The ruling on Thursday by the EU court in Luxembourg stems from a case brought by the German drinks company Brita.
It imports products from an Israeli company based in Mishor Adumin in the (occupied)West Bank and was refused preferential trade treatment by the German customs authorities.
On appeal, a German court asked the European Court of Justice for its decision.
European Court of Justice rulings are binding on member states. The decision reflects what has been the general policy of the EU on the issue.
"The Court notes in this respect that, under the EC-Israel Agreement, the Israeli authorities are obliged to provide sufficient information to enable the real origin of products to be determined."
I am a bit torn, I realize that the Palestinians desperately need these jobs. I also realize the Israeli companies exploit Palestinians for their cheap labour.
Palestinians have long argued that Israeli goods made in settlements should not receive trade privileges, as settlements are not part of Israel.
Pro-Palestinian campaigners have also regularly protested that European supermarkets stock goods with Israeli labels on farm products from the West Bank.
Despite a specific request from the German authorities, the Israeli authorities did not reply to the question whether the products had been manufactured in Israeli-occupied settlements in Palestinian territory.
Israel has yet to formally comment on the court ruling.