The President’s decision to veto the Act concerning the mechanism for using funds under the SAFE instrument shifted the debate on SAFE in Poland largely into the realm of sharp political dispute. For companies in the defence sector, however, a different question remains crucial: how does the SAFE mechanism work in practice, and will companies be able to participate in projects financed from these funds?
The answer follows primarily from the legal structure of the SAFE instrument laid down in Council Regulation (EU) 2025/1106. The veto of the legislation intended to regulate the national mechanism for using these funds does not alter the rules governing the instrument itself at EU level. The Government had planned to implement those rules domestically through legislation on the Financial Instrument for Increasing Security (FIZB), which was intended to establish the mechanism for using SAFE funds in Poland.
The legal position of companies under the SAFE mechanism
Financial support under the SAFE instrument takes the form of a loan granted by the European Union to a Member State. It is the state – not the company – that is party to the financial relationship with the EU. The draft FIZB Act provided for the creation of a national mechanism under which SAFE funds would be incorporated into the public finance system and then directed towards the implementation of tasks set out in the Investment Plan for the European Defence Industry (the Plan). Disbursements made by Bank Gospodarstwa Krajowego were to be transferred to the competent ministers responsible for implementing the individual tasks included in the Plan.
Under this mechanism, the state — acting through BGK and the designated ministers — remains the central participant. A company enters the mechanism only at the implementation stage, as a contractor under a public procurement contract, defined in the draft legislation as an “entity implementing a task” or the “final recipient of support”.
A company’s legal relationship with the SAFE mechanism therefore arises through an agreement concluded with a central government authority, namely the competent minister. That agreement sets out the conditions governing financing, settlement and any financial adjustments. From the company’s perspective, the stability of the financing therefore depends primarily on the structure of those agreements and on how the settlement requirements and risks associated with implementation of the Plan are transferred to the contractor.
Access to funding – when does a company enter the SAFE mechanism?
The procedure for activating SAFE funds begins at Member State level, with the Member State submitting an application to the European Commission together with an Investment Plan for the European defence industry.
The draft FIZB legislation provided that the SAFE loan would be taken out by Bank Gospodarstwa Krajowego on behalf of the FIZB, after which the funds would be made available in accordance with the fund’s annual financial plan. That plan would allocate the funds among the competent ministers responsible for implementing the tasks set out in the Plan. Only at that stage would public procurement procedures and contracts begin, creating opportunities for companies to participate as contractors carrying out tasks financed from the SAFE loan.
Eligibility requirements for contractors and the supply chain
Participation by companies in procurement financed under SAFE is limited to entities whose registered office and executive management structures are located in the European Union, EEA-EFTA states or Ukraine. This applies in particular to projects implemented through joint procurement or cooperation between Member States. Contractors and subcontractors may not be controlled by a third country or by an entity from a third country outside those territories.
The SAFE Regulation does, however, provide for certain exceptions. Limited participation by subcontractors from outside the EU may be permitted, as may participation by companies established in the EU but controlled by entities from third countries, provided that they have undergone foreign investment screening or provide appropriate security guarantees.
The structure of the supply chain is also relevant. The value of components of the final product originating outside the Union, EEA-EFTA states and Ukraine may not exceed 35% of the value of all components. In addition, components may not originate from countries regarded as posing risks to the security interests of the Union. Procurement financed under SAFE may also benefit from accelerated procurement procedures in the defence sector, particularly where urgency applies.
Risk relating to the eligibility of expenditure
Under the SAFE mechanism, a key issue is whether funds are used correctly in implementing the Plan. The European Commission will verify whether activities undertaken by the Member State and expenditure reported under implementation of the Plan satisfy the conditions laid down in the SAFE Regulation and are therefore eligible for financing.
The draft FIZB legislation contemplated situations in which expenditure had already been incurred in implementing a task but the Commission did not consider it eligible for financing from the SAFE loan. In such a case, the financial burden would fall on the state and, within the national system, on the competent minister responsible for implementing the task. The draft legislation did not establish a direct claim against the company, as the final recipient of support, solely on the basis of an adverse Commission assessment concerning the eligibility of expenditure.
This would not, however, eliminate all risk for companies. The settlement rules were to be set out in the agreement concluded with the public authority, and that agreement could provide mechanisms transferring to the contractor part of the risk associated with the eligibility of expenditure or the proper implementation of the task.
Risk of failing to achieve implementation milestones
The SAFE mechanism provides for monitoring progress in implementing the tasks set out in the Plan. A key role is played by so-called implementation milestones, which form the basis for assessing the progress of works and for releasing subsequent disbursements of funds. This approach is similar to the mechanism used under the Recovery and Resilience Facility.
The draft FIZB legislation provided that implementation controls would include, in particular, verification of whether the implementation milestone specified in the Plan had been achieved within the required timeframe. Achievement of those milestones was also relevant to the release of subsequent payments. If an implementation milestone was not achieved, the Commission could suspend payment of the next financing tranche.
Although the draft FIZB legislation did not provide for an automatic financial penalty to be imposed on the final recipient of support for failure to achieve a milestone, the company would remain at the centre of the proceedings aimed at determining the progress of the task. In practice, this could lead to disputes with the authority concerning the proper performance of the task and the rules governing settlement of the financing.
Control and audit system
The draft FIZB legislation provided for an extensive control and audit system covering tasks financed from the SAFE loan. The relevant obligations were to apply not only to public authorities, but also to the final recipients of support.
Those entities were required to ensure the operation of an internal control system relating to the use of funds and implementation of tasks. In particular, the system was to cover risk identification, prevention of fraud and assurance that activities complied with national and EU law.
Audits concerning task implementation and the use of funds were to be carried out by the Head of the National Revenue Administration. The audit could cover both the public institutions implementing the tasks and the companies participating in the projects, including the final recipients of support.
In practice, this would require companies to be prepared for extensive documentation and information obligations. An adverse control or audit outcome could lead to the proper use of funds being challenged, to an obligation to repay funds and, consequently, to a dispute with the public authority.
Financial liability mechanism
The draft FIZB legislation provided that responsibility for repayment of the SAFE loan would rest with the state. The loan was to be taken out by Bank Gospodarstwa Krajowego on behalf of the FIZB, while BGK’s obligations under that arrangement were to be covered by a State Treasury guarantee.
At statutory level, however, no provision was introduced establishing direct financial liability of companies, as final recipients of support, towards the state for the use of SAFE funds. This meant that the draft FIZB legislation did not provide for an automatic obligation on the contractor to repay funds. It did not, however, exclude companies’ financial liability altogether. The financing of tasks was to be based on agreements concluded with the competent ministers, setting out the rules governing liability for irregularities, failure to perform obligations and any obligation to repay funds. As a result, companies’ financial liability under the SAFE mechanism was to be contractual in nature and would depend primarily on the structure of their legal relationship with the public authorities rather than directly on the legislation governing the FIZB.
In practice, this means that for companies the key issue will be not only the structure of the SAFE instrument itself, but also the terms of the contracts concluded with the state for the performance of procurement financed from SAFE funds.
Read more in our article “SAFE – how can companies benefit from it?” about Council of Ministers Resolution No. 96 and the ways in which funds available under the SAFE instrument can be used.
