Mod\modname1\gfx\flags folder

From EU3 Wiki

The flags folder contains all the flag graphics for a mod and some code that is related to it. the flagfile.dds file should not be included in a mod unless it has been edited correctly. The game will automaticaly generate the flagfiles.dds file. The flagfiles.txt files contains a list of all the countries in the game and positioned in the .txt file so that it shows which flag is for which country in the flagfiles.dds file. If you make a .tga flag for a new country you should add the name of your flag file you made to the list inside the flagfiles.txt file. This example shows AAA.tga, this name must be spelled the same as how you declared it in the other files (like in the .csv files). If you make a .tga file you do not have to edit the .dds file here. the game will generate everything correctly.