It's reserved for really close friends (sometimes also relatives). The problem is not the extent of politeness per se, but one that exceeds the "expected" politeness. If you're politer than you're supposed to be, you are being too 客气 ("acting like a guest") or 见外 ("looking like a stranger").

Although, the expected politeness is sometimes tricky to know as it depends on each part's perception of the relation. On top of that, there's also the supposed "acting" of politeness, like fighting to pay restaurant bills.

This is actually not that hard to understand. Note that across cultures, close friends can insult each other as jokes. So showing less politeness is like an insult, but with the understanding of the participants, it becomes a show of closeness.