The European Commission said on Wednesday that Luxembourg provided illegal tax benefits worth 250 million euros ($294 million) to e-commerce giant Amazon between 2003 and 2011.
"Luxembourg gave illegal tax benefits to Amazon. As a result, almost three quarters of Amazon's profits were not taxed," Margrethe Vestager, european commissioner for competition, said in a statement.
Vestager said that Amazon was allowed to pay four times less tax than other local companies, which 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.
The commission launched an investigation in October 2014, and concluded that a tax ruling issued by Luxembourg for the years 2003-2011, lowered the tax paid by Amazon in Luxembourg without any valid justification.
"The tax ruling enabled Amazon to shift the vast majority of its profits from an Amazon group company that is subject to tax in Luxembourg (Amazon EU) to a company which is not subject to tax (Amazon Europe Holding Technologies)," the statement said.
"In particular, the tax ruling endorsed the payment of a royalty from Amazon EU to Amazon Europe Holding Technologies, which significantly reduced Amazon EU's taxable profits."
The commission defined Amazon EU as the "operating company", which manages Amazon's retail business throughout Europe, and Amazon Europe Holding Technologies as the "holding company", which is a limited partnership with no employees, no offices and no business activities.
"The holding company acts as an intermediary between the operating company and Amazon in the US," the Commission said.
Under Luxembourg's general tax laws, the operating company is subject to corporate taxation in Luxembourg, whilst the holding company is not because of its legal form -- a limited partnership.
The commission concluded, that the tax ruling issued by Luxembourg authorized in-group money transfers not in line with "economic reality".
U.S. based e-trade giant Amazon, founded in 1994, provides worldwide retail services and has currently over $450 billion market capitalization.