The European Commission has warned Switzerland over tax breaks which it offers to companies who have their headquarters there.
Many firms have relocated to Zurich
A growing number of firms have moved their head offices to Switzerland because of advantages they can get on profits made within the EU.
The commission said the tax breaks were "unfair" as they differentiated between domestic and foreign income sources.
However, Switzerland said the argument was "unfounded".
There were no regulations between Switzerland and the EU on harmonising tax arrangements, so it was impossible to infringe rules, the Swiss government said.
Google, Kraft and IBM have all chosen Zurich as their European headquarters. Google is set to expand its Zurich office this year from about 300 staff to 1,600, making it the biggest Google office outside the US.
Swiss law allows individual cantons to grant full or partial regional and company tax exemptions on profits generated abroad.
These had provided a "formidable incentive" for companies to base themselves in Cantons such as Schwyz and Zug to "minimise their tax liabilities", the commission said.
It added that Switzerland's refusal to change those rules breached a 1972 agreement between the EU and Switzerland not to offer subsidies that affected competition.
While Switzerland is not a member of the EU, it has agreed to apply most EU trade rules.
In return, Switzerland is given access to EU customers.
"Switzerland enjoys the benefits of privileged access to the internal market and must accept the responsibilities that go along with this," said EU external relations commissioner, Benita Ferro-Waldner.
"The decision the commission has taken is not about tax competition, but about the state aid undermining the level playing field necessary for partnership and trade relations between Switzerland and the EU."
The commission gave no indication of what measures could be taken against Switzerland if an agreement was not reached.