According to a Commission statement published on Thursday, the formal investigation will probe three tax rulings which Luxembourg issued to Huhtalux, part of Huhtamäki group, in 2009, 2012 and 2013. The 2009 tax ruling was disclosed as part of the “LuxLeaks” investigation led by the International Consortium of Investigative Journalists in 2014 in which over 500 files were disclosed.

The Commission said that Huhtalux carries out intra-group financing activities and receives interest-free loans from another company of the Huhtamäki group based in Ireland. “These funds are then used by Huhtalux to finance other Huhtamäki group companies through interest-bearing loans,” the statement read, adding: “The three tax rulings issued by Luxembourg allow Huhtalux to unilaterally deduct from its taxable base fictitious interest payments for the interest-free loans it receives. According to Luxembourg, these fictitious expenses correspond to interest payments that an independent third party in the market would have demanded for the loans that Huhtalux receives. However, Huhtalux does not pay any such interest.”

The deductions serve to reduce the taxable base so that Huhtalux is taxed on a “substantially” smaller profit. The Commission wrote that it had doubts over whether the treatment could be justified and is investigating whether the unilateral downward adjustment of the firm’s taxable base constitutes a “selective advantage”.

It further wrote that if this is the case, then it would amount to illegal State aid.

“The opening of an in-depth investigation gives Luxembourg and interested third parties an opportunity to submit comments. It does not prejudge the outcome of the investigation,” it wrote.

In September 2018, Luxembourg was cleared of giving illegal State aid to McDonald’s as it is in line with national tax laws and the Luxembourg-US Double Taxation Treaty. However, in June the same year the European Commission ordered French firm Engie to pay €120m in back taxes to Luxembourg after it deemed its transactions broke State aid rules. In 2017, Amazon was ordered to pay Luxembourg €282.7m in corporate taxes after the Commission reached a similar conclusion and in 2015, Luxembourg was ordered to recover €23.1m from Fiat Finance and Trade. Luxembourg is appealing all three decisions.

Commissioner in charge of competition policy, Margrethe Vestager, said: “Member States should not allow companies to set up arrangements that unduly reduce their taxable profits and give them an unfair advantage over their competitors. The Commission will carefully investigate Huhtamäki's tax treatment in Luxembourg to assess whether it is in line with EU State aid rules.”

Since the LuxLeaks disclosures, Luxembourg applied a more stringent national tax treatment to of firms. According to the Commission, “the changes imply that the rulings regarding certain financing companies issued before 2017, including those from the LuxLeaks files no longer bind the tax authorities in Luxembourg.”