The 35% rule and design authority: how EDIP’s third-country restrictions reshape defence supply chains

Article 10(3) provides that for EU-funded procurement “the cost of components originating outside the Union and associated countries shall not exceed 35% of the estimated cost of the components of the end product.”

This threshold also applies to industrial reinforcement actions and EDPCIs.

No component may be sourced from countries that contravene EU security interests. Raw materials are excluded from the definition of “components”. This matters for manufacturers relying on imported rare earths or titanium.

The threshold is a ceiling, not a target. Contractors need to audit supply chains, map component origin and calculate cost ratios. Companies sourcing critical subsystems from the US, UK or other third countries must assess whether their structures fall within the 35% limit and, if not, whether EU-based alternatives are viable.

Article 10(5) requires recipients of EU funding to have the ability to decide on the definition, adaptation and evolution of the design of defence products. This includes the legal authority to substitute or remove components.

This is a sovereignty requirement. Companies must show that no third country has a veto over their ability to modify product design across the full lifecycle.

The European Military Sales Catalogue will indicate whether products are free from third-country restrictions. In practice, companies operating under ITAR, EAR or similar regimes must assess whether they retain genuine control or whether a third-country licensor holds an effective veto.

Article 12(4) provides a targeted derogation for ammunition and missiles. Design authority may be met through a legally binding commitment to obtain full autonomy by 31 December 2033.

Securing such a commitment from a foreign government is unprecedented. Given development timelines, companies should plan restructuring now.

Article 11(7) allows common procurement to include one extra-EU subcontractor with 15–35% of contract value while remaining eligible. This applies only where a direct contractual link existed before the Regulation entered into force.

This is a transitional measure. New subcontracting arrangements with non-EU entities do not benefit from this exemption.

Companies need to review IP and licensing arrangements with third-country partners.

Three areas require focus:

• Manufacturing licence agreements that restrict modification in conflict with Article 10(5)
• Technical data agreements subject to ITAR or EAR constraints, especially in avionics and missile systems
• Supply agreements with denial-of-supply clauses

Under Article 9(6), IP generated under EDIP must not be subject to third-country restrictions. Companies should review IP ownership, export controls and substitution rights together.

These requirements are particularly relevant for Italian defence companies, which operate across European and transatlantic supply chains.

Italy has secured a EUR 14.9 billion loan under SAFE (Council Implementing Decision (EU) 2026/410). This positions it as a key beneficiary of EU defence funding. Italy participates in four of eight EDPCIs: IMSD, EU-FIAMD, DECODER and Space, all of which require compliance.

Italian entities rank among the top three in EDF 2025 participation.

The Italy–Germany partnership, highlighted at the April 2026 Rheinmetall Italia conference in Rome with Leonardo, Fincantieri, RENK Italia and German SMEs, shows how supply chains are evolving under EDIP.

The immediate opportunity for Italian primes is clear: identify EU-origin substitutes and document design authority positions before EDIP applications are assessed.

The 35% rule and the design authority requirement form the operational core of the EU defence sovereignty agenda.

Together with the ammunition derogation and the subcontractor band, they create a structured and pragmatic framework. Companies that start supply chain audits, IP reviews and contract restructuring now will be best positioned to access EU funding.

Looking ahead, the second funding cycle under the European Competitiveness Fund from 2028, with around EUR 131 billion for “Resilience and Security, Defence Industry and Space”, suggests that these rules will shape the European defence landscape for the long term.