Amazon has been ordered to pay around 250 million euros (£221 million) in back taxes after the European Commission ruled it received "illegal tax benefits" under a sweetheart deal with Luxembourg.
The Commission said Luxembourg must now recover the unpaid taxes after finding its agreement with Amazon allowed the firm to pay "substantially less tax than other businesses".
The EU's competition commissioner Margrethe Vestager said: "Luxembourg gave illegal tax benefits to Amazon.
"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."
The decision follows a three-year investigation into a 2003 tax agreement between Luxembourg and the retailer that saw most of Amazon's European profits recorded in the country, but not fully taxed.
It comes after the Commission last year hit US tech giant Apple with a 13 billion euro (£11.5 billion) tax bill in the wake of an investigation which found that Apple paid 50 euros in tax for every one million of profit made outside the US in 2014.
The Commission separately announced on Wednesday it was referring Ireland to the European Court of Justice for failing to recover the unpaid taxes from Apple.
On the Amazon decision, the Commission said the Luxembourg deal slashed the retailer's tax bill "without any valid justification".
Luxembourg must now calculate and recover the exact amount of unpaid taxes from Amazon, which the Commission said was estimated at around 250 million euros (£221 million), plus interest.
It marks the latest EU regulatory decision to affect a major US firm, with Ms Vestager putting the tax affairs of a number of high-profile targets including Amazon under the microscope in recent years.
McDonald's is also facing fire from EU antitrust officials who are investigating claims that the fast food giant avoided more than one billion euros (£886 million) in tax through the use of a royalties loophole in Luxembourg.
Amazon has already been under pressure over taxes in Britain and earlier this summer it was found to have paid 50% less UK corporation tax last year, despite a 54% jump in turnover.
Accounts filed by Amazon UK Services showed the company was billed £15.8 million in 2015 compared with £7.4 million in 2016.
In the same period, turnover at Amazon UK Services broke the £1 billion barrier for the first time, climbing from £946 million to £1.46 billion, while profit before tax fell from £48.5 million to £24.2 million.