diff --git a/flow-server/src/main/java/com/vaadin/flow/server/frontend/NodeUpdater.java b/flow-server/src/main/java/com/vaadin/flow/server/frontend/NodeUpdater.java
index b3d7b336030..4a1d6a70402 100644
--- a/flow-server/src/main/java/com/vaadin/flow/server/frontend/NodeUpdater.java
+++ b/flow-server/src/main/java/com/vaadin/flow/server/frontend/NodeUpdater.java
@@ -263,6 +263,10 @@ static Map<String, String> getDefaultDevDependencies() {
 
         defaults.put("typescript", "4.0.3");
         defaults.put("ts-loader", "8.0.12");
+        defaults.put("file-loader", "6.1.0");
+        defaults.put("extract-loader", "5.1.0");
+        defaults.put("lit-css-loader", "0.0.4");
+        
         // Constructable style sheets is only implemented for chrome,
         // polyfill needed for FireFox et.al. at the moment
         defaults.put("construct-style-sheets-polyfill", "2.4.2");
diff --git a/flow-server/src/main/resources/plugins/application-theme-plugin/application-theme-plugin.js b/flow-server/src/main/resources/plugins/application-theme-plugin/application-theme-plugin.js
index 75ae11e582c..67e373706a2 100644
--- a/flow-server/src/main/resources/plugins/application-theme-plugin/application-theme-plugin.js
+++ b/flow-server/src/main/resources/plugins/application-theme-plugin/application-theme-plugin.js
@@ -17,7 +17,7 @@
 const fs = require('fs');
 const path = require('path');
 const generateThemeFile = require('./theme-generator');
-const { copyThemeResources, copyStaticAssets } = require('./theme-copy');
+const copyStaticAssets = require('./theme-copy');
 
 let logger;
 
@@ -112,7 +112,6 @@ function handleThemes(themeName, themesFolder, projectStaticAssetsOutputFolder)
 
     const themeProperties = getThemeProperties(themeFolder);
 
-    copyThemeResources(themeFolder, projectStaticAssetsOutputFolder);
     copyStaticAssets(themeProperties, projectStaticAssetsOutputFolder, logger);
 
     const themeFile = generateThemeFile(themeFolder, themeName);
diff --git a/flow-server/src/main/resources/plugins/application-theme-plugin/package.json b/flow-server/src/main/resources/plugins/application-theme-plugin/package.json
index 2027a6bd109..079d7ab58a4 100644
--- a/flow-server/src/main/resources/plugins/application-theme-plugin/package.json
+++ b/flow-server/src/main/resources/plugins/application-theme-plugin/package.json
@@ -6,7 +6,7 @@
   ],
   "repository": "vaadin/flow",
   "name": "@vaadin/application-theme-plugin",
-  "version": "0.1.6",
+  "version": "0.2.0",
   "main": "application-theme-plugin.js",
   "author": "Vaadin Ltd",
   "license": "Apache-2.0",
diff --git a/flow-server/src/main/resources/plugins/application-theme-plugin/theme-copy.js b/flow-server/src/main/resources/plugins/application-theme-plugin/theme-copy.js
index e3eaeaaf70b..34abd768b2d 100644
--- a/flow-server/src/main/resources/plugins/application-theme-plugin/theme-copy.js
+++ b/flow-server/src/main/resources/plugins/application-theme-plugin/theme-copy.js
@@ -15,52 +15,13 @@
  */
 
 /**
- * This file handles copying of theme files to
- * [staticResourcesFolder]
+ * This contains functions and features used to copy theme files.
  */
 
 const fs = require('fs');
 const path = require('path');
 const glob = require('glob');
 
-/**
- * Copy theme files to static assets folder. All files in the theme folder will be copied excluding
- * css, js and json files that will be handled by webpack and not be shared as static files.
- *
- * @param {string} themeFolder Folder with theme file
- * @param {string} projectStaticAssetsOutputFolder resources output folder
- */
-function copyThemeResources(themeFolder, projectStaticAssetsOutputFolder) {
-  if (!fs.existsSync(path.resolve(projectStaticAssetsOutputFolder))) {
-    require('mkdirp')(path.resolve(projectStaticAssetsOutputFolder));
-  }
-  copyThemeFiles(themeFolder, projectStaticAssetsOutputFolder);
-}
-
-const ignoredFileExtensions = [".css", ".js", ".json"];
-
-/**
- * Recursively copy files found in theme folder excluding any with a extension found in the `ignoredFileExtensions` array.
- *
- * Any folders met will be generated and the contents copied.
- *
- * @param {string} folderToCopy folder to copy files from
- * @param {string} targetFolder folder to copy files to
- */
-function copyThemeFiles(folderToCopy, targetFolder) {
-  fs.readdirSync(folderToCopy).forEach(file => {
-    if (fs.statSync(path.resolve(folderToCopy, file)).isDirectory()) {
-      if (!fs.existsSync(path.resolve(targetFolder, file))) {
-        fs.mkdirSync(path.resolve(targetFolder, file));
-      }
-      copyThemeFiles(path.resolve(folderToCopy, file), path.resolve(targetFolder, file));
-    } else if (!ignoredFileExtensions.includes(path.extname(file))) {
-      fs.copyFileSync(path.resolve(folderToCopy, file), path.resolve(targetFolder, file));
-    }
-  });
-}
-
-
 /**
  * Copy any static node_modules assets marked in theme.json to
  * project static assets folder.
@@ -118,4 +79,4 @@ function copyStaticAssets(themeProperties, projectStaticAssetsOutputFolder, logg
   });
 };
 
