Online retailer Amazon has become the latest firm to face a probe by the European Commission (EC) to see whether its tax affairs comply with state aid rules.
The EC said it will look at a 2003 tax agreement between Luxembourg and the retailer because it said most of Amazon’s European profits are recorded in Luxembourg but are not taxed in the state.
The EC suspects that Luxembourg’s agreement with Amazon amounts to a distortion of competition.
The US retailer said: “Amazon has received no special tax treatment from Luxembourg-we are subject to the same tax laws as other companies operating here.”
The EC said it will look at the way an Amazon subsidiary in Luxembourg pays a tax deductible royalty to a limited liability partnership in the state that is not subject to corporation tax.
The EC said: “As a result, most European profits of Amazon are recorded in Luxembourg but are not taxed in Luxembourg.”
Commission vice president in charge of competition policy Joaquin Almunia said: “National authorities must not allow selected companies to understate their taxable profits by using favourable calculation methods.”
“It is only fair that subsidiaries of multinational companies pay their share of taxes and do not receive preferential treatment which could amount to hidden subsidies.”
This investigation follows on from other probes the EC has launched into the tax affairs of computer giant Apple, coffee chain Starbucks, and the financial arm of carmaker Fiat.
The EC is looking into whether the Republic of Ireland and the Netherlands have struck unfair deals with multinational firms to help them cut their tax bills.
The EC said the Luxembourg government has been slow to comply with requests for information and still has matters outstanding.
Mr Almunia said: “This investigation concerning tax arrangements for Amazon in Luxembourg adds to our other in-depth investigations launched in June. I welcome that cooperation with Luxembourg has improved significantly.”
The Luxembourg ministry of finance said: “Luxembourg has submitted all requested information to the Commission and will fully cooperate with the Commission in the investigation.”
“Luxembourg is confident that the allegations of state aid in this case are unsubstantiated and that the Commission investigation will conclude that no special tax treatment or advantage has been awarded to Amazon.”
Corporate tax avoidance has come under the spotlight in the US and in Europe since the financial crisis, as existing deals with authorities that save companies millions of pounds are accused of being a form of subsidy at the expense of ordinary taxpayers.