As expected, the European Commission on Oct. 4 ordered Luxembourg to recover about €250 million from Amazon.com Inc. after the competition regulator concluded the country's tax rules allowed the U.S. online retailer to avoid paying taxes on three-quarters of its profits earned in the European Union between May 2006 and June 2014.
The EC, the executive arm of the EU, said the undue tax benefit amounted to illegal state aid to Amazon because it allowed the Seattle-based company to pay substantially less tax than other businesses.
"Luxembourg gave illegal tax benefits to Amazon," Margrethe Vestager, commissioner in charge of competition policy, said. "As a result, almost three-quarters of Amazon's profits were not taxed.
"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."
Amazon disputed the findings, saying: "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. We will study the commission's ruling and consider our legal options, including an appeal."
In its report, the EC said a tax ruling issued by Luxembourg in 2003 lowered the tax paid by Amazon in the country without justification.
Amazon was allowed to shift the vast majority of its profits from Amazon EU, a group operating company subject to tax in Luxembourg, to Amazon Europe Holding Technologies, a holding company that was not subject to the same tax rules, the commission added.
According to the EC, Amazon EU employed 500 workers and operated Amazon's retail business throughout Europe. Amazon set up its operations in Europe in such a way that customers buying products on any of its websites on the continent were contractually buying from the operating company, Amazon EU, in Luxembourg. It recorded all European sales, and the profits stemming from these sales, in Luxembourg.
Amazon EU made royalty payments to Amazon Europe Holding Technologies, an intermediary between the U.S. parent and the European operating company and which licensed intellectual property to the operating company. Those payments were endorsed by the Luxembourg tax ruling, which significantly reduced Amazon EU's taxable profits, the EC said.
Amazon Europe Holding Technologies was a limited partnership with no employees, no offices and no business activities, the commission said, adding that the royalty payment "was inflated and did not reflect economic reality."
"On this basis, the commission concluded that the tax ruling granted a selective economic advantage to Amazon by allowing the group to pay less tax than other companies subject to the same national tax rules," the EC concluded.
In June 2014, Amazon changed the way it operates in Europe. Its current structure is outside the scope of the EC's investigation.
Separately, the commission said Oct. 4 that it had decided to refer Ireland to the European Court of Justice for failing to recover illegal state aid worth up to €13 billion from Apple Inc.