Abstract This article examines the ways in which the EC State aid rules apply to defence procurement in the EU and identifies the issues raised by the interplay between these two areas of the law. The award of a public contract can be found to be State aid if it is not in the form of a ''normal commercial transaction''. However, even though defence procurement generally has to comply with EC public procurement law, it can be subject to a number of exemptions for reasons of public security. This raises the issue of cross–subsidization from the military to the civil sector, which could be found to constitute State aid. Moreover, defence procurement contracts are often awarded without competition and include specific pricing mechanisms, and complex military equipment usually has no civil equivalent. These particularities make it difficult to compare the award of defence contracts with ''normal commercial transactions''. EC Member States usually do not consider possible interference between defence procurement and State aid rules. This creates the risk that defence contracts may have to be annulled if in breach of such rules, could undermine the regulation of State aid because of cross–subsidisation, and could also reduce the effectiveness of the EC policy to progressively open its defence market and render it more transparent. This article therefore suggests how best EC Member States could implement a policy for the award of defence contracts without breaching the EC State aid rules.