Goods from Israeli settlements that are sent to Europe must now be labelled as being produced in the 'territory of origin'.
The ruling by the European Court of Justice said the labels could no longer imply that goods produced came from Israel itself.
In the ruling, the court referred to all territory Israel captured in the 1967 war. This includes East Jerusalem and the Golan Heights, both of which Israel has annexed - as well as the West Bank.
They say the settlements violate the rules of general international humanitarian law and mislead consumers, whilst denying them access to "ethical considerations and considerations relating to the observance of international law."
"The European Union's position on Israeli settlement policy in the occupied Palestinian territory is clear and remains unchanged: all settlement activity is illegal under international law and it erodes the viability of the two-state solution and the prospects for a lasting peace," said a spokesperson from the EU in August of this year.
The products affected are wine, fruit and vegetables.
Palestinians argue that settlements on occupied land are an unlawful violation of the Geneva conventions and multiple U.N. resolutions. Israel denies that its settlements break international law.
The move has been hailed by Palestinians, but condemned by Israelis who are now attempting to prevent its implementation.
Our Brussels-based correspondent Shona Murray has more on the story in the player above