The European Court of Human Rights had called for Kavala to be immediately released, but Turkey has dismissed the ruling.
The Council of Europe says it will begin rare disciplinary action against Turkey over the detention of philanthropist Osman Kavala.
The European human rights body had warned Turkey in September that it would launch proceedings if they did not release Kavala.
Last week, a court in Istanbul extended Kavala’s imprisonment, defying the European Court of Human Rights.
The Strasbourg court had ruled that the 64-year-old businessman was unfairly jailed and the Council of Europe had instructed Ankara to immediately release him.
The lengthy infringement proceedings could see Turkey suspended from its voting rights or even membership of the Council of Europe. It will be only the second time the Council of Europe has used this procedure, after Azerbaijan in 2017.
"Turkey is refusing to abide by the court’s final judgment in this case," the council said in a statement on Friday.
Ankara has called on the Council of Europe to respect Turkey’s ongoing legal proceedings involving Kavala.
The Turkish Foreign Ministry said the European organisation should "avoid taking further steps, which would amount to interference in the independent judiciary.”
Kavala has been incarcerated for more than four years without ever having been convicted of a crime.
He is accused of funding nationwide anti-government protests in 2013 and helping to orchestrate the attempted coup in 2016. Turkey insists he is being held based on rulings of its courts.
But international NGOs have condemned his detention as a crackdown on political opponents and a violation of human rights.
After ten western countries called for Kavala's release, Turkey initially expelled a number of diplomats.