Defence investments in the EU and Luxembourg: opportunities and legal challenges

The European Union is entering a new era of defence policy. In view of the geopolitical context on the continent, the European Commission’s White Paper for European Defence – Readiness 2030 of March 2025 has called for a “once-in-a-generation surge in European defence investment” to rebuild Europe’s defence capabilities and industrial base, aiming also to create a true EU-wide Market for Defence equipment.

Furthermore, the Commission’s Defence Readiness Omnibus of June 2025 encourages Member States to mobilise up to €800 billion in additional defence spending by 2030. In parallel, the SAFE Regulation (Security Action for Europe) proposes €150 billion in loans to support Member States’ procurement of strategic capabilities such as air and missile defence, drones, and cyber systems. To finance these loans, the Commission may, on behalf of the EU, borrow the necessary funds on the capital markets or from financial institutions. 

Measures to be implemented are listed in the Commission’s Defence Readiness Roadmap 2030, which sets out a number of priorities and objectives for the coming years. The Commission focuses in particular on Member States’ organising joint procurement and on how to address critical defence capability gaps, for example by promoting the creation of Member States Capability Coalitions, each of which will address specific defence capability shortcomings by setting clear objectives and timelines. 

These initiatives, which remain subject to state aid, merger control and antitrust rules, will lead to a profound transformation of the European defence landscape. It is up to the Member States to put them into effect.

The framework also recognises the need to boost private investment in defence next to public investment. In this respect, it is noted that progress towards a Savings and Investments Union will help channel long-term private capital into defence investment, innovation and infrastructure. The EIB Group’s recent step-up of its financing of projects related to defence, including infrastructure, is also underlined as sending a strong signal to markets.

The main takeaways of the developments in 2025 as well as the challenges and opportunities in this area going forward are set out below.

The Luxembourg Defence Bond: an unprecedented initiative

Against this EU backdrop, the Luxembourg government approved on 6 October 2025 the Defence Bond Framework, authorising the issue of national sovereign bonds dedicated exclusively to defence projects. While the EU is allowing joint borrowing under the SAFE Regulation, Luxembourg’s Defence Bond is a national sovereign instrument explicitly dedicated to defence. The first issuance took place on 15 January 2026, selling out quicky, in particular due to the fact that resident investors enjoy full tax exemption on interest income as stipulated in the Law of 19 December 2025 on certain tax measures, an incentive designed to encourage broad participation by retail savers.

The proceeds, which will be managed by the State treasury, will finance projects strengthening Luxembourg’s military, industrial and technological capabilities, for instance, secure satellite communication, the development of drones and the build-up of ammunition stocks. Certain sectors are excluded, such as the development of unconventional or controversial weapons. 

Legislative and industrial developments in Luxembourg

To anchor its role in the emerging European defence ecosystem, Luxembourg must adapt its domestic weapons legislation. At present, the Law of 2 February 2022 on weapons and ammunition effectively prohibits any commercial activities involving “category A” weapons and ammunition, which encompasses the common military list of the EU, a blanket restriction that may deter defence manufacturers from establishing operations in the country. It also contains certain further restrictions which may complicate commercial development in the sector. 

In this respect, in 2025, the newly formed Lux4Defence association, supported by the Chamber of Commerce, called for the liberalisation of the legal framework to allow the development of a domestic defence-industrial base. Such a reform would be in line with the EU’s Defence Readiness Omnibus, which seeks to reduce red tape and facilitate defence investments.

Hence, the Law of 2 February 2022 may be up for reform to allow certain forms of weapons production and trade. 

The ESG dimension: defence enters sustainable finance

In September 2025, the Commission issued a Notice on the application of the sustainable finance framework and the Corporate Sustainability Due Diligence Directive (CSDDD) to the defence sector.

This notice clarifies that investments in defence are considered compatible with the EU’s sustainable-finance rules, including the SFDR, EU Taxonomy, MiFID II and the CSRD. The Commission warns against “undue discrimination” of defence companies by ESG investors and underlines that a robust defence sector can contribute to social sustainability, namely the protection of democracy, peace, and human rights. The Commission’s message is that through its contribution to the resilience, security and peace of the Union, the EU defence industry enhances sustainability. Defence investments are to be assessed on a case-by-case basis, like those in any other sector. 

