Amazon was ordered to pay 250 million euros ($294 million) to Luxembourg on Wednesday after the European Commission said the online retailer had received illegal tax benefits.
According to regulators, Amazon received tax advantages between 2006 and 2014 in the country without any "valid justification."
"Luxembourg gave illegal tax benefits to Amazon. As a result, almost three quarters of Amazon's profits were not taxed," Margrethe Vestager, the EU's commissioner for competition, said in a statement.
"In other words, Amazon was allowed to pay four times less tax than other local companies subject to the same national tax rules. This is illegal under EU state aid rules. Member states cannot give selective tax benefits to multinational groups that are not available to others," she added.
From June 2014, Amazon changed the way it operates in Europe and the new structure is outside the EU Commission's authority on state aid.
In the period investigated, Amazon was shifting its profits from a company that was subject to tax in Luxembourg to another one that wasn't subject to tax, known as the "holding company." The latter had no employees, no offices and no business activities.
Luxembourg is due to receive the amount created by the aid, though there are no fines under EU law. Luxembourg authorities said they have taken notice of the decision and will "use appropriate due diligence to analyze the decision."
"The decision of the Commission refers to a period going back to 2006. Over time, both the international and the Luxembourg legal frameworks have substantially evolved," they said.
Amazon said in response to the commission's decision that it believes it did not receive any special treatment from Luxembourg and that it paid tax in "full accordance with both Luxembourg and international tax law."
"We will study the Commission's ruling and consider our legal options, including an appeal. Our 50,000 employees across Europe remain heads-down focused on serving our customers and the hundreds of thousands of small businesses who work with us," the online retailing giant said in a statement.
Tensions between Europe and US
The European Commission opened its investigation into Amazon and Luxembourg's tax arrangements in October 2014.
Luxembourg and U.S. technology companies have been at the center of the commission's probes into tax affairs and antitrust. Last year, the EU ordered Ireland to recover 13 billion euros in taxes from Apple. The commission is also looking into the tax deal between McDonald's and Luxembourg.
The EU has promised to scrutinize tax arrangements between large mulitnationals and the bloc's member states. This case is likely to increase tensions between Europe and the U.S. After the commission's decision on Apple, Chief Executive Tim Cook denounced it as "total political crap." The Amazon tax ruling is also set against a push by President Donald Trump to come up with a money repatriation plan for U.S. companies with big cash piles abroad.
At the heart of the EU's investigation into Amazon is its network of subsidiaries in Europe and so-called transfer pricing. That is the price of goods that one subsidiary of a company sells to another subsidiary under the same corporation. This in itself is not illegal. But what is illegal is if this transfer of goods is mispriced, therefore affecting the profits a company makes, and subsequently how much tax it pays.
In 2004, Amazon restructured its operations to create Amazon EU Sarl, which was its European operating headquarters. Amazon EU Sarl pays a royalty to the parent company in Europe for use of intellectual property. But that parent company is a limited liability partnership, which is not subject to corporate tax in Luxembourg.
EU chief under pressure
The Amazon ruling could be embarrassing for Jean-Claude Juncker, president of the European Commission, who was Luxembourg's prime minister from 1995 to 2013.
At the opening of these investigations, many European policymakers asked for Juncker's resignation. However, he denied any involvement in the tax arrangements, saying that the prime minister doesn't have enough power to restrict the work of tax authorities.
Correction: This story has been revised to correct the amount in U.S. dollars that Amazon has been ordered to pay.