The European Commission has begun investigating company taxation schemes in eight member-states, including Ireland. This could mean companies having to reimburse the Commission for foregone taxes.

Commissioner Mario Monti is examining whether certain business tax schemes constituted unfair state aid in the countries where they were offered. In Ireland's case, the Commission is looking at tax exemptions on foreign income offered by the Government to multinationals when establishing operations here.

The measure, which allows multinationals to bypass payment of tax on earnings of certain foreign operations through Irish business, was abolished in February in the 2001 Finance Act.

The Commission's concerns now focus on the companies that secured this tax exemption before last February and continue to enjoy its benefits. The Department of Finance has stated that the scheme is used by only three companies.

"We do not consider this to be a very big problem for Ireland. Only three companies were ever given this exemption," the Department said in a statement yesterday.

A spokesman for Mr Monti said that while the tax measure was abolished earlier this year, it is still "producing effects". The Commission will circulate its decision to begin this investigation to the Government, while a final decision on whether this does constitute unfair State aid will be made within 18 months.

If the Commission finds the Government did use the measure to offer unfair State aid to encourage multinationals to establish operations here, it could ask it to direct these companies to repay those monies. This could be embarrassing for the Government - although such an outcome is considered to be a worst case scenario.

The EU's executive body said it was targeting preferential tax arrangements granted to multinationals or to companies active in the insurance and financial sector. "The current launch of investigations is the beginning of a longer term exercise that will ensure that no tax measures in the EU are being used to support companies in a way that is incompatible with the single market," Mr Monti said.

States being investigated are Germany, Spain, France, Ireland, Luxembourg, the Netherlands, Finland and Britain.

Four states have also been asked to halt certain tax advantages which the Commission believes are no longer justified following the creation of a single European market. These states are Belgium, Greece, Italy and Sweden.