ZATCA E-Invoicing in Saudi Arabia: How to Keep Your Business Ready

Is your business ready for ZATCA’s E-Invoicing requirements? Failure to comply with these regulations could result in hefty penalties that could disrupt your business. But don’t worry—we’re here to guide you through every step of the process to ensure you’re ready. 

As a business owner or CFO in Saudi Arabia, you’re likely familiar with the e-invoicing mandate introduced by the Zakat, Tax, and Customs Authority (ZATCA). This initiative, known as Fatoora, aims to digitize and modernize invoicing processes. 

The implementation began with Phase I in December 2021, requiring businesses to generate and store invoices electronically in structured formats like XML or JSON. In Phase II, introduced in January 2023, businesses are required to integrate their invoicing systems with ZATCA’s platform for real-time validation. Phase II is being rolled out in waves, starting with larger companies and gradually expanding to include smaller businesses and SMEs.

With deadlines fast approaching, it’s important to get your business ready—not just to avoid fines but also to improve your invoicing process.

Here, we’ll cover everything you need to know about ZATCA e-invoicing to help you stay compliant and penalty-free.

What is ZATCA E-Invoicing?

E-invoicing refers to the electronic generation, exchange, and storage of invoices, replacing traditional paper-based systems with a digital process. In Saudi Arabia, this change is part of a broader taxation framework introduced in 2018 with the implementation of Value-Added Tax (VAT) to improve transparency and streamline tax collection.

The process began with Phase I in December 2021, requiring VAT-registered businesses to generate and store invoices electronically in structured formats like XML or JSON. This ensured greater accuracy and compliance.

The rollout advanced further with Phase II, starting on January 1, 2023. In this phase, businesses must integrate their invoicing systems with ZATCA’s platform for real-time transaction tracking and verification. This phased approach aims to reduce tax evasion, improve efficiency, and modernize how businesses operate in the Kingdom.

While e-invoicing is used globally, Saudi Arabia’s system brings significant changes for businesses, focusing on compliance, efficiency, and reliability. If your business is VAT-registered, issuing and storing invoices electronically is mandatory.

Before diving into the technicalities of e-invoicing, let's take a look at why it’s so important for businesses in Saudi Arabia.

Why is E-Invoicing Important for Saudi Businesses?

E-invoicing offers more than just compliance with ZATCA’s regulations. It brings several operational, financial, and environmental benefits to help your business thrive in today’s digital landscape. Here are some key advantages:

1. Improved Tax Compliance: Digitally recorded invoices allow the Saudi tax authority to track transactions more easily, reducing the likelihood of discrepancies and fraud.
2. Operational efficiency: Automating the invoicing process reduces manual errors and saves time. Businesses can also improve their record-keeping and data management, making audits and tax filings much simpler.
3. Cost savings: Although there might be initial investment costs, businesses can save on expenses related to paper, printing, storage, and physical delivery of invoices.
4. Environmental impact: E-invoicing supports the Kingdom's sustainability efforts by reducing paper waste and promoting digital business practices.
5. Enhanced cash flow management: E-invoices are easier to manage and track, which can help businesses monitor their cash flow in real-time.

Before diving into e-invoicing, you need to determine whether your business is required to register for VAT.

How Do You Know Your Business Needs to Register for VAT?

ZATCA sets clear thresholds for VAT registration based on taxable revenue. Here's how you can determine whether your business needs to register for VAT:

• If your business's annual taxable revenue exceeds SAR 375,000, VAT registration is mandatory, which automatically means compliance with ZATCA's e-invoicing guidelines.
• If your taxable revenue is between SAR 187,500 and SAR 375,000, you can choose to register voluntarily and will need to comply with e-invoicing if you do.
• If your taxable revenue is below SAR 187,500, you are not required to register or comply with e-invoicing, unless you choose voluntary registration.

Next, let’s take a look at who needs to comply with ZATCA e-invoicing and who might be exempt.

Who Needs to Comply with ZATCA's E-Invoicing Regulations?

