The legislation has been criticised as unfairly targeting groups critical of Israel's government.
Described by its proponents as a "transparency bill", Israeli politicians have adopted legislation obliging Non-Government Organisations to provide details of the donations they've received if most comes from organisations based outside the country.
This applies to organisations such as the European Union and foreign governments.
Members of Israel's parliament, the Knesset, passed the bill 57 to 48.
Justice Minister Ayelet Shaked says the law will prevent foreign interference in Israeli matters.
"I think it's the right of the public to know if a specific country or state wants to fund an NGO more than 50 per cent. In Israel in general we are not interfering in other countries or the politics of other countries, and I expect that countries will respect Israel and will try to influence on Israel in a diplomatic path, and not by funding millions of dollars or euros to NGOs that usually try to promote their views."
The United States and the EU have both raised questions over the new legislation, with many saying it discriminates against rights groups and organisations who speak out against the country's government.
They say groups which oppose Israel's policies towards the Palestinians will be particularly affected.
The law will not affect private funds from overseas donors.
Israeli-Arab MP Ahmad Tibi says it's really designed to silence dissenting voices.
"It's far from transparency, it's anti-democratic, it's strangulation of the left. Mainly they are targeting specific communities and associations. We are talking about B'Tselem, talking about Adalah, keeping the silence. They are acting in a fascist way exactly as what is done in the third world. People should be free in order to act and to resist and to be opposed to the government."
Deputy speaker Hilik Bar, has questioned why the piece of legislation appears to be aimed solely at left-wing groups, and hinted at a deeper motive.
"This is a bill that is a very wrong bill meant to chase specific NGOs that allegedly help the left. It's not right. The right wing has a lot of NGOs that help them. There is a lot of money in the right wing that is going to the prime minister and others. If we want to make a bill that will inspect NGOs we should do it a general bill - we should work on it."
Around 70 NGOs registered in Israel are focused on the ongoing Israel-Palestinian conflict, and receive funds from either the EU or governments such as Sweden, Belgium and Norway.