The European Commission is referring Ireland to the Court of Justice for failing to properly apply the rules on marked fuel.
Under EU rules, fuel that can benefit from a reduced tax rate has to be marked by coloured dye.
Agricultural vehicles and fishing vessels can benefit from fuel subject to a lower tax rate but private boats must use fuel bought at the standard rate.
Marked fuel can be up to 40% cheaper than diesel typically sold at petrol stations.
“Currently, Ireland breaches EU law by allowing the use of marked fuel for the purposes of private pleasure craft. As a consequence, private leisure boats cannot only use fuel intended for fishing vessels but also risk heavy penalties if they travel to another Member State and the boat is inspected by the local authorities”, the Commission said.
It added Ireland “hasn’t properly implemented” its obligation to apply a minimum level of taxation.