Currently the whole non-profit sector in Sweden enjoys an exemption from the consumption tax levied on goods and services and the government had applied to limit the levy to organisations with a turnover of more than one million kronor ($158,000).
Sweden's finance minister Anders Borg, expressed surprise at the news and vowed to file the Commission's ruling.
"We will contest this. We intend to pursue this all the way," Borg said at a press briefing on Thursday.
Non-profit groups can therefore rest easy for now as until the issue is settled - which according to Anders Borg could take a couple of years - the current rules allowing a full VAT exemption for non-profit organizations will apply.
The exemption is in contravention of European Union law and the EU Commission has persistently tried to force its removal.
The EU Commission ruling would impose a considerable burden on non-profit organizations, which range from charities to theatre and interest groups, and study circles.
However the EU considers the current tax regime to be overly generous and in the longer term the financial impact will be considerable. The administrative burden of paying VAT is also likely to increase, if the Swedish government loses in its bid.
The government's application for the one million kronor turnover limit was made in January and would mean that 90 percent of Sweden's non-profit associations would be tax exempt.
The purpose of the application was to protect the financial stability of the sector and to furthermore avoid a lawsuit in the European Court of Justice.