It will still pass, they were just pushing the emissions tests lower so that the car could fit in a lower tax bracket. I don't know about every country, but in the UK you get taxed on how polluting your car is.

I believe that various governments have made a promise not to increase the taxes on existing cars, as the consumers were unaware at the time of purchase.

Is VW paying the tax difference, or walking away with a government handout?

No it's the consumers being taxed on road vehicles every year. The lower tax makes them quite attractive in comparison to other manufacturers.