The pronouncement came during the case of a German citizen living in Switzerland who was told by the Bern road traffic office to undergo a driving test in order to exchange his German licence for a Swiss one, reported Swiss news agency ATS.
Current legislation states that any EEA citizen who moves to Switzerland has up to a year to swap their driving licence for a Swiss one, after which time it becomes invalid.
A driving test is not required, although some cantons demand an eye test.
In 2010 the Association of Road Traffic Offices (ASA) decided that anyone who applies to exchange their foreign licence five years or more after moving to Switzerland must undergo a driving test.
But the Federal Court has ruled against the assoication.
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The court upheld the complaint brought by the German man, saying that the association had no right to legislate in this way.