Backing defence tech: navigating Austria's legal environment for investors and founders

At the same time, Austria applies a dense, EU-anchored regulatory regime. Most material rules on exports, dual use and sanctions are EU law first and are then implemented or complemented by Austrian law – notably the Foreign Trade Act 2011 (Außenwirtschaftsgesetz 2011) and the Austrian War Material Act (Kriegsmaterialgesetz) together with the 1977 War Material Regulation (Kriegsmaterialverordnung). That makes the system both predictable and unforgiving: if classification or licensing is wrong, the consequences are severe.

In light of such regulation, every transaction in this space must deal with the following regulatory questions:

1.   What is the product? (classification: dual-use, war material, military equipment)

2.   Who is investing? (FDI screening, sanctions, fund restrictions)

3.   How is the deal structured and operated afterwards? (governance, compliance, exit)

Get these topics right early and regulation becomes a deal enabler rather than a blocker.

1 Core regulatory pillars

In Austria, the Foreign Trade Act 2011 (Außenwirtschaftsgesetz 2011) and the Austrian War Material Act (Kriegsmaterialgesetz) together with the 1977 War Material Regulation (Kriegsmaterialverordnung) form the core legal framework governing the export of military goods and certain dual-use items. Most of these rules are based on EU law and operate in line with the EU Dual-Use Regulation 2021/821, Directive 2009/43/EC (mainly) containing the list of defence-related products, as well as international agreements on war materials, such as the Wassenaar Arrangement. These create a dense system of controls that founders and investors must factor into any defence-related transaction.

Moreover, some EU sanctions regimes impose wide-ranging obligations on EU companies. In particular, the EU's sanctions against Russia have a reach beyond the territory of the Union. Regulation (EU) 833/2014 regulates trade sanctions against Russia, whereas Regulation (EU) 269/2014 governs individual sanctions against persons who – in the view of the EU – support Russia's aggression against Ukraine or contribute materially to Russia's economy. These individual sanctions impact the investment landscape in the EU because plenty of so-called "leading Russian businesspersons" are affected. But it is also important to be mindful of other sanctions regimes, such as those targeting Iran or Venezuela.

Why this matters

A breach of the Foreign Trade Act can trigger criminal liability of up to five years, in exceptional cases ten, and civil-law nullity of the underlying transaction. That is why Austrian VC/PE-style documentation in this segment routinely contains:

·        representations and warranties/indemnities on licensing/export compliance;

·        sanctions and FDI undertakings;

·        information covenants to keep investors in the loop when authorities or banks ask questions; and

·        KYC/AML provisions.

Practical takeaway

Map the regulatory regime before preparing the term sheet. If the business touches dual-use or war material, the legal framework should not be treated as a closing condition to be drafted around at the end – it must be part of the deal thesis from the outset.

2 Regulatory framework for defence tech investments

2.1 Regulatory classification for investment access

2.1.1 Dual-use goods

Dual-use goods are items, technologies or software that can be used for both civilian and military purposes. Examples include high-performance sensors, specialised electronics, certain types of industrial machinery as well as certain software and technology. These items are subject to the Dual-Use Regulation (EU) 2021/821, which governs the control of exports, brokering and technical assistance related to dual-use items throughout the European Union.

In Austria, dual-use controls are implemented under the Foreign Trade Act 2011. The competent supervising authority is the Federal Minister for Economic Affairs, Energy and Tourism (Bundesministerium für Wirtschaft, Energie und Tourismus).

Any export, transit or intangible transfer (for example, by e-mail, phone or cloud access) of dual-use goods may require prior approval. In practice, founders and investors should be aware of the following key points:

• Licensing requirement: A licence is generally required before transferring dual-use goods outside the EU, including digital or intangible exports.
• Electronic transfers count: Sharing controlled technology electronically (e.g. via cloud services, remote access or e-mail) qualifies as an export.
• Security review: Licences are only granted if the export does not conflict with Austria's or the EU's international obligations or security interests.
• Conflict-related restrictions: Exports that could contribute to armed conflicts or weapons development will be denied.
• General licence for trusted destinations: Exports to certain countries – such as the US, UK, Australia, Switzerland or Norway – are covered by a general licence, requiring only notification to the authority rather than an individual approval.

For investors, dual-use classification matters: it can determine whether a product is legally marketable and whether an investment aligns with fund strategies or regulatory restrictions. An incorrect classification can have serious consequences and must be avoided at all costs.

2.1.2 War material

The import, export, transit and brokering of war material under the 1977 War Material Regulation require approval pursuant to the War Material Act. Covered items include weapons, ammunition, explosives, tanks, armoured vehicles and related production facilities. Depending on the case, permits may also be required from the destination country. Applications are decided by the Federal Minister of the Interior (Bundesminister für Inneres) in agreement with the Federal Minister for European and International Affairs (Bundesminister für europäische und internationale Angelegenheiten) after consultation with the Federal Minister of Defence (Bundesminister für Landesverteidigung). Decisions are based on certain criteria such as human rights violations in the destination country, arms embargoes and Austria's foreign security interests.

