An official of the European Union competition directorate is due to start a formal investigation "within a matter of weeks" to determine whether the credit union movement has received favourable tax treatment from the State.
An initial complaint was made to the Commission by the Irish Mortgage and Savings Association.
This is an umbrella group for several of the State's leading financial institutions. These include Irish Life and Permanent, EBS, First Active, Irish Nationwide and ICS Building Society.
The IMSA has alleged that the credit union movement has benefited from preferential tax treatment by not being liable for corporation tax, while its members do not pay retention tax on their savings income. The move has been supported by the Irish Bankers' Federation, which represents the main banks including AIB and Bank of Ireland.
The outcome of the European Commission investigation could threaten the tax-free status of credit unions, with the possible imposition of corporation tax on their surpluses.
Should the Commission recommend a standard tax treatment for all financial institutions, it is considered likely that Deposit Interest Retention Tax would be applied to credit union accounts for the first time.
A working group on the taxation of credit unions recommended to the Minister for Finance in 1998 that credit unions remain exempt from corporation tax while they would not be required to report interest or dividends on savings to the Revenue Commissioners.
A proposal in the 1998 budget to tax dividends above £375 from credit-union savings generated considerable controversy and forced a U-turn from Mr McCreevy in the subsequent Finance Bill.
The Irish League of Credit Unions has called for the first £375 of dividends on credit union savings to be exempted from tax where a member has less than £7,500 in savings. It is estimated that this proposal would affect about 1 per cent of credit union accounts.
However, after the controversy in 1998 the Government has been reluctant to revisit the area, despite strong lobbying of the Minister for Finance by several independent TDs in recent months.
A Department of Finance source said last night that the EU investigation now "tied the Minister's hands" on the issue.
The preliminary investigation will be undertaken by a member of the European Commission competition directive. Should the official find substance in the complaint, then a more detailed examination of the issue would be sanctioned by Brussels.