Israeli goods produced in West Bank settlements are not eligible for customs benefits in the European Union, stated an advocate general of the European Court of Justice last week.

Israel and the EU have a free-trade agreement that gives Israeli exports substantial customs breaks.

The advocate general's non-binding opinion, if followed, could mean that goods produced in the territories may be saddled with full customs duties.

The opinion, submitted in a case in Germany brought by water purification firm Brita in 2002, could serve as a precedent in the EU. The company was ordered to pay 19,155 euros in customs for equipment it imported from the Israeli firm Soda Club, whose factory is in the West Bank.

German customs authorities asked Israeli authorities whether the goods were produced in the territories, and when no answer was received, Brita was ordered to pay customs duties.

Brita then appealed the decision to the German court system, and the Finance Court in Hamburg requested advice on the matter from European Union legal authorities.

In the past, EU authorities have ruled that the Golan Heights and East Jerusalem are also part of the "occupied territories," but in this case, the advocate general said his opinion referred only to the West Bank and Gaza.

Currently, for goods from the territories to receive customs breaks, they must bear a certificate issued by the Palestinian Authority.

The disagreement with the EU over Israeli exports from the territories has been going on for a long time. At one point, the EU threatened sanctions against all Israeli exports if an agreement was not reached. However, Israel refused to label or otherwise differentiate products from the settlements.

Five years ago, Israel and the EU agreed that all exports would be labeled with the place of manufacture, or the factory's zip code, and the EU customs authorities would then decide whether to levy customs.

Israeli exports to the EU totalled $17.8 million in 2008, of which only a tiny fraction were from the territories. However, Der Spiegel recently reported that a third of Israeli exports to Europe are made in part or in full in the territories.