European Commission president Ursula von der Leyen today announced the plans after the UK went against the “good faith" articles (4 & 5) of the agreement by voting for the Internal Market Bill this week.
A "draft letter of formal notice" has now been finalised, triggering legal action.
The pound dropped by 0.5 per cent against the dollar on the announcement, which sees EU and UK relations hit yet another low with just 100 days until the end of the transition period.
Dictators will say that if Britain can break international law, they can follow suit
Speaking at a press conference in Brussels, Ms Von der Leyen said: “We had invited our British friends to remove the problematic parts of their draft internal market bill, by the end of September.
“This draft bill is by its very nature, a breach of the obligation of good faith, laid down in the withdrawal agreement.
"Moreover, if adopted as is it will be in full contradiction to the Protocol on Ireland and Northern Ireland.
"The problematic provisions have not been removed. Therefore this morning, the Commission has decided to send a letter of formal notice to the UK Government.”This is the first step in an infringement procedure.”
The EU claim the Internal Market Bill “flagrantly” violates the Protocol on Ireland / Northern Ireland as it allows the UK authorities to disregard the legal effect of the Protocol's substantive provisions under the Withdrawal Agreement.
An EU spokesperson added: “Representatives of the UK government have acknowledged this violation, stating that its purpose was to allow it to depart in a permanent way from the obligations stemming from the Protocol.
"The UK government has failed to withdraw the contentious parts of the Bill, despite requests by the European Union.
"By doing so, the UK has breached its obligation to act in good faith, as set out in Article 5 of the Withdrawal Agreement. Furthermore, it has launched a process, which – if the Bill is adopted – would impede the implementation of the Withdrawal Agreement.
"As a result, the Commission has launched infringement proceedings today in line with the provisions of the Withdrawal Agreement.”
The EU had previously called for the UK to withdraw the parts of the legislation which would breach international law by the end of September.If legal action is taken and the UK loses, the Court of Justice of the European Union could hit Britain with fines or other sanctions.
The infringement procedure is a common tool used by the commission against member states, with last year seeing 800 open cases.In a sign the Brexit debate is not going away, each procedure takes an average of 35 months to complete.
Labour called for both sides to get on and sort a deal, with Shadow Chancellor of the Duchy Of Lancaster Rachel Reeves calling to "move on from past divisions".
She said:“There is clearly a deal to be done. Both sides need to drop the posturing and the threats by getting back round the negotiating table and getting a trade deal done.”
In a clear move to distance himself from the Tory accusations of being a remainer, the Labour leader Sir Keir Starmer demanded both sides end the "absurd" row.He said:"It's absurd that with weeks to go the focus and the energy is not on their negotiations, it's on threatened court proceedings.
"We need everybody around the table, we need to get a deal. The prime minister said he had an 'oven-ready deal', get on, deliver it - that's in the national interest."
The SNP claimed it showed the Tories were "ruining the UK's international reputation and threatening the economy".Westminster leader Ian Blackford said: "The Prime Minister has shown he is arrogant, reckless and completely untrustworthy.
"There is now little doubt that the UK is heading towards a low deal or no deal Brexit, either of which would be devastating for jobs, living standards, businesses and the economy.”
Irish Prime Minister Micheal Martin claimed the commencement of legal proceedings was "to be expected".
Despite this, he insisted talks were “moving in the right direction”, but admitted there were “serious challenges ahead."
It came after MPs voted to break international law by an 84 majority on Tuesday night.
Despite a small Tory rebellion, the bill sailed through the Commons earlier this week and will go on to face further scrutiny in the House of Lords.
Mr Johnson is pushing through legislation that by the Government's own admission breaks international law.
The bill allows ministers to override parts of the Brexit Withdrawal Agreement agreed with Brussels last year.
Northern Ireland Secretary Brandon Lewis told the Commons last month that doing so would mean Britain was be breaking international law “in a limited and specific way”.
The UK Government had previously suggested the move was a negotiating tactic, something those in Brussels likened to negotiating with a “gun on the table”.
Number 10 now has until the end of October to respond, with a UK Government spokesman insisting they would respond to the letter "in due course".
They added: "We need to create a legal safety net to protect the integrity of the UK's internal market, ensure ministers can always deliver on their obligations to Northern Ireland and protect the gains from the peace process.”