Brussels sent a letter of formal notice to Hungary on Thursday for failing to lift restrictions over the funding of NGOs.
Budapest now has two months to reply to the European Commission and may face a fine.
The letter comes seven months after Hungary was found guilty by the European Court of Justice (ECJ) of breaking EU law by putting limits on the amount of foreign funding NGOs operating in the country can receive.
The law, passed by the government of Prime Minister Viktor Orban in 2017, restricted foreign donations to €22,000 annually with NGOs also required to list foreign sponsors giving more than €1,400 per year.
The government said the measure was intended to counter money laundering or the financing of terrorism and that it would show which groups get funding from the Open Society Foundations set up by Hungarian-American billionaire George Soros, whom Orban repeatedly claims seeks to influence Hungarian policies and the country’s elections.
But the ECJ said that "Hungary has introduced discriminatory and unjustified restrictions on foreign donations to civil society organisations, in breach of its obligations" under the EU's governing treaties.
The Commission stressed in its statement on Thursday that "judgements of the European Court of Justice are immediately binding on the Member State concerned".
"The Commission considers that Hungary has not taken the necessary measures to comply with the judgement, despite repeated calls from the Commission to do so as a matter of urgency."
"Hungary has two months to reply to the concerns raised by the Commission. Otherwise, the Commission may decide to refer the case back to the Court of Justice of the EU with proposed financial sanctions," it added.
Vera Jourova, the Commission's Vice-President for Values and Transparency, wrote in a tweet; "We must take a firm step to ensure compliance with this judgement. Civil society organisations are [a] key part of our democracies. We must support them, not fight them."
NOS including Amnesty International, the Hungarian Helsinki Committee, Liberties and the Hungarian Civil Liberties Union has called on the government to repeal the law and said in a letter to the Commission in December that the Tempus Public Foundation — an NGO set up by the government — is "preventing Hungarian NGOs from accessing EU funding, citing the infringing law."
The government communications offices said on Thursday that "the Hungarian government will perform all necessary measures to comply with the judgment of the European Court of Justice."
"To that effect, there are currently ongoing negotiations between the European Commission and the Hungarian government based on the principle of sincere cooperation," the statement said.