For businesses that are operating in Saudi Arabia, e-Invoicing isn’t new anymore. It has moved from being good-to-have to a clear regulatory requirement and is no longer a choice or future initiative.

However, most businesses in Saudi Arabia have already adopted it smoothly, while others are still figuring out the difference between Phase 1 and Phase 2.

And if you’re here, then you must be looking for that clarity. So, for you, we’ll keep it simple, just a straight-up understanding of what ZATCA is asking businesses to do and what each phase actually means, and what they have to do with accounting software.

Now read carefully, because getting it wrong doesn’t just affect your compliance. It hits your business flow, technology setup, and eventually, your revenue.

What Is E-Invoicing in Saudi Arabia?

At the core, e-Invoicing is the process of converting traditional paper or PDF invoices into a structured electronic format that can be read, validated, and stored by both the business and the government.

The Zakat, Tax, and Customs Authority (ZATCA) has defined very specific rules around what a compliant e-invoice must look like. These rules touch everything from the format of the invoice to the way it's generated, transmitted, and stored. The ultimate reason behind it is to crack down on fake invoicing and push digitization across the Kingdom.

ZATCA informed it in two major phases:

• Phase 1: Generation Phase

• Phase 2: Integration Phase

Phase 1 of E-Invoicing in Saudi Arabia: Generation Phase

What is Phase 1?

Phase 1 is basically the starting point. ZATCA made it mandatory for VAT-registered businesses in Saudi Arabia to stop issuing handwritten or unstructured invoices. Instead, every business must now use electronic invoicing solutions that generate tax-compliant invoices.

But here's the deal: you're not yet connected to ZATCA’s system during this phase.

You create the invoice and follow their structure. But you're still operating within your own accounting system, which means no real-time validations and no submissions.

When Did Phase 1 Begin?

The Generation Phase officially went live on December 4, 2021. As per this phase, all eligible businesses were expected to stop manual invoicing and start using e-invoicing solutions aligned with ZATCA’s guidelines after this date.

What’s Required in Phase 1?

If you are a VAT-registered business in Saudi Arabia, then you must:

• Use a compliant e-Invoicing system togenerate invoices electronically.

• Invoices must follow a structured electronic format like XML or PDF/A-3 with embedded XML.

• Include mandatory fields; each invoice must include specific data points, like buyer and seller VAT numbers, timestamps, and VAT details.

• B2C invoices (Simplified Tax Invoices) must include a QR code, which customers can scan and verify.

• Once an invoice is generated, it must remain unchanged without any edits or modifications.

• Remember, handwritten invoices, unstructured PDFs, or Excel-generated bills are out of the picture.

Types of Invoices Covered

• Standard Tax Invoices: Mostly for B2B transactions

• Simplified Tax Invoices: Mostly for B2C transactions

What Changed After Phase 1?

Phase 1 basically forced businesses to adopt e-invoicing software that complied with ZATCA’s standards. But this was still internal; there was no external validation or data sharing.

What is Phase 2?

Well, the technical part comes here. Phase 2 connects your invoicing system directly to ZATCA. Now, every invoice you issue must be shared with ZATCA's digital platform.

You can think of this phase as a full integration between your internal system and the authority’s verification engine. This phase requires system upgrades, stronger security features, and direct API integration.

When Did Phase 2 Start?

Phase 2 began January 1, 2023, but not for everyone at once. ZATCA rolled it out in waves. The timeline depends on your business size and annual turnover.

Here’s the rollout Timeline Highlights:

Wave 1: Turnover more than SAR 3 Billion - from Jan 1, 2023

Wave 2: Turnover more than SAR 500 Million - from July 1, 2023

Wave 3 and beyond: Gradual onboarding based on company size

Each wave gives businesses time to prepare, test, and go live with integration.

Key Requirements in Phase 2

Invoice Clearance for B2B: All Standard Tax Invoices (B2B) must be cleared by ZATCA before being shared with the buyer. The process: You generate the invoice, it goes to ZATCA, gets validated, and stamped. And now you can send it to the customer.

Reporting of Simplified Invoices: For B2C invoices, you don’t need prior clearance, but you must report them to ZATCA within 24 hours of issuance.

System Integration: Your software must communicate with ZATCA’s platform through APIs.

Cryptographic Stamp: Each invoice must be digitally signed using a cryptographic stamp to ensure authenticity.

UID and Hashing: Every invoice requires an Identifier (UID) and hashing of previous invoices to ensure a tamper-proof sequence.

Device Registration: Your e-invoicing solution or device must be registered with ZATCA and whitelisted.

XML Format for All Invoices: While PDF/A-3 is still used for archiving or viewing, XML becomes the central format for system-to-system communication.

Technical Requirements You Can’t Skip

• Integration-ready invoicing and finance software

• Cybersecurity readiness

• Digital certificates for stamping

• Device-level authentication

• ZATCA whitelisting

Basically, Phase 2 turns e-invoicing into a live, verified, and highly regulated process.

How to Get Ready for Phase 2?

Sometimes it’s good to hurry, because the earlier you get onboarded, the smoother the transition will be. Now here’s the checklist most businesses in Saudi Arabia are following:

Choose a ZATCA-Compliant Software: Make sure the solution you’re using is approved and listed by ZATCA. It should be ready for XML handling, cryptographic stamping, API-based submission, and device registration.

Get Your System API-Ready: Phase 2 demands integration. Your accounting software must be able to “talk” to ZATCA. If your tool lacks this, it’s time to migrate.

Train Your Staff: Finance teams, accountants, and IT support should understand what’s changing because Internal knowledge speeds up adoption and reduces downtime.

Stay Updated with Your Timeline: ZATCA is announcing waves regularly. So, keep tabs on when your business is expected to transition to Phase 2.

Now you know that e-invoicing in Saudi Arabia isn’t just another update in your finance workflow. It’s a full system transformation driven by government standards. Phase 1 got everyone through the door, but Phase 2 connects you directly to the regulator.

If your current setup doesn’t support UAE VAT validations, then the shift to Phase 2 will be rough. This is where working with a certified partner like Penieltech can really help you out.

We help businesses in KSA move smoothly into full e-invoicing compliance with:

• ZATCA-ready accounting software

• Seamless data migration

• Local support for training and troubleshooting

• API integration for invoice clearance

If you’re feeling stuck or unsure about the integration process, you don’t need to figure it all out alone.