Furthermore, the Commission recalls that the defence industry is highly regulated at international, EU and Member State level, in particular as regards use and export, requiring specific due diligence, and that potential exposure to manufacture or selling of weapons deemed controversial raises issues under the SFDR and EU Taxonomy.

In summary, on the basis of a case-by-case analysis, asset managers and institutional investors may include defence-related projects in their portfolios without compromising their ESG policies and objectives. 

Defence investments and competition law

The Commission’s Defence Readiness Omnibus addresses the interaction between EU competition law and defence policy. While the Commission reaffirms that competition rules remain applicable to the defence sector, it recognises that traditional frameworks must adapt.

In the field of merger control, the Commission emphasises that mergers will be assessed with due regard to the changed security environment. The ongoing review of the merger guidelines seeks to account for efficiencies arising from enhanced defence and security (e.g. interoperability and resilience of supply chains) when evaluating whether a concentration restricts competition. In particular, in its public consultation on the review, the Commission sought feedback from stakeholders whether further guidance on the interaction between Member States’ security and defence interests and the Commission’s competition assessment under the EU Merger Regulation could be useful. Feedback was also sought on how to undertake a potential balancing of interests between defence and competition objectives for cases that involve dual-use goods. The results of the review will be presented in 2026.

From an antitrust perspective, the Commission signals openness to cooperation between defence undertakings, including joint procurement of raw materials or coordinated production. Such collaborations may now be viewed favourably where they generate efficiencies in terms of defence readiness and supply chain resilience.

Finally, in the state aid context, the Commission highlights that certain measures supporting the defence sector may fall under the Article 346 TFEU exemption, which allows Member States to adopt measures to protect their essential security interests in connection with the production of or trade in arms, munitions and war material under certain circumstances. Alternatively, they may benefit from an exemption to the state aid prohibition under the existing frameworks: when Article 346 TFEU does not apply, the Commission will prioritise and expedite reviews of aid measures that support critical defence investments, applying a pragmatic balancing test under Article 107(3)(c) TFEU, which allows it to declare compatible aid facilitating the development of certain economic activities or of certain economic areas where such aid does not adversely affect trading conditions to an extent contrary to the common interest. The Commission will view certain factors positively, such as the fact that the aid measure has defence readiness 2030 as its objective or that the aid is granted in the context of EU programmes, contributes to resilience needs or to the reduction of third-country dependencies.

Public security considerations

The Luxembourg export control regime is also relevant here. It is governed by the Law of 27 June 2018 on export controls, which provides for a prior authorisation system in particular regarding export, transfer, import and transit operations carried out by operators of goods of a strictly civilian nature, defence-related products and dual-use goods and regulates the brokering of defence-related products and dual-use goods, technical assistance related to certain military end uses, and the intangible transfer of technology. It also prohibits export of equipment specifically designed for torture or other cruel, inhuman or degrading treatment and implements trade restrictions against certain States or entities in accordance with UN resolutions and EU law.

In addition, foreign investors seeking to invest in the EU defence sector will have to count with foreign direct investment screening powers of the Member States. In Luxembourg, the law setting up a national mechanism for the screening of foreign direct investments likely to affect security or public order provides that investments made by investors from outside the European Economic Area with a view to acquiring control of a Luxembourg entity engaged in critical activities, which include in particular activities in the defence or aerospace sector as well as the development, operation and trade of dual-use goods, are subject to notification to and prior authorisation by the Minister for the Economy. 

This mechanism, which provides for severe penalties in the event of non-compliance, will be further strengthened following the political agreement at EU level on a proposal for a new EU Regulation, which aims in particular to extend the mechanism to investments by EU investors that are ultimately controlled by a non-EU person. 

Main takeaways

The year 2025 marked a turning point for both European and Luxembourg defence policy. Various EU initiatives recast defence as a driving force for industrial innovation and a legitimate field for sustainable investment.

Luxembourg’s Defence Bond and the government’s stated willingness to revisit arms-production restrictions show that Luxembourg seeks to adapt proactively to this new paradigm. 

Finally, the EU’s pragmatic approach to competition and state aid control reflects a shift towards enabling, rather than constraining, strategic defence investments. 

Please do not hesitate to reach out to our teams for support in all compliance and EU law matters as well as to assist you with investments in the defence sector in Luxembourg and beyond.