The decision on Wednesday followed a three-year investigation into whether a tax deal between the online retailer and Luxembourg amounted to state aid.
EC commissioner Margrethe Vestager said Luxembourg gave “illegal tax benefits” to Amazon, which meant almost three quarters of Amazon's profits were not taxed.
Vestager said in press conference added, “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.”
She added the EC was not fining the company, but only removing an illegal advantage it should never have received in the first place.
The deal between the country and Amazon under investigation dates back to 2003. When it was made, the current EC president Jean-Claude Juncker was prime minister of Luxembourg.
The EC said the deal contained a cap on the tax base, which meant Luxembourg's tax authorities limited the Amazon’s tax base to a fraction of its turnover.
It added that the level of the royalty payments was inflated and did not reflect economic reality.
An Amazon spokesperson told economia the company believed it did not receive special treatment from Luxembourg and had paid in accordance to the local and international tax law.
“We will study the Commission's ruling and consider our legal options, including an appeal,” he said.
Head of ICAEW's Tax Faculty, Frank Haskew, said, “There remains much public concern over the tax arrangements of multinational companies and the cases highlight the difficulty in adapting existing corporate tax rules to internet based traders.
To address the issue, the UK had introduced a diverted profits tax and was seeking to finalise proposals for the taxation of digital businesses, he said.
"It is important that future work is directed to achieving a realistic international consensus. US companies are the major players in international digital commerce and [are] trying to find a tax reform path that will command support in the US. All these efforts need to be coordinated if there is to be a sustainable solution to address the current problems," Haskew added.