The European Commission on Monday warned Cyprus that its taxes for registering used cars bought outside the country break European rules protecting free trade within the 25-nation bloc, Dow Jones reported.

Under Cypriot law, all imported cars must pay a registration tax in Cyprus. The tax isn't required on used cars already registered on the island. The amount of the tax varies, according to the age of the vehicle and its CO2 emissions, the news agency noted.

In a statement cited by Dow Jones, the Commission said "the rules are applied in a way that may breach the EC Treaty provisions on equal treatment of domestic products and those of other Member States."

The report said Cyprus now has two months to respond to the Commission charges. If Brussels remains dissatisfied with the response, it can ultimately bring the case before the European Court of Justice.

"Member States are free to introduce registration taxes for vehicles," EU Taxation and Customs Commissioner Laszlo Kovacs told Dow Jones. "But they must respect the Treaty principle of non-discrimination between domestic and EU products as well as secondary community law."