Brussels - Luxembourg must collect around 250 million euros (290 million dollars) in back taxes from US online retail giant Amazon, the European Commission ordered on Wednesday.
The commission found that the small Western European country granted illegal tax benefits to Amazon by allowing the company to pay much less in taxes than other companies.
"As a result, almost three-quarters of Amazon's profits were not taxed," said Margrethe Vestager, European commissioner for competition.
Luxembourg must recover approximately 250 million euros
The European Commission launched an investigation into Amazon's subsidiary in Luxembourg, Amazon EU, in 2014. That company had been paying a tax-deductible royalty to another legal entity (Amazon Europe Holding Technologies) that was not subject to corporate taxation in Luxembourg.
As a result, most European profits of Amazon were recorded in Luxembourg, but not taxed there.
This tax structure was implemented between May 2006 and June 2014. Amazon's structure of operations in Europe since that period was not part of the current investigation.
Vestager said that Luxembourg must recover the approximately 250 million euros in unpaid taxes, plus interest.
Both Amazon and Luxembourg defended their action and said they would study the ruling.
"We believe that Amazon did not receive any special treatment from Luxembourg and that we paid tax in full accordance with both Luxembourg and international tax law," Amazon said in a statement.
"We will study the commission's ruling and consider our legal options, including an appeal."
Luxembourg's Finance Ministry noted that the commission's decision referred to a period going back to 2006.
"Over time, both the international and the Luxembourg legal frameworks have substantially evolved," the ministry said in a statement.
"As Amazon has been taxed in accordance with the tax rules applicable at the relevant time, Luxembourg considers that the company has not been granted incompatible state aid."
Calls for increased tax transparency
Vestager said the EU-wide rules on competition were meant to prevent countries from giving undue advantages to multinational companies and distorting competition.
"These rules are not new - they have been in place since 1958 - and they apply to all companies that choose to do their business within the single market," she said.
Oxfam, a non-governmental organization focused on poverty alleviation, called for increased tax transparency to crack down on governments having special tax deals with multinational companies.
"When large companies, such as Amazon, don't pay their fair share of tax, small businesses and citizens end up unjustly footing their bill," said Aurore Chardonnet, Oxfam EU policy advisor on inequality and tax.
This is the second high-profile Silicon Valley company the EU took on over special tax arrangements in Europe. Last year, the commission ordered US tech giant Apple to pay Ireland 13 billion euros for what the EU considered illegal tax benefits.
On Wednesday, the commission moved to take Ireland to court to force it to claim the money from Apple.