Several county councils across Sweden demand that the meat supplied to the schools and elder care homes in their municipalities meet Swedish regulations for the treatment of animals.
But the demand for higher ethical standards have now been dismissed by the Competition Authority, which maintains that EU regulations prohibit it.
"One can not favour one country's producers in this way. All suppliers should be treated equally," Charlotta Frenander, a lawyer at the Competition Authority said.
The attention of the authority to the issue was brought by the Danish animal slaughter sector.
"They maintain that they are unable to compete on the same conditions," Frenander said.
Around ten county councils demand that imported meat is produced to ethical standards equivalent to Swedish legislation.
The agriculture minister Eskil Erlandsson has argued on Sveriges Radio's Ekot news programmed that the councils are in the wrong.
Meanwhile local councillors in Laholm and Mellerud - two of the municipalities which place the demands on imported meat - argue that the demands are not in breach of EU rules.
"We do not think it harms competition at all. If the Danish producers can guarantee that they can meet the standards for animal protection and welfare then they are welcome. Had we written "Swedish goods" then it would have been a clear breach of the EU law, but not this," Robert Svensson, a Centre party councillor in Mellerud explained.
But the Competition Authority rejects this argument.
Even if the Danish farmers could meet the Swedish standards for animal protection, there is no way for the buyers to check this, Charlotta Frenander said.
"Common principles are lacking at EU level. Swedish producers are therefore in practice favoured, as they are bound to meet the standards."
Michael Stråhle Wärring at Laholm council argues that the issue should be left to the courts to decide.
"It is a problem when public bodies can not buy in products with the level of animal protection that we require. As a private person, you can choose, but our school children and elderly are exposed to whatever food is bought," he said.