Under the ZATCA e-invoicing regulations, most VAT-registered businesses are required to comply with the new e-invoicing system. However, there are certain exemptions and obligations to be aware of.

Mandatory Compliance

If your business is registered for VAT in Saudi Arabia, you are obligated to comply with ZATCA’s e-invoicing regulations. This applies to all taxable (VAT-registered) entities, including:

• Startups
• Small and medium-sized enterprises (SMEs)
• Large corporations

All businesses involved in VAT-taxable transactions must issue electronic invoices for their taxable sales.

Exemptions from E-Invoicing Compliance

While the regulations apply broadly, there are specific exemptions that may apply to certain entities. These include:

• Businesses with Low Taxable Revenue: If your annual taxable revenue is below the specified threshold, you may be exempt from e-invoicing. Check the latest ZATCA guidelines or consult a tax advisor for more details.
• Non-VAT-Registered Entities: Businesses that are not VAT-registered are usually exempt from e-invoicing requirements. However, it's important to check for any updates from ZATCA, as certain non-VAT-registered businesses might still need to comply in specific cases.
• Certain Governmental Entities: Some government bodies or entities may have specific rules or alternative compliance methods. These entities should consult ZATCA for detailed guidance.
• Businesses in Special Cases: ZATCA may offer exemptions for specific industries or businesses under particular conditions. These exceptions may depend on the nature of the business or specific regulatory decisions made by the tax authority.

Now, let’s explore the deadlines and phases for implementing e-invoicing. 

Deadlines and Phases for E-Invoicing Implementation

ZATCA has implemented the e-invoicing rollout in two phases:

Phase 1: Generation and Storage (Effective December 4, 2021)

In this phase, businesses are required to generate and store invoices electronically using compliant solutions. The invoices must include all necessary details, such as the buyer’s name, VAT number, issue date, total amount, and other relevant data, formatted in structured formats like XML or JSON.

Phase 2: Integration with ZATCA’s System (January 2023 and onwards)

Phase 2, known as the Integration phase, is being implemented in waves targeting specific taxpayer groups. During this phase, businesses must integrate their invoicing systems with ZATCA’s platform for real-time invoice transmission and validation. All e-invoices are required to be sent directly to ZATCA for approval before reaching the recipient.

Implementation Waves in Phase 2
Phase 2 is being rolled out in waves, with businesses grouped based on specific criteria:

• Wave 1: Taxpayers with revenues exceeding 3 billion SAR started integration on January 1, 2023.
• Wave 2: Taxpayers with revenues exceeding 500 million SAR began integration on July 1, 2023.

Subsequent waves will follow, and ZATCA provides businesses with at least six months' notice to prepare for their deadlines. If your business hasn’t yet integrated, stay alert for ZATCA notifications about your compliance wave. Missing deadlines can result in fines, penalties, and operational issues.

Important Note: ZATCA’s deadlines and rollout schedules are subject to change. Regularly check for updates to stay informed about the latest regulatory requirements and your specific compliance timeline.

Now that you know who is exempt, it’s also crucial to understand the consequences of non-compliance.

What Happens If You Don’t Comply with E-Invoicing?

Failure to comply with ZATCA’s e-invoicing regulations can lead to significant consequences, including:

• Fines: Businesses that do not comply with the regulations may face huge fines, which can be levied per instance of non-compliance.
• Audit Risk: Non-compliant businesses may attract audits from ZATCA, which can be time-consuming and disruptive to business operations.
• Reputation Damage: Failure to comply with regulatory standards can damage your company’s reputation, particularly in a region like Saudi Arabia, where regulatory compliance is taken seriously.

To fully comply with ZATCA’s regulations, it’s important to understand the key features of the e-invoicing system. 

What Are the Key Features of ZATCA E-Invoicing?

