Boeing facilities as seen in Los Angeles, CaliforniaReuters

The World Trade Organisation (WTO) on Monday dealt a huge blow to Boeing Co. by ruling that a special and very low "business and occupation" tax rate granted by the state of Washington to the airliner was unlawful.

In 2013, Washington provided Boeing the subsidy asking the company to make wings for its new 777X jetliner -- in which more than 400 passengers can seat and is due to enter service around the of 2020 -- only there. This provision ensured that Boeing will use only local rather than imported materials, distorting international trade rules.

In December 2014, the European Union alleged in the WTO that the tax cut given by the US state was discriminatory and was central to a wider protracted dispute over subsidies to aircraft makers. It alleged that the latest tax cuts to be withdrawn immediately amount to $5.7 billion.

However, the US pegged the value at merely $50 million.

The WTO said in its ruling on Monday: "The Panel has found that the European Union has demonstrated that the B&O aerospace tax rate for the manufacturing or sale of commercial airplanes under the 777X programme... is a subsidy contingent upon the use of domestic over imported goods [and is] prohibited."

For more than a decade, both the US and the EU have accused the other of providing billions of dollars in illegal government subsidies to the other's large commercial airplane maker. "The wider dispute dates back more than a decade over government handouts provided to Boeing and its European rival Airbus Group SE," the Wall Street Journal reported.

The two aircraft makers previously settled a disagreement in 1992, but the US withdrew from that deal in 2004, saying Airbus had an unfair advantage.

The US government is consulting with Washington state to decide how to respond and it remains to be seen if the US would appeal the ruling. However, the WTO asked the US to withdraw the tax relief to Boeing within 90 days. 

"We expect the US to respect the rules, uphold fair competition, and withdraw these subsidies without any delay," said EU Trade Commissioner Cecilia Malmström.

Even though Boeing general counsel J. Michael Luttig said the planemaker expected "every aspect" of the Washington state incentives to persevere after any appeal, Boeing said it wouldn't engage in talks until the EU had come into compliance with WTO rules.

According to the WSJ report, "at stake are potentially billions of dollars in tariffs the US and EU could impose on each other unless the WTO's subsidy concerns are addressed."