(CN) - Antitrust investigators with the European Commission released a document publicly on Friday that explains why they believe tax breaks between Luxembourg and Amazon amount to illegal state aid.
The EU's regulatory arm launched its investigation into whether tax breaks given by the tiny kingdom to Seattle-based Amazon were legal in early 2014. The commission is also investigating cushy tax deals between Apple and Ireland, Starbucks and the Netherlands, and Fiat's arrangement - also with Luxembourg.
In a 23-page letter to Luxembourgish authorities dated Oct. 7 but made public on Friday, the commission said the 998-square-mile kingdom allowed Amazon to use subsidiaries to lower its corporate tax liability.
Under the scheme, Amazon's European subsidiary records most of the company's profits in the EU while being headquartered in Luxembourg. The subsidiary then pays a tax-deductible royalty to a limited liability partnership - lowering its taxable profits - but the LLP doesn't pay corporate taxes to the Luxembourgish government.
The net effect of the deal is that, while most of Amazon's European profits are recorded in Luxembourg practically none of it is taxed, the commission said.
Amazon and Luxembourg inked their original deal in 2003, and it has been renewed annually through at least 2013, according to the commission. But investigators also said the deal is exclusive to Amazon, not part of Luxembourg's standard corporate tax code, and therefore amounts to illegal state aid.
Luxembourg has denied the allegations, arguing that because its tax code doesn't give tax authorities discretion to deviate from the rules an illegal state aid finding can only be made if its tax code is misapplied - and even then only by an assessment under national law.
The investigation is still at an early stage, the commission said. But if it makes its illegal state aid finding official, regulators could order Luxembourg to do a "clawback" of more than a decade in back taxes worth tens of millions of dollars.
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