The Israel Tax Authority said Monday it was imposing a value added tax on local sales by international Internet-based firms, a change that could affect multinational giants like Google, Amazon and Facebook.
Prior to the new directive, a foreign company's income from sales in Israel would be taxed only if the product was produced locally.
But with the "digitalizing" trend of current commerce, the tax authority now says that a foreign company with a "permanent institution" in Israel would be obliged to be registered as a local business and taxed as such – even if its activity is based online.
Israel's standard rate of VAT is 17 percent.
Monday's announcement comes alongside a fresh global impetus to seal tax loopholes, in the wake of the "Panama Papers" scandal which revealed how offshore companies are used to hide wealth.
But it seemed to contradict Israeli Prime Minister Binyamin Netanyahu's declared aim of making his country a business-friendly world tech hub.
A statement from the tax authority said that international companies would have to conduct activities specifically targeting Israeli customers to be liable to the new levy.
Lawmaker Yoav Kish, who was been lobbying for foreign corporations to be taxed at the same rates as local firms, says the new regulation is not the solution.
"The idea of a 'permanent institution' as the criterion is likely to lead to the closure of these corporations' local branches," Kish, a member of Netanyahu's Likud party, said in a statement.
But high-profile social activist Tomer Avital hailed it as a victory.
"The state's coffers will justly receive lots of money," he wrote on his Facebook page.
AFP contributed this report.