Rare-earth metal (Eu)-doped aluminum nitride has potential application as luminescence materials due to its unusual mechanical and physical properties, as well as high chemical stability. Here, we investigate the energetics, local structure and optical and electronic properties by means of a combination of experimental observations (XDR, SEM, HR-TEM and XANES) and first-principles simulations. Present study has revealed that Eu ions are likely to be co-doped with O in the form of Eu-O pairs. Eu ions or Eu-O pairs favor participation at the surfaces of the AlN crystallites. Our analyses show dependences of the Eu valence and electronic/optical properties on the local chemical composition and structure. The obtained information helps us to realize tuning of the optical properties of the luminescent materials via composition and site occupation modification.