2.1.3 Military equipment

There is a broad range of equipment that is not classified as a "weapon" but is specially designed for military use (protective gear, comms, tactical drones, night vision, certain software). These will still pull in the foreign trade or export-control regimes even though they are not "war material".

For a broader perspective on how Austria's rules compare with those in other CEE jurisdictions, see our companion guide: CEE regulatory overview: defence & national security.

Practical takeaway

Founders and investors should conduct a formal product classification as early as possible, taking into account the technical specifications, intended end-use and destination country of the product or technology. The outcome should be properly documented so it can be shared with investors, banks and authorities when required. The classification result should also be reflected in the investment documentation, including representations and warranties, undertakings and clauses addressing possible reclassification or changes in law. If there is any uncertainty, it is prudent to assume that licensing will be required and to plan transaction timing and conditions precedent accordingly.

2.2 Foreign direct investment screening (FDI)

Beyond product-level controls, investors face an additional layer of scrutiny at the transaction level itself. The Austrian Investment Control Act (Investitionskontrollgesetz) requires prior government approval for foreign investments in sensitive sectors, including defence, dual-use technologies and critical infrastructure. Approval is triggered when a non-EU, non-EEA or non-Swiss investor acquires 10 % or more – directly or indirectly – of an Austrian company. The only exemption applies to micro-enterprises with fewer than ten employees and an annual turnover or balance sheet total below EUR 2m.

Any transaction falling under the Act is deemed subject to the suspensive condition of regulatory clearance. Without approval, closing is invalid and may result in significant financial penalties or, in severe cases, criminal liability.

Importantly, scrutiny is not limited to the 10 % threshold: authorities can also review smaller stakes where indirect influence is evident – for example, through strategic voting rights, shareholder agreements or coordinated behaviour. Staged investments structured to avoid review are particularly likely to draw attention.

Practical takeaway for founders and investors

Determine early whether the target operates in a sensitive sector and assess ownership structures, shareholder rights and transaction timing. Filing requirements often arise where least expected, and without proper planning, approvals can cause material delays or even jeopardise the deal entirely.

For country-specific information, check out our FDI info corner here.

2.3 ESG investment restrictions and compliance

As defence and dual-use technologies move into the investment mainstream, asset managers must reconcile EU sustainable finance rules with disclosure duties and investor expectations.

In March 2024, the European Commission confirmed in its Defence Industrial Strategy Paper (JOIN(2024) 10 final) that the Sustainable Finance Disclosure Regulation (SFDR), EU Taxonomy Regulation and Corporate Sustainability Reporting Directive (CSRD) permit investments in defence-related sectors, including weapons and ammunition. The only absolute prohibition concerns so-called controversial weapons such as anti-personnel mines, cluster munitions and chemical or biological arms. Managers reporting on Principal Adverse Impacts must disclose annually if funds have exposure to such assets.

• Article 9 SFDR funds and Article 8 funds with binding sustainability commitments cannot hold controversial weapons due to the Do No Significant Harm (DNSH) principle.
• Other funds face no strict EU ban, but investor mandates, national laws and reputational considerations often rule them out in practice.

The treatment of conventional weapons is less clear. The rules do not prevent classifying them as sustainable investment under Article 2(17) SFDR, and the Commission has emphasised their role in resilience and security. Still, this position is politically sensitive and could shift. For Article 9 funds in particular, demonstrating compliance with the Do No Significant Harm test is extremely difficult.

Finally, the SFDR requires managers to explain how they manage sustainability risks. In defence, this extends beyond environmental and social impacts to governance, corruption, diversion, terrorism and the misuse of technologies – all of which must be factored into ESG assessments.

Practical takeaway

Asset managers and investors should anticipate heightened disclosure demands, assess reputational exposure, and treat sustainability classification in defence as a moving target subject to political and market scrutiny.

3 Enhanced due diligence for defence and dual use

Due diligence in the defence and dual-use sector demands more rigor than in standard venture deals. Each of these areas presents unique risks that fall outside the scope of conventional venture due diligence. Understanding each is essential for defence tech investors:

• Screen shareholders and co-investors for sanctions exposure, politically exposed persons (PEPs) and state affiliations.
• Product classification: determine whether goods fall under war material, dual-use or conventional categories. This classification drives licensing needs, export restrictions and investment control filings. Misclassification is a frequent regulatory risk.
• Account for export controls, since some defence-related information cannot be shared without security clearance. Standard disclosure warranties often require tailoring, and sensitive data may need to be reviewed in clean rooms under clean team agreements.
• Verify intellectual property rights, especially where assets stem from defence contracts, university research or EU funding, as these often come with restrictions or reversion rights.

