The European Commission has told the Government it must act to update the compensation system to Bus Éireann for the school transportation scheme.
An investigation began in 2007 on foot of complaints by a group representing private bus operators here which claimed it amounted to state aid.
The Commission has found that the original scheme was based on an agreement dating from 1975 which pre-dated the opening of the sector to competition, and although it wants changes to be made it is not asking the state to recover the aid granted.
Bus Éireann has provided the service for more than 40 years.
A statement from the EU Commission read: "In its current form the scheme is not compatible with EU rules.
"Member States must bring existing measures in line with EU state aid rules. The dialogue that the Commission will now initiate under the so-called ‘appropriate measures’ procedure will give Ireland and the Commission a chance to explore options for reforming that scheme to bring it in line with the Single Market."
Bus Éireann pointed out that company itself was not found to be in breach of EU rules, saying that the Commission wished to “initiate a dialogue to update our current arrangements”.
“Bus Éireann welcome the decision of the European Commission to end their investigation into the operation of CIE bus services across Ireland, and in particular, the finding that current funding arrangements constitute existing aid which pre-dated the opening of the EU bus sector to competition in 1995,” a Bus Éireann statement read.
“We are pleased to note that the Commission also consider the School Transport Scheme to be a beneficiary of existing aid as it is based on a 1975 agreement, that also pre-dates the opening of the sector to competition.
“We note the Commission’s decision that this must now be brought into line with present rules governing the EU Single Market, and we look forward to assisting the State in their dialogue with the Commission about this matter.
“We await the non-confidential version of the decision which be published in the Official Journal of the EU.”