The European commission has widened its investigation into the tax treatment of multinationals, opening a formal investigation into whether online retailer Amazon’s complex tax arrangements in Luxembourg are so generous as to amount to state aid for the $146bn (£90bn) group.

At the heart of the investigation is a local tax ruling secured in 2003 by Amazon’s main European operating subsidiary, Amazon EU Sàrl. This business takes sales from across Europe, including more than £4bn from UK customers.

The Luxembourg tax ruling clears Amazon EU Sàrl to pay large royalties to a sister operation, depressing its taxable profits. That sister entity is a Luxembourg limited partnership but is not subject to Luxembourg tax.

“As a result, most European profits of Amazon are recorded in Luxembourg but are not taxed in Luxembourg,” the European commission said in a statement.

“At this stage the commission considers that the amount of this royalty ... might not be in line with market conditions.”

The investigation will now test these concerns further, and the commission stressed the outcome of its investigation had not prejudged.

The US company, headed by Jeff Bezos (below), denied the charge. “Amazon has received no special tax treatment from Luxembourg, we are subject to the same tax laws as other companies operating here,” it told Reuters.

The Luxembourg finance ministry said: “Luxembourg is confident that the allegations of state aid in this case are unsubstantiated and that the commission investigation will conclude that no special tax treatment or advantage has been awarded to Amazon.”

Joaquín Almunia, the Spanish politician who is currently head of competition policy at the commission, said that “national authorities must not allow selected companies to understate their taxable profits by using favourable calculation methods”.

“It is only fair that subsidiaries of multinational companies pay their share of taxes and do not receive preferential treatment [that] could amount to hidden subsidies,” Almunia added.

The commission has already opened three other state aid investigations into the tax arrangements of large multinationals. These include Apple in Ireland, Fiat Finance and Trade in Luxembourg, and Starbucks in the Netherlands.