that everything is controlled and clear throughout the period of statutory retention.

Since the Phase was rolled out in phases, it gave time to prepare and reduce disruptions. Each wave was divided as per the annual taxable profits of businesses registered for VAT. These phases also came with an implementation notice and deadline, and businesses were legally notified about everything.

Additionally, entities that issued the tax invoices or third-party invoices were also listed for phase 2 compliance. Failure to comply with all obligations exposes companies to severe capital fines, rejection of invoices, disruption of operations, and damage to credibility.

ZATCA phases 1 and 2

How Businesses Can Prepare for ZATCA Compliance

Many companies find it hard to keep up with the e-invoicing standards set by the ZATCA, as they mostly lack skilled teams, upgraded tools, and even resistance from the workforce to evolve. But staying compliant is highly critical to operate legally safely in KSA. To stay fully prepared for ZATCA e-invoicing compliance, it is essential to:

  • Completely analyze the ongoing invoicing systems
  • Upgrade any legacy or outdated systems and tools with ZATCA-compliant software
  • Implement controls and thoroughly conduct internal audits.
  • Train your teams and stay informed with the latest changes implemented by ZATCA
  • Hire experienced accounting advisory and technology advisors to ease the process

Staying compliant is essential not just to keep your business protected from legal queries but also to keep track of your invoices, improve your cash flow management, and keep an eco-friendly business by reducing paper waste. International investors also rely on compliant businesses and ESG focused.

Role of SS&CO Professional Advisors in ZATCA Compliance

SS&CO is one of the top-tier accounting firms in KSA, preferred by regional and international businesses for its tax advisory services. With years of regional expertise and understanding of global best practices, SSCOKSA professionals facilitate the businesses in:

  • Interpret the ZATCA e-invoicing regulations in your current systems
  • Execute e-invoicing systems that are fully compliant with ZATCA
  • Supervise and manage the complete phase 2 integration
  • Representing in front of tax authorities on Company’s behalf to avoid disruptions
  • Dedicated round-the-clock support for prompt management of queries

If you’re feeling stuck or unsure about the integration process, you don’t need to figure it all out alone. Our team of experts is committed to making your invoicing experience as straightforward as possible. With our robust solutions, we aim to simplify your invoicing processes and elevate proficiency, leaving you free to focus on the critical areas of your business.

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FAQ,s

The traditional invoices follow a typical paper-based format; for tools like Word and Excel, however, the formats for invoices used are XML, which are readable by machines. These invoices are synced in real time with ZATCA for prompt verification and compliance.
The e-invoicing requirements in KSA include: cryptographic stamping, XML formats, real-time integration with ZATCA, and staying compliant with the added invoice fields as per ZATCA guidelines. These invoices must also be stored for at least 5 years for transparency in audits and legal questioning.
Yes, the phase impacts the POS systems; businesses running the outdated systems, therefore, must upgrade their PoS systems to align them with the requirements of e-invoicing. This should be done before the e-invoicing implementation to protect from any complexities in the process.
In Saudi Arabia, Invoices must be in Arabia language, which is the primary language. However, English can be added as a secondary choice for the understanding of international customers and businesses. Arabic must always be present.
Yes, it does, but in a positive way, as it helps to keep you track of your finances, which fosters clarity, and it also helps you to automate your invoicing process, which is less prone to errors and also more secure. These overall impact a business’s efficiency, productivity, and credibility.
No, it’s not necessary to onboard an external professional if the internal teams are competent enough. However, the entire process can be too intricate to handle and demands complete understanding. Therefore, hiring a professional accounting firm in Saudi Arabia, like SS&CO, can be highly beneficial. It not only guards you from penalties but also elevates your reputation.