A 2003 deal between Amazon and Luxembourg has become the latest tax-minimizing arrangement to attract the attention of EU regulators trying to rein in corporate tax avoidance.

tax avoidance2The European Commission announced Monday it had opened an in-depth investigation into whether Luxembourg broke EU state aid rules by approving a deal that, according to Reuters, “allows Amazon to operate almost tax free in Europe.” Amazon’s main European subsidiary racks up almost 14 billion euros ($18 billion) in annual sales.

“National authorities must not allow selected companies to understate their taxable profits by using favorable calculation methods,” Joaquin Almunia, the commission’s vice-president for competition policy, said in a news release. “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.”

In June, the commission launched similar investigations into tax breaks granted to Apple in Ireland, Starbucks in the Netherlands and Fiat Finance and Trade in Luxembourg. Possible remedies could include the recovery of illegally granted tax aid.

Amazon is structured so that all online sales in Europe are technically between customers and a Luxembourg subsidiary. Under the 2003 tax agreement, the commission said, Amazon EU Sarl pays a tax-deductible royalty to its immediate parent, Amazon Europe Holding Technologies SCS, in return for using Amazon intellectual property. As a result, Reuters says, most European profits of Amazon are recorded in Luxembourg but are not taxed in Luxembourg.

“At this stage the Commission considers that the amount of this royalty … might not be in line with market conditions,” the EU’s antitrust watchdog said. “The Commission has concerns that the ruling could underestimate the taxable profits of Amazon EU Sarl, and thereby grant an economic advantage to Amazon by allowing the group to pay less tax than other companies whose profits are allocated in line with market terms.”

Amazon denied receiving special tax treatment from Luxembourg, saying in a statement that it was subject to the same tax laws as other companies operating there.

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