The European Commission has ruled that €10 million in Government tax breaks given to Co Limerick firm Aughinish Alumina between 2002 and 2004 were illegal and must be repaid.

It is also continuing an investigation to discover if the ongoing practice of offering exemptions from excise duty on mineral oil used by the firm is distorting competition.

Aughinish Alumina uses the mineral oil as fuel to produce alumina, a white, crystalline powder that is used to make aluminium. Since the plant opened in 1983, it has availed of the tax break, which was worth €4.4 million last year.

The commission ruled yesterday that the tax relief on excise duty on mineral oils constituted an illegal state aid that was liable to distort competition in the EU. It also found two alumina companies in Italy and France, Eurallumina and Alcan, had also benefited from similar types of aid and should repay up to €32 million.

"The commission's action will remedy serious distortions of competition by ordering repayment of large tax breaks benefiting selected companies," said competition commissioner Neelie Kroes yesterday.

The commission said it would not seek to have all the state aid provided to Aughinish Alumina from 1983 to the present repaid, an amount that could run up to €100 million. It said it took this unusual decision because the exemptions had previously been authorised under EU rules on excise duties through decisions taken by the EU Council of Ministers.

The commission said it would seek further information on the practice of offering tax breaks on mineral oils before ruling on the period since the start of 2004.

If it rules against the tax break Aughinish Alumina would have to repay more cash. Aughinish Alumina did not return calls on the decision yesterday.

However, the Department of Finance said that it was examining the decision by the commission and did not rule out an appeal.

"We are examining the commission's ruling. A member state or the company concerned may challenge a ruling in the European Court of Justice. This option will be considered. The company has been advised of the position," it said in a statement.

The commission's ruling is the latest in a series of setbacks for the Government on state aid. Earlier this year, the Government was forced to withdraw an application to supply Intel with €170 million in grants to build a new plant, provoking an angry response by the Minister for Enterprise, Micheál Martin.

A commission spokesman said it applied the rules in an even-handed manner to all member states, and it was not singling out Ireland for a harsh application of the rules. Without state aid rules, companies would be attracted unfairly to those member states prepared to pay out the most in state subsidies, he added.

Aughinish Alumina is based about 20 miles from Limerick city and has been producing alumina since 1983. It is now responsible for about 3.5 per cent of the global output of alumina and employs about 500 people. It will shortly open a combined heat and power station that will reduce its reliance on mineral oil.