The court has ordered Warsaw to comply with a previous ruling that said the country's disciplinary chamber of judges must be dismantled.
Poland must pay daily fines of €1 million over its controversial judiciary reforms, the European Union's Court of Justice (ECJ) has ruled.
The penalty is believed to be the highest ever imposed on a member state.
The punitive measures will be in place until Warsaw agrees to comply with an ECJ ruling issued back in July that ordered the immediate suspension of the disciplinary chamber of judges of the Supreme Court and the reversal of the decisions it had already taken on the lifting of judicial immunity. The chamber can punish magistrates according to the content of their resolutions.
Brussels believes the controversial chamber is a threat to the country's judicial independence because it makes judges subject to political control.
Warsaw, however, insists it's an essential tool to eliminate the remains of the communist regime.
After repeated calls on Poland to comply with the July ruling were ignored, Brussels asked the ECJ to impose daily fines - the last and most radical step of its legal action.
The sanctions will be deducted from the EU funds that Poland periodically receives. The country is by far the biggest recipient of EU funds, having received more than €18 billion in 2020.
In Wednesday's ruling, the ECJ notes that Poland has not made the necessary changes to its legal order to deprive the disciplinary chamber of its powers, meaning it continues to function.
The dismantling is necessary "to avoid serious and irreparable harm to the legal order of the European Union and, consequently, to the rights which individuals derive from EU law and the values on which that Union is founded, in particular, that of the rule of law," the ECJ's vice-president wrote.
The vice-president added that Poland's "expressed intention to adopt, within a year, a series of measures intended to reform the Polish judicial system" is not enough to prevent the damage now.
Reacting to the ECJ's ruling, Piotr Müller, spokesperson of the Polish government, said regulating the judiciary was the "exclusive competence of member states".
"The way of punishments and blackmail towards our country is not the right way. This is not a model in which the European Union should function - a union of sovereign states," he wrote on Twitter.
Didier Reynders, European Commissioner for justice, welcomed the news without further elaborating.
Daniel Freund, a German MEP who sits with the Greens and is a prominent critic of the current Polish government, said there was a "very serious rule of law crisis" inside Poland.
"It's good now that the ECJ has ruled that this will now cost the Polish government real money every day. It's not an overly strong reaction, this is a very normal procedure if ECJ rulings are ignored," Freund told Euronews.
The sanctions come at an extremely fraught moment in the relations between Warsaw and Brussels.
Earlier this month, the Polish Constitutional Court issued a verdict defying the primacy of EU law inside the country, a legal principle established in 1964, long before the country joined the bloc.
In a majority ruling, the tribunal openly rejected two key articles of the EU treaties: Article 1, which establishes the conferral of competencies from member states to the institutions, and Article 19, which sets up the EU's Court of Justice. The judges said these provisions were incompatible with the Polish constitution, an unprecedented conclusion in the bloc's history.
The judgement sent shockwaves across the continent, with many calling on the Commission to take decisive action and reassert EU law primacy. The executive has promised a firm response but is still assessing its next steps. The daily fines might influence the Commission's course of action.
Although Poland no longer recognises the ECJ's absolute authority, Brussels will ensure compliance with the new ruling by subtracting €1 million per day from the funds allocated to Poland under the bloc's multi-annual budget.
Poland is already subject to another raft of daily fines: in late September, the ECJ ordered Warsaw to pay €500,000-a-day over its failure to close a coal mine on the Polish-Czech border. Prague had previously filed an injunction saying the Turow open-cast lignite mine drains groundwater away from surrounding areas.
Making matters more complicated for the Polish treasury, the Commission is still withholding Poland's €36-billion COVID recovery fund. The executive has been trying to push Warsaw into agreeing to certain judicial reforms as a condition to release the coronavirus package but, after months of behind-the-scenes negotiations, no breakthrough has been announced.
At the same time, the European Parliament is asking the Commission to activate a new conditionality mechanism that can completely freeze EU funds to countries suspected of breaching the bloc's laws and values. The executive said it is willing to trigger the instrument but will wait until a pending legal case before the ECJ is resolved in order to have total legal certainty.
'Poland will not be intimidated'
October has seen relations between Brussels and Warsaw plummet to a historic low.
Last week, during a tense plenary session in Strasbourg, Polish Prime Minister Mateusz Morawiecki said threats of financial penalties – under the proposed conditionality mechanism – amounted to "blackmail", "hazing" and "coercion".
"We say yes to European universalism and no to European centralism," he said. "Poland will not be intimidated".
Days later, during a two-day EU summit in Brussels, leaders agreed to maintain political dialogue to resolve the legal row, while keeping on the table the possibility of using other existing tools. The anger was palpable among several heads of government, who urged Poland to abide by the same rules and legal principles as any of the other members of the European Union do.
"I do believe Poland has gone too far," said Irish Prime Minister Micheál Martin.
At the end of the summit, European Commission President Ursula von der Leyen stressed that Warsaw has to comply with the ECJ verdict that ordered the dismantling of the disciplinary chamber and re-institute all the judges who have been unlawfully removed.
"We have a long road ahead of us," she said in a press conference.
"This road is a combination of dialogue, legal response and concrete action to restore the independence of the judiciary."