The overhaul would force 27 out of 72 Supreme Court members to retire, including its chief, Malgorzata Gersdorf. The Polish president would be able to grant a five-year term extension to a judge upon the judge's request.
Warsaw vows response
The ruling Law and Justice (PiS) party says the changes are necessary to a justice system they say is controlled by an untouchable "caste" of judges steeped in communist-era mentality.
Goverment critics, however, see the reform as a further attempt by the right-wing party to tighten its grip on power. The move prompted rallies across the country in July. Judge Gersdorf has called the move a "purge" and refused to step down.
On Friday, Gersdorf said she was "pleased" by the news from Luxembourg.
"Personally, I am pleased that we have been heard, but I am not pleased about the fact that my country's government didn't do this sooner, and that we had to take them to an European court," she said.
It is possible the dispute could also see member states cut funding allocated to Poland in the next EU budget, which starts from 2021. Poland is the biggest recipient of EU handouts for infrastructure and other projects.
The PiS faces key local elections on Sunday, with the ruling conservatives projected to snatch around 34 percent of the vote. This would put them well ahead of their main rivals from the centrist-liberal Civic Platform, who are polling at 24 percent.
The row with Brussels could play badly for the PiS party ahead of the elections, as the vast majority of Poles, including the PiS voters, are pro-Europe, says Poland correspondent for Germany's public broadcaster ARD Jan Pallokat.
"You should not forget that we are in final stages of a very important election," he told DW. "Europe is a very sensitive thing for the PiS party."
In Poland, the Supreme Court is also in charge of validating election results.