How Europe's Carmakers Are Entering Defence

European carmakers are increasingly engaging in defence production. Subdued demand and continued supply chain disruption have left a number of European plants operating below capacity. At the same time, rearmament budgets across the continent offer a source of government-backed demand

In recent months, a series of arrangements between carmakers and defence manufacturers has been announced on this basis. The pattern is not confined to the automotive sector, as other industrial manufacturers, facing comparable pressures, are exploring similar steps. Although often presented as a single development, these arrangements take different forms, each with materially different legal, tax and financing consequences. 

Plant conversion

The most far-reaching route is to repurpose an entire site for defence production, whether through a joint venture with an established defence manufacturer, the acquisition of the plant by one, or a transfer of capacity to it. Two questions tend to dominate.

First, all EU Member States have introduced national foreign direct investment (FDI) screening regimes. Where a transaction falls within the scope of such regimes - in particular where the target is active in sensitive sectors such as defence, dual use items or critical technologies or infrastructure - filings may be required in one or more jurisdictions, depending on the applicable national rules. At EU level, a revised FDI Screening Regulation was agreed in December 2025 and formally adopted in June 2026. While not yet in force, it will require all Member States to operate screening mechanisms (as is already the case) and introduce a harmonised minimum scope for sensitive sectors, without creating a centralised EU approval system. Please refer to our earlier update for further background regarding the revision of the EU FDI Screening Regulation.

Secondly, public investment aid is typically granted on condition that the supported activity, and the jobs it creates, are maintained for a minimum period – commonly five years under EU regional aid rules. Converting the plant to defence production within that period changes the activity the aid was granted to support, which may expose part of the subsidy to clawback. Alongside these, there are questions familiar from any carve-out: transaction structure, the position of the existing workforce, and the tax treatment of the restructuring itself.

Dual production

A less far-reaching variation brings defence production into an existing civilian plant, adding a defence production line alongside regular output. The most visible example is UAV manufacturing, where a carmaker assembles systems in partnership with a defence group and under contract with a national procurement agency. That co-existence carries consequences of its own. Export control requirements and product classification apply to part of the output but not to the rest, and the commercial arrangements can be unusual. A procurement agency may, for instance, pay the manufacturer to keep production capacity available rather than ordering actual output. Such availability payments may be treated differently from ordinary sales revenue and raise characterisation and timing questions for corporate income tax and VAT alike.

Product integration

A third route is product integration, where the plant itself remains unchanged. In this model, the manufacturer supplies a civilian vehicle platform, such as a van or all-terrain vehicle, which a defence partner then adapts or equips as part of a defence system. The threshold question is at what point a civilian vehicle becomes a controlled dual-use or strategic good. That classification determines the export control position, and an incorrect classification of export without the proper licences carries real consequences. The same classification determines the customs treatment and the VAT analysis.

The common question

The defence pivot may affect only part of a manufacturer's production and may, in some cases, prove temporary. The reorientation it requires is nonetheless potentially substantial, with new production flows, new counterparties and new contractual arrangements, with consequences that span several legal and tax disciplines.