The EU’s complaint related to conditional tax incentives established by the US state of Washington in 2013 for aircraft company Boeing in relation to the development, manufacture, and sale of large civil aircraft.
It identified seven different tax incentives, including a reduced business and occupation tax rate, credits against business taxation, and exemptions from various other taxes in the state of Washington.
The EU claimed such incentives were prohibited.
EU trade commissioner Cecilia Malmström
Today's WTO ruling is an important victory for the EU and its aircraft industry
A panel formed by the WTO found that one of the aerospace tax measures offered to Boeing constituted a subsidy and was unlawful as it depends upon the use of domestically produced wings rather than imported materials, discriminating against foreign suppliers.
"The panel has found that the European Union has demonstrated that the B&O aerospace tax rate for the manufacturing or sale of commercial airplanes under the 777X programme... is a subsidy contingent upon the use of domestic over imported goods [and is] prohibited," the WTO ruled.
“Accordingly, taking into account the nature of the prohibited subsidy found in this dispute, the panel recommends that the United States withdraw it without delay and within 90 days,” it added.
The six other tax measures were also deemed to be subsidies as the panel found that in each case there is a financial contribution by the Washington state government and a benefit is thereby conferred.
However, the panel rejected the complaints about the six measures.
While the EU trade commissioner Cecilia Malmström considered the ruling a “major win” for the EU, Boeing played it down as laughable.
Malmström said, "Today's WTO ruling is an important victory for the EU and its aircraft industry. The panel has found that the additional massive subsidies of $5.7bn (£4.5bn) provided by Washington State to Boeing are strictly illegal. We expect the US to respect the rules, uphold fair competition, and withdraw these subsidies without any delay".
"In total, the EU claimed that Boeing had received $8.7bn in subsidies. This claim was rejected by the WTO, which found future incentives totalling no more than $50m a year to be impermissible," Boeing said.
The aerospace company added, "The WTO found that to date Boeing has received no benefit from the 777X (tax) rate incentive, and will not until 2020, because the first airplane will not be delivered until then."
Boeing's general counsel J Michael Luttig added, "Today's decision is a complete victory for the United States, Washington State and Boeing."
The EU and the US are both able to appeal the decision.
"After any appeal," Luttig said, "we fully expect Boeing to preserve every aspect of the Washington state incentives, including the 777X revenue tax rate."
The ruling, which raises discrimination against foreign suppliers, follows promises made by Donald Trump to put American businesses first.