Britain is being investigated by the EU over the legality of a tax exemption scheme for multinational companies.
EU Commissioner Margrethe Vestager said the probe would look at whether it breached rules banning big firms paying less tax than other companies.
She announced: “Rules targeting tax avoidance cannot go against their purpose and treat some companies better than others.”
The scheme facing scrutiny came into force in 2013, and forms part of a broader anti-tax avoidance plan.
Britain has promised to cooperate with the investigation.
Image: Ms Vestager said anti-tax avoidance schemes ‘cannot go against their purpose’
Downing Street said the scheme was compliant with EU law and that all multinationals in the UK were required to pay “all taxes due”.
But Labour responded that the inquiry showed the programme was simply a “tax dodge” and should be shut down.
Set up by former chancellor George Osborne, the scheme was billed as an overhaul of rules preventing multinationals from artificially shifting profits between countries to avoid paying tax.
One exemption implemented at the time meant financing income received by the offshore subsidiary of a British parent company from another foreign group firm was not subject to UK tax.
Image: Britain will cooperate fully with the inquiry
Launching the inquiry on Thursday, the European Commission said such financing income was often used as a “channel for profit-shifting” by multinationals.
It refused to say how long the investigation would last, but some believe it will go on beyond Britain’s exit from the EU in March 2019.
A Number 10 spokeswoman said: “Multinational companies must pay all taxes due. We don’t settle for less. This includes paying tax on any profits they make in the UK
“Our rules prevent these profits being artificially diverted overseas. We do not believe these rules are incompatible with EU law.”