-module.exports = { copyThemeResources, copyStaticAssets };
+module.exports = copyStaticAssets;
diff --git a/flow-server/src/main/resources/plugins/theme-loader/package.json b/flow-server/src/main/resources/plugins/theme-loader/package.json
index db02fde7259..171891789f4 100644
--- a/flow-server/src/main/resources/plugins/theme-loader/package.json
+++ b/flow-server/src/main/resources/plugins/theme-loader/package.json
@@ -6,7 +6,7 @@
   ],
   "repository": "vaadin/flow",
   "name": "@vaadin/theme-loader",
-  "version": "0.0.2",
+  "version": "0.0.3",
   "main": "theme-loader.js",
   "author": "Vaadin Ltd",
   "license": "Apache-2.0",
diff --git a/flow-server/src/main/resources/plugins/theme-loader/theme-loader.js b/flow-server/src/main/resources/plugins/theme-loader/theme-loader.js
index 3e9f03a1412..353e4e23c4e 100644
--- a/flow-server/src/main/resources/plugins/theme-loader/theme-loader.js
+++ b/flow-server/src/main/resources/plugins/theme-loader/theme-loader.js
@@ -2,7 +2,7 @@ const loaderUtils = require("loader-utils");
 const fs = require('fs');
 const path = require('path');
 
-// Collect groups [url(] [ |'|"]optional './', file part and end of url
+// Collect groups [url(] [ |'|"]optional './|../', file part and end of url
 const urlMatcher = /(url\()(\'|\")?(\.\/|\.\.\/)(\S*)(\2\))/g;
 
 /**
@@ -21,11 +21,11 @@ module.exports = function (source, map) {
   let themeFolder = handledResourceFolder;
   // Recurse up until we find the theme folder or don't have 'theme' on the path.
   while (themeFolder.indexOf("theme") > 1
-      && path.basename(path.resolve(themeFolder, "..")) !== "theme") {
+  && path.basename(path.resolve(themeFolder, "..")) !== "theme") {
     themeFolder = path.resolve(themeFolder, "..");
   }
   // If we have found no theme folder return without doing anything.
-  if(path.basename(path.resolve(themeFolder, "..")) !== "theme") {
+  if (path.basename(path.resolve(themeFolder, "..")) !== "theme") {
     this.callback(null, source, map);
     return;
   }
@@ -35,14 +35,15 @@ module.exports = function (source, map) {
   source = source.replace(urlMatcher, function (match, url, quoteMark, replace, fileUrl, endString) {
     let absolutePath = path.resolve(handledResourceFolder, replace, fileUrl);
     if (fs.existsSync(absolutePath) && absolutePath.startsWith(themeFolder)) {
-      logger.debug("Updating url for file '", replace, fileUrl, "' to use 'VAADIN/static'");
+      const frontendThemeFolder = "theme/" + path.basename(themeFolder);
+      logger.debug("Updating url for file", "'" + replace + fileUrl + "'", "to use", "'" + frontendThemeFolder + "/" + fileUrl + "'");
       const pathResolved = absolutePath.substring(themeFolder.length).replace(/\\/g, '/');
 
-      // keep the url the same except replace the ./ to VAADIN/static
+      // keep the url the same except replace the ./ or ../ to theme/[themeFolder]
       if (quoteMark) {
-        return url + quoteMark + 'VAADIN/static' + pathResolved + endString;
+        return url + quoteMark + frontendThemeFolder + pathResolved + endString;
       }
-      return url + 'VAADIN/static' + pathResolved + endString;
+      return url + frontendThemeFolder + pathResolved + endString;
     } else if (options.devMode) {
       logger.info("No rewrite for '", match, "' as the file was not found.");
     }
diff --git a/flow-server/src/main/resources/webpack.generated.js b/flow-server/src/main/resources/webpack.generated.js
index 777cd809c57..6c17b897bf2 100644
--- a/flow-server/src/main/resources/webpack.generated.js
+++ b/flow-server/src/main/resources/webpack.generated.js
@@ -16,6 +16,10 @@ const ApplicationThemePlugin = require('@vaadin/application-theme-plugin');
 const path = require('path');
 const baseDir = path.resolve(__dirname);
 // the folder of app resources (main.js and flow templates)
+
+// this matches /theme/my-theme/ and is used to check css url handling and file path build.
+const themePartRegex = /(\\|\/)theme\1[\s\S]*?\1/;
+
 const frontendFolder = '[to-be-generated-by-flow]';
 
 const fileNameOfTheFlowGeneratedMainEntryPoint = '[to-be-generated-by-flow]';
@@ -160,7 +164,9 @@ module.exports = {
             options: {
               url: (url, resourcePath) => {
                 // Only translate files from node_modules
-                return resourcePath.includes('/node_modules/');
+                const resolve = resourcePath.match(/(\\|\/)node_modules\1/);
+                const themeResource = resourcePath.match(themePartRegex) && url.match(/^theme\/[\s\S]*?\//);
+                return resolve || themeResource;
               },
               // use theme-loader to also handle any imports in css files
               importLoaders: 1
@@ -176,6 +182,23 @@ module.exports = {
           }
         ],
       },
+      {
+        // File-loader only copies files used as imports in .js files or handled by css-loader
+        test: /\.(png|gif|jpg|jpeg|svg|eot|woff|woff2|ttf)$/,
+        use: [{
+          loader: 'file-loader',
+          options: {
+            outputPath: 'static/',
+            name(resourcePath, resourceQuery) {
+              const urlResource = resourcePath.substring(frontendFolder.length);
+              if(urlResource.match(themePartRegex)){
+                return /^(\\|\/)theme\1[\s\S]*?\1(.*)/.exec(urlResource)[2];
+              }
+              return '[path][name].[ext]';
+            }
+          }
+        }],
+      },
     ]
   },
   performance: {