"Special rights granted to the German authorities are not acceptable and compatible under basic (EU) treaty provisions like the freedom of capital flows," commission spokesman Oliver Drewes told reporters.
The commission gave Berlin a two-month deadline to respond to concerns about the law and said failure to provide answers would result in the case being transferred back to the European Court of Justice.
Last year, the European Union's top court ruled against a law giving the German state of Lower Saxony, which owns 20 percent of VW's shares, the ability to block company decisions. Normally a blocking minority is only accorded to those owning more than 25
Last week, the German government approved a new draft law that would effectively preserve Lower Saxony's minority blocking position. "Failure by the German authorities to comply with the 2007 judgement could result in fines being applied by the Court of Justice," the commission warned in a statement.
In reaction to the commission's latest move, Lower Saxony remained defiant, with regional premier Christian Wulff describing it as "expected but regrettable."
"In the next eight weeks, it will be a question of proving" that the new law respects the 2007 ruling by the European Court of Justice, Wulff said in a statement.
The commission warned last week when the German government approved the new draft law that it considered the move did not amount to compliance with the court's ruling and warned that new legal action against Berlin could follow. "We don't believe that Germany is implementing and applying this ruling in full even though they have some new legislation on the way," Drewes said on Thursday.
VW is an iconic German industrial group and has been protected from takeovers by an initial VW law since it was privatised in 1960. German luxury sportscar maker Porsche, which wants to increase its 31 percent interest in VW, has also been leading a legal campaign of its own against the law.
Porsche, which was unable to reach an accord with Lower Saxony at a VW general assembly in April, has asked a northern German court to reject the state's blocking minority power.
The sportscar maker, which intends to take full control of VW at some point in the future, said that as far as it was concerned the case was closed and the law should be scrapped.
"We have already said all there is to say on the subject," a Porsche spokesman told AFP on Thursday. "The VW law is not needed. The European Commission has confirmed with this procedure our conception of law."
The German justice ministry, which drafted the new law, said the commission's move "was not extraordinary" because it reproached Germany for failing to respect the court ruling - but not for having drafted a new law. "We have two months and within that time will inform the commission of our intentions," a ministry spokeswoman told AFP.
For Berthold Huber of the German trade union IG Metall however, the commission decision "is unbelievable. The VW law hinders neither the free circulation of capital nor the completion of a single market," he said.