ZATCA’s e-invoicing system includes key features designed to improve tax compliance and streamline invoicing. Here are the main features:

• QR Codes: Every e-invoice must include a QR code that contains essential transaction details, such as the invoice number, date, and VAT information.
• Real-time Integration with ZATCA: Invoices must be submitted electronically to ZATCA’s system for validation before they are issued to the customer. This ensures that each transaction is verified in real-time.
• Audit Trail: ZATCA’s system facilitates the tracking and validation of transactions. However, businesses are required to maintain their own comprehensive audit trails for all financial documents, including invoices, credit notes, and debit notes, to ensure compliance and simplify audit processes.
• Secure Transmission: All e-invoices must be transmitted electronically, ensuring secure, tamper-proof records.

To help you get prepared, let’s first look at the two types of e-invoices you’ll need to use.

Types of E-Invoices Under ZATCA

Under ZATCA's e-invoicing regulations, businesses must use two main types of invoices for VAT transactions: 

Type 1: Standard Tax Invoice

The Standard Tax Invoice is the most commonly used type for business transactions and is required for most VAT-registered businesses. It includes detailed information such as the seller’s and buyer’s tax IDs, item descriptions, VAT amounts, and total transaction value.

The Standard Tax Invoice must be transmitted electronically to ZATCA’s portal for validation before being issued to the customer. Make sure your invoicing system supports this format to ensure compliance. Here’s an example:

Image Source: Cordius

Type 2: Simplified Tax Invoice

For smaller transactions, businesses—primarily those engaging in B2C transactions like supermarkets, retail shops, and cafes—may issue a Simplified Tax Invoice. This invoice type has fewer requirements but still includes the VAT amount and basic transaction details. Although simpler, it must still meet ZATCA’s e-invoicing format and transmission rules

Both types of invoices must be electronically submitted to ZATCA’s system for validation before being sent to the customer. For detailed information on ZATCA regulations, refer to the official website. 

Now that you understand the different invoice types, let's focus on how to prepare your business for ZATCA’s e-invoicing system.

How To Prepare For E-Invoicing In Saudi Arabia?

The transition to e-invoicing requires careful planning. Follow these key steps to ensure your business stays compliant with ZATCA’s regulations:

Step 1: Assess Your Current Invoicing System

Before you can comply with e-invoicing requirements, you must first assess your current invoicing system. Is your invoicing process manual or automated? Does it generate electronic invoices in a format that can easily integrate with ZATCA’s platform?

Step 2: Understand ZATCA’s E-Invoicing Requirements

Once you’ve assessed your current invoicing system, you need to familiarize yourself with ZATCA’s technical requirements for e-invoicing.

1. Invoice Format: Use XML or JSON formats to ensure compatibility with ZATCA’s system.
2. Language: E-invoices must be generated in Arabic or English. You may need to update your invoicing system to support these languages.
3. Electronic Signatures: ZATCA requires electronic signatures on invoices for validation.
4. Integration with ZATCA’s Portal: In Phase 2, your system will need to integrate with ZATCA’s platform for real-time invoice validation via API.

Step 3: Choose a Suitable E-Invoicing Solution

Next, depending on the scale of your business and your industry, you may need to choose an e-invoicing solution that suits your needs. Several software providers offer solutions that can help you comply with ZATCA’s e-invoicing requirements. Ensure that it meets the following criteria:

• Compatibility with ZATCA’s platform
• Easy integration with your existing accounting and ERP systems
• Strong security features to protect sensitive data
• Reasonable cost and maintenance fees

For many businesses, partnering with a trusted ERP provider like HAL Software can be an ideal solution. HAL ERP’s integrated modules support e-invoicing compliance, ensuring your business is ready for both Phase 1 and Phase 2 of ZATCA’s mandate.

Step 4: Train Your Team

E-invoicing requires a change in mindset and how invoices are handled internally. Prepare your finance, accounting, and IT teams to handle the new e-invoicing system. Offer training and workshops to ensure everyone understands the new processes, including how to create, submit, and manage e-invoices.

