Amazon is to face a formal investigation into its tax practices in Europe.
The European Commission announced it would look into an agreement the online retailing giant made with the Grand Duchy of Luxembourg.
The EC alleged a deal between Luxembourg and Amazon amounted to state aid and distorted competition.
According to EU competition commissioner Joaquin Almunia, most of Amazon's European profits "are recorded in Luxembourg but are not taxed in Luxembourg."
He said the Amazon subsidiary in Luxembourg records most of the group's European profit and then pays a royalty to another entity in Luxembourg.
"At this stage the Commission considers the amount of this royalty, which lowers the taxable profits of Amazon EU Srl each year, might not be in line with market conditions," said Almunia.
"National authorities must not allow selected companies to understate their taxable profits by using favourable calculation methods," he said.
"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 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."
"Fair tax competition is fundamental for a healthy Single Market and our common economic prosperity," added Algirdas emeta, commissioner for taxation. "As we work together to restore growth and competitiveness, it is essential to tackle the harmful tax practices which erode the tax bases of EU Member States. Fair play in taxation must be the rule."
In a short statement to the media, Amazon denied this and said it had "received no special tax treatment from Luxembourg".
"We are subject to the same tax laws as other companies operating here," it added.
In June, the EC launched an inquiry into Apple's tax arrangements in Europe
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