Qatari-born Palestinian Omar Barghouti, a leader in the Boycott, Divestment and Sanctions (BDS) movement which advocates a boycott of Israel, was arrested on Monday on suspicion of not reporting USD 700,000 in income over the last decade, a tax authority statement said.
It comes after Israeli authorities refused to renew Barghouti's travel documents last year, effectively meaning he would be unable to travel.
Israeli ministers have said they are considering revoking Barghouti's residency status.
"After the effective travel ban imposed on him proved futile in stopping his human rights work, the Israeli government has resorted to fabricating a case related to Omar's alleged income outside of Israel," a statement said.
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He was due to travel to the United States to receive an award at Yale University, the statement said, but that would no longer be possible.
"No matter what extreme measures of repression Israel wields... It cannot stop this movement for human rights," the statement added.
Israel sees BDS as a strategic threat and accuses it of anti-Semitism -- a claim the group denies.
"The suspect did not report approximately US $700,000 in income between 2007 and 2017; in order to conceal his criminal activity he deposited the income in a bank in Ramallah," it said.
Barghouti is married to an Israeli citizen of Arab descent, entitling him to claim permanent residency but also creating tax obligations.
Israel passed a law earlier this month banning entry to foreigners who support BDS.