The SAFE Regulation: Strengthening Europe's Defence Industrial Base Through Strategic Financial Support

Executive Summary

The European Union's defence policy is undergoing a fundamental transformation, driven by a deteriorating geopolitical landscape. To strengthen collective security and foster industrial autonomy, the EU has introduced the pivotal SAFE Regulation (Regulation (UE) 2025/1106), which provides substantial financial support for urgent defence investments while establishing strict eligibility criteria to build a robust European defence industrial base.

The SAFE Regulation offers up to €150 billion in loans to Member States for urgent defence investments. Its eligibility rules prioritize entities established in the EU, EEA-EFTA states, or Ukraine, while strictly limiting third-country components to a maximum of 35%. The regulation includes stringent requirements for executive management location, infrastructure placement, and design autonomy for critical defence products, marking a strategic pivot towards increased EU-level cooperation and industrial self-sufficiency.

This instrument presents both unprecedented opportunities and complex compliance challenges for contracting authorities and defence companies. Critically, these changes extend beyond prime defence contractors, impacting every company within the defence supply chain – from component manufacturers and software providers to raw material suppliers and maintenance service providers. Any entity supplying products, components, or services that ultimately contribute to defence products must thoroughly understand and comply with these new requirements to access SAFE funding opportunities.

1. Purpose and Objectives of the SAFE Instrument (“SAFE”)

The SAFE Instrument is a temporary measure providing financial assistance to Member States in order to increase European defense production capacity, enhance product availability, and accelerate industry adaptation. Specifically, SAFE targets priority areas including munitions and missiles, artillery systems (including precision strike capabilities), ground combat capabilities, critical infrastructure protection, cyber defence, military mobility, air and missile defence systems, maritime and submarine capabilities, drones and anti-drone systems, and strategic enablers such as strategic airlift, in-flight refueling, C4ISTAR systems, and space assets.

2. Mechanism of Financial Assistance: Loans for Joint Acquisitions

SAFE provides up to EUR 150 billion in loans to Member States. These loans are structured with a maximum repayment duration of 45 years, and, in principle, may include a grace period of ten years for principal repayments. To ensure a broader distribution of funds and prevent over-concentration, a prudential rule stipulates that the share of loans granted to the three largest beneficiaries cannot exceed 60% of the total maximum financial assistance available under SAFE.

Member States must submit detailed investment plans demonstrating defense needs, activities, expenditures, and regulatory compliance.

The significant financial leverage of SAFE, coupled with its stringent eligibility criteria, transforms the instrument into a powerful industrial policy tool. This represents a more active and interventionist role for the EU in shaping the defence market, moving beyond mere regulatory harmonization to direct financial incentives. This financial instrument is expected to accelerate the consolidation and integration of the European defence industry, favoring companies that can meet the established "European" criteria. 

3. Procurement Rules for SAFE-Financed Acquisitions (Regulation (UE) 2025/1106, Article 16)

Article 16 ensures SAFE financing builds a robust, autonomous EU defense base.

• Eligibility Requirements for Contractors and Subcontractors: Establishment, Executive Management, and Control

Prime contractors and key subcontractors must be established in the EU, EEA-EFTA states, or Ukraine with executive management located in these territories. Third-country control is prohibited unless specific mitigation measures or guarantees are in place. The consistent inclusion of "Ukraine" alongside "EU" and "EEA-EFTA" in the eligibility criteria for establishment, executive management, and infrastructure signifies a pragmatic geopolitical alignment. This expanded definition of the "European" defence industrial base (EDTIB) extends beyond the strict geographical boundaries of the EU-27, acknowledging existing industrial ties with EEA-EFTA states and, more critically, integrating Ukraine into the EU's defence supply chain.

Limited exceptions exist for subcontractors representing 15-35% of contract value located outside eligible territories, but only if: (1) a direct contractual relationship existed before SAFE took effect, or 2the contractor commits to replace restricted inputs with EU/EEA-EFTA/Ukrainian components within two years.

• Conditions for Third-Country Participation and Component Sourcing: Thresholds and Restrictions

Infrastructure and production must be located in EU, EEA-EFTA states, or Ukraine. Maximum 35% components may originate outside these regions and no components may be originated from countries deemed contrary to EU security interests.

The granular nature of these rules, particularly the requirement for at least 65% "European" component value, reflects a strong legislative intent to "onshore" or "nearshore" defence production and research and development within the expanded European definition. This will likely compel defence companies with global supply chains to re-evaluate and potentially reconfigure their production strategies and partnerships to meet eligibility criteria, leading to a significant restructuring of supply chains.

