Vestager said today that US giant online retailer Amazon unfairly profited from special low tax conditions since 2003 in the tiny Grand Duchy, where its European headquarters are based.
The EU nations are actively looking to close loopholes for US internet multinationals and are considering harmonised tax rules.
Amazon said in a statement it believed it "did not receive any special treatment from Luxembourg and that we paid tax in full accordance with both Luxembourg and international tax law." It said it would consider appealing after studying the ruling.
Luxembourg too said it might appeal, but stressed it is "strongly committed to tax transparency and the fight against harmful tax avoidance."
Criticism over sweetheart deals struck by EU states with big multinationals has increased over the past years, especially as the bloc struggled through a financial crisis over the past decade.
It focused on foreign multinationals being able to get away with huge tax breaks on profits as EU nations competed with each other to lure companies
looking for a place to establish their EU headquarters.
Vestager said that Luxembourg had offered "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," she said.
The issue was not so much that the companies got tax breaks but that they were available only to them, Vestager said. "Member states cannot give selective tax benefits to multinational groups that are not available to others."
Vestager already ordered Ireland to claw back up to 13 billion euros from Apple last year, but said Wednesday that Ireland hadn't made the necessary haste as none was recovered so far. "More than one year after the Commission adopted this decision, Ireland has still not recovered the money, also not in part," she said.