Under the planned toll, those driving on German motorways would have been charged an annual fee of up to 130 euros, but those with cars registered in Germany would have been given a corresponding reduction in motor vehicle tax.
The European Court of Justice has ruled that a planned German highway toll for cars discriminates against foreign drivers and breaches EU law.
The court backed a claim brought by Austria and supported by the Netherlands, which said the levy of up to 130 euros unfairly penalised drivers from other EU countries.
The toll would have applied to all motorists, but German drivers would have got a refund.
The ruling means Berlin cannot introduce the autobahn (motorway) toll for passenger cars in its current form. It was due to start in October 2020.
Austrian drivers, in particular, would have felt the pinch because the fastest east-west route across their mountainous country involves a shortcut through the "German corner".
Austria has a similar highway toll - but without the tax break - which can irritate Germans who flock to Austria on holiday or cross its narrow western section en route to Italy.
"I believe this ruling of the ECJ really is a good day for the European Union ... and that it is also a sign, a clear signal, in favour of fairness," said Austrian Transport Minister, Andreas Reichhardt.
Germany, supported by Denmark, had argued the charge was in line with EU transport policy and the principle that users and polluters should pay the cost of the highway network.
The court said the toll scheme did not meet this goal. For example, drivers in Germany did not have the opportunity to pay for less than the full year even if they rarely drove on highways.
Euronews correspondent, Jona Kallegren says no party in Germany really wanted this policy - other than the Bavarian Christian Social Union party.
Click on the video player above to watch his report.