• Ensuring Autonomy Over Design for Critical Defence Products (Article 16(11))

For critical defence products, prime contractors must possess complete design autonomy—the unrestricted ability to define, adapt, or evolve product design without third-country interference. This includes the absolute legal right to replace or remove any restricted components. This clause serves as a critical strategic safeguard designed to prevent long-term technological dependence and ensure the EU's capacity to maintain, upgrade, and adapt its most sensitive defence capabilities without external constraints. This requirement will significantly influence research and development (R&D) and licensing agreements for defence companies, particularly those with non-EU partners, compelling them to negotiate or develop alternative intellectual property arrangements to ensure compliance for critical systems.

• Safeguarding EU Security Interests: Screening and Guarantees (Article 16(5), (7))

EU-established entities under third -country control may participate only if they have undergone foreign direct investment screening with mitigation measures, or provide binding legal guarantees that their participation poses no security risk. The Commission may demand additional information at any time.

• Interplay with Existing Procurement Procedures: Urgent Procurement and Framework Agreement Modifications

Acquisitions that receive support under the SAFE Instrument are automatically deemed to satisfy the condition of "urgency resulting from crisis" as defined in Article 28(1)(c) of Directive 2009/81/EC. This designation justifies the use of a negotiated procedure without prior publication, thereby expediting the procurement process. Furthermore, existing framework agreements or contracts can be modified or opened to include additional Member States, even if such modifications were not initially foreseen, provided they comply with the criteria of Article 16 and receive the consent of the original contractor.

• VAT Exemption for SAFE-Financed Procurements (Article 20)

A significant financial incentive under the SAFE Regulation is the exemption from Value Added Tax (VAT) for supplies, intra-Community acquisitions, and imports of defence products related to SAFE-financed procurements. This exemption includes the right to deduct prior-stage VAT. This VAT exemption serves as a substantial financial lever, directly reducing the cost burden on Member States and enhancing the economic viability and attractiveness of SAFE-funded projects. While beneficial, this exemption may introduce administrative complexities for national tax authorities and suppliers in ensuring correct application and preventing potential misuse. It also establishes a precedent for direct EU-level fiscal interventions in specific, strategically critical sectors.

Key Eligibility Criteria under SAFE Regulation (Article 16)

4. Conclusions and Recommendations for Defence Companies

The SAFE Regulation represents a fundamental shift in EU defence policy, introducing unprecedented financial support coupled with strict eligibility criteria designed to build a robust European defence industrial base. This €150 billion instrument is not merely a funding mechanism but a strategic tool for reshaping the defence industry landscape, prioritizing European entities and reducing dependence on third-country suppliers. The regulation's comprehensive approach addresses multiple dimensions of defence industrial policy: financial incentives through substantial loans, geographical preferences through establishment requirements, supply chain control through the 65% European component rule, and technological sovereignty through design autonomy requirements. 

The inclusion of Ukraine alongside EU and EEA-EFTA states signals a pragmatic expansion of the European defence industrial base in response to current geopolitical realities.

Companies seeking to benefit from SAFE funding must proactively adapt to these new requirements. The regulation's strict eligibility criteria mean that non-compliance could result in exclusion from significant funding opportunities. Here are the critical steps for SAFE compliance:

• Conduct Immediate SAFE Eligibility Audit: Review corporate structure, executive management location, and supply chains against SAFE's specific requirements. Identify any gaps with the 65% European component requirement, establishment criteria, and third-country control provisions. Document compliance status thoroughly as this will be subject to scrutiny.
• Establish Strategic European Partnerships: Build relationships with entities from the EU, EEA-EFTA, and Ukraine to meet SAFE's eligibility requirements. This may involve joint ventures, licensing agreements, or supply chain restructuring to achieve the required European content thresholds.
• Ensure Complete Design Autonomy: For critical defence products under SAFE, establish unrestricted ability to define, adapt, and evolve product design without third-country interference. This includes securing legal rights to replace restricted components and may require renegotiating intellectual property agreements with non-EU partners.

• Prepare for SAFE Procurement Procedures: Understand that SAFE-financed acquisitions automatically qualify for urgent procurement procedures under Directive 2009/81/EC, enabling negotiated procedures without prior publication. Prepare to respond quickly to such opportunities while ensuring full compliance with Article 16 requirements.
• Document Compliance Meticulously: Maintain comprehensive records of compliance with SAFE eligibility criteria, including foreign investment screening results where applicable and binding legal guarantees regarding security interests. The Commission retains the right to demand additional information at any time.

For companies throughout the defence supply chain, SAFE compliance is crucial even if you don't primarily identify as a defence company. The regulation's broad scope means that:

• Assess whether your products or services could be incorporated into SAFE-funded projects, as this would subject them to the regulation's eligibility requirements.
• Ensure your corporate structure, ownership, and production facilities comply with SAFE's European requirements, including the 65% component threshold and establishment criteria.
• Clearly communicate your SAFE compliance status to potential defence industry customers, as your eligibility directly impacts their access to €150 billion in funding opportunities.

By taking these proactive steps, defence companies and their supply chain partners can contribute to, and benefit from, a more integrated, resilient, and strategically autonomous European defence industrial base, better equipped to address evolving security challenges.