Ultimately, due diligence not only safeguards investors but also serves as a pre-test for regulatory review. Ownership structures, product classifications and compliance measures must withstand authority scrutiny to ensure the deal is viable.

4 Venture capital in the defence and dual-use space

Venture capital plays a key role in scaling Austria's emerging defence and dual-use ecosystem but operates under tighter structural and compliance constraints than in conventional tech. Fund mandates, side letters and ESG policies often restrict exposure to defence, meaning eligibility must be confirmed early. VC-style documentation in this segment typically features enhanced representations, covenants and information rights to address export control, FDI and sanctions risk.

Practical takeaway

Investors should confirm that fund mandates allow defence or dual-use exposure, build regulatory timing into transaction planning, and ensure that fund documentation, governance rights and information flows align with export control and sanctions obligations.

5 Key considerations for investors and start-ups or founders

For investors:

• Regulatory clearance: Check early whether the Austrian Investment Control Act applies. Non-EU/EEA/Swiss investors acquiring 10 %, 25 % or 50 % of voting rights in sensitive sectors (defence, AI, cybersecurity, dual-use technologies) need prior approval. Pay close attention to definitions of "control" and the aggregation of voting rights.
• Fund restrictions: Review fund documentation and side letters for restrictions on defence or dual-use investments. This is particularly relevant where institutional or government-backed LPs are involved.
• Closing conditions: Make closing conditional on all required FDI and export-control approvals. Cooperation undertakings with founders help streamline filings.
• Staged closing mechanisms: If approval timelines are uncertain, consider a two-step structure – initial minority stake (below filing thresholds), followed by full closing post-clearance.
• Sanctions-related protections: Include call options or redemption rights to address the risk of sanctioned shareholders. Governance and board rights should be suspended automatically if sanctions hit.
• Export control compliance: Confirm that the target company has robust export control procedures in place, including compliance with the Foreign Trade Act 2011, the Austrian War Material Act and the EU Dual-Use Regulation. Request detailed documentation of all export licences, end-use certificates and internal compliance programmes.
• Sanctions and end-use risks: Evaluate exposure to embargoed or sanctioned countries or regions as well as sanctioned and other high-risk customers. Investment agreements should cover sanctions, end-use and diversion risks in representations and warranties.
• IP and data security: Verify clean title to IP, particularly if developed under defence contracts or with public funding. Ensure data protection under the Austrian Information Security Act (Informationssicherheitsgesetz) and compliance with security clearance rules for foreign investors.
• Exit strategy: Anticipate how FDI, sanctions and export rules may affect exits, especially sales to non-EU buyers. Build in flexibility for secondary sales and confirm whether approvals can be renewed or transferred.

For start-ups and founders:

• Sector classification: Assess early whether your business falls under critical infrastructure or sensitive technologies under Austrian law. This determines if FDI screening, export controls or additional security requirements apply.
• Compliance-oriented product classification: Conduct a documented legal assessment of whether your products qualify as dual-use goods, military equipment or weapons. Accurate classification impacts funding access, investor confidence and regulatory obligations.
• Licensing and approvals: Secure necessary export licences and, where required, FDI clearances before closing an investment round. Anticipate delays – approvals can directly affect both financing and operations.
• Governance and compliance: Implement internal policies for export control, sanctions compliance, data security and anti-money laundering (AML) and counter-terrorism financing (CTF). Designate a compliance officer and ensure regular training across the team.
• KYC/AML processes and beneficial ownership transparency: Implement robust internal processes to ensure the company knows at all times who its direct and indirect beneficial owners are. Shareholders' agreements should include provisions requiring investors to notify the company in advance of any direct or indirect transfer of shares and to provide all information and documentation necessary for the company to assess the effects of such transfer including potential harm to the company's regulatory standing, licensing status, or compliance obligations. The company should retain the right to withhold consent to any transfer where KYC/AML or regulatory concerns arise.
• Public funding and dual-use: Where grants (e.g. FFG, EDF) are used, stay on top of reporting and compliance obligations. For dual-use products, maintain records that demonstrate both civilian and defence applications, enabling flexibility for future classification.

Successfully navigating Austria's defence tech landscape requires three things: early regulatory mapping, robust compliance infrastructure and strategic deal structuring. By treating regulation not as an obstacle but as a strategic advantage, founders and investors can build defensible positions in one of Europe's fastest-growing sectors.

Drawing on deep experience in venture capital, private equity and technology M&A, our team advises across the full life cycle, from product classification and licensing to FDI screening and deal execution, ensuring that innovation and investment remain compliant, resilient and future-ready.

authors: Dominik Tyrybon, Thomas Kulnigg, Piotr Daniel Kocab