A tax deal that Luxembourg signed with Amazon in 2003, which allows the multinational online retailer to operate nearly tax-free in Europe, may be illegal, the European Union's executive said Friday.

The EU opened an investigation into Amazon in October, one of several efforts to put closer scrutiny on large international companies that have sought to minimize tax payments in Europe. A preliminary assessment of its concerns found that it appeared Luxembourg broke EU state aid rules by offering Amazon an unfair advantage over other companies.

According to the 23-page document signed by previous EU Competition Commissioner Joaquin Almunia, "The Commission's preliminary view is that the tax ruling of 5 November 2003 by Luxembourg in favour of Amazon constitutes state aid ... and the Commission has doubts at this stage as to that ruling's compatibility with the internal market."

Amazon registers its profits from across the EU at its unit in Luxembourg, a company by the name of LuxOpCo. The net turnover of LuxOpCo was $15.8 billion in 2013, about a fifth of worldwide sales of $74.5 billion.

But Amazon's taxable profits in Luxembourg are further reduced by making royalty payments to another Luxembourg-based Amazon entity that is not subject to corporate taxation. The result is that not only does Amazon pay little tax in many EU countries where it operates, but also that its effective tax rate in Luxembourg is particularly low.

Luxembourg signed off on this arrangement in 2003, after just 11 days of consideration, the EU Commission said Friday. It added that the presentation of the royalty payment, expressed as a percentage of revenue, seemed to be a "cosmetic arrangement."

"It also follows from the above that Amazon has a financial incentive to exaggerate the amount of the royalty when applying the transfer pricing arrangement approved in the contested tax ruling," the document said.

The Commission is also investigating the tax arrangements of Italian automaker Fiat in Luxembourg, Apple in Ireland and Starbucks in the Netherlands.

Wire services