Step 5: Integrate Your Systems with ZATCA

Once you have the right e-invoicing solution in place, the next step is to integrate your system with the ZATCA platform. This integration will allow your business to transmit invoices directly to ZATCA’s system for real-time validation. Work closely with your IT team and software provider to ensure a smooth integration process.

Step 6: Conduct Testing

Before fully launching your e-invoicing system, it’s important to conduct thorough testing. Make sure everything works correctly and is fully integrated with ZATCA’s platform. Here’s how to do it:

• Test compatibility with your existing software and systems (e.g., ERP or accounting systems).
• Validate VAT amounts and other critical data on e-invoices
• Run test transactions to ensure the system works properly with ZATCA’s platform
• Submit test invoices to ZATCA for real-time validation to confirm the system is working properly

During testing, address any issues discovered to avoid complications once you go live.

Step 7: Stay Updated on ZATCA Requirements

The e-invoicing regulations are subject to change, and ZATCA may update its requirements as the system evolves. Regularly check for changes to ensure your invoicing system remains compliant.

Step 8: Ensure Compliance with VAT Regulations

In addition to e-invoicing, ensure your business is fully compliant with Saudi Arabia’s VAT regulations. Verify that VAT rates are applied correctly and that VAT returns are submitted on time to avoid penalties.

As with any major change, the shift to e-invoicing comes with its challenges. Let’s explore them. 

Common Challenges and How to Overcome Them

Here are some common obstacles you may face and how to overcome them:

• Technical Difficulties: Integration with ZATCA’s platform may present technical challenges, especially for businesses with complex systems or legacy software.

Solution: Work closely with your IT team and software provider to ensure smooth integration. Consider hiring external experts if necessary.

• Resistance to Change: Employees may be hesitant to adopt the new e-invoicing system, particularly if they are accustomed to traditional paper methods.

Solution: Provide comprehensive training and clear communication on the benefits of e-invoicing to ease the transition.

• Data Security Concerns: With digital invoicing, data security is a key concern for many businesses.

Solution: Choose a secure e-invoicing solution that complies with international data protection standards and ZATCA’s security requirements.

To avoid these problems, choose an e-invoicing system that integrates well with your existing software. HAL system is designed for easy integration, reducing the risk of disruption to your business processes. Let’s see a real-world example of a company that leveraged HAL. 

Al Haram Retail: Simplifying E-Invoicing Compliance

Al Haram, a major retail chain in Saudi Arabia, needed a solution to comply with ZATCA’s e-invoicing regulations. Their legacy system wasn’t compatible with ZATCA’s platform, making the transition difficult.

Solution: 

By adopting HAL ERP, Al Haram quickly adopted the new e-invoicing system, ensuring they met all ZATCA requirements. For more details, read the full case study.  

Results: 

• Successfully met e-invoicing regulations
• Automated invoicing reduces errors
• Adapted to both small and large transactions

You, too, can make the transition with ease—HAL ERP simplifies the entire e-invoicing process, ensuring full compliance with ZATCA’s regulations and helping you avoid any potential penalties.

Why Choose HAL ERP for E-Invoicing?

HAL is a ZATCA-approved smart accounting software that makes e-invoicing effortless. You can easily stay VAT-compliant and generate paperless e-invoices to efficiently manage your business while adhering to all the latest guidelines. With HAL ERP, your business can:

• Generate Compliant Invoices: Automatically create invoices in the required XML or PDF/A-3 formats.
• Direct Integration with ZATCA: Seamlessly submit invoices for validation and approval through ZATCA’s platform.
• Enhanced Security: Ensure that your invoices are secure, tamper-proof, and digitally signed
• Simplified Invoice Tracking: Track invoice status post-submission with automatic updates.
• Tax Compliance: Verify customer VAT status and manage tax calculations automatically.
• Easy Integration: HAL ERP integrates with your existing platforms and tools, minimizing disruption and enhancing workflow.

Want to see how it works? Watch this video to learn more about HAL ERP integration with the Fatoora portal.

If you’re ready to get started, Book a free demo today and see how we can make your invoicing process smoother and more efficient.