You run a successful cloud business outside Europe and are now looking to set up your EMEA operation. But where do you choose?
The UK is in your top 5 choices but is it the best option? Or must you set up in Germany because you’ve heard German data can’t be held outside the country? Here’s a quick rundown of what to expect if you set up business in the UK (and the key benefits of doing so over Germany).
- The Economy – £ vs €
The financial climate is volatile and choosing a stable economy in which to establish your European operation is crucial to your success. The Eurozone crisis has left many European countries struggling to recover. 2015 is bringing further currency pressure in the Eurozone. Switzerland has abandoned its currency cap of its Franc against the Euro, the Greek election results have favoured abandoning austerity measures which could further destabilise the Euro, and the European Central Bank has announced €1.1 trillion of quantative easing in an attempt to boost the Eurozone. The UK is looking fairly stable by comparison. In fact, the World Bank GDP growth rates for 2013 illustrate that even Germany has found the struggle much harder than the UK – Germany’s GDP increased by only 0.1% compared to 1.7% for the UK. Also, the World Bank forecasts that the percentage increase in GDP from 2014 to 2015 will be 2.9% for the UK but only 1.1% for the Euro Zone.
- Corporation Tax
Only two things in life are certain and one of them is having to pay tax. There are ways to reduce your tax burden, of course, as demonstrated by more than a few multi-national companies recently. You could establish your business in a tax haven. Or you could set up several international divisions to spread your tax liabilities between them, favouring the country with the lowest rate. Not surprisingly, tax forum shopping and the taxation of multi-national businesses is a big topic for governments.
Assuming you’ll have to pay corporation tax at some point, you’ll need to take advice from specialists, as tax is often complicated and time consuming. In fact, the World Bank ranks the UK 52 places ahead of Germany in terms of ease of paying taxes. Apparently, companies in Germany spend 218 hours on average per year dealing with tax related issues, whereas UK companies spend only 110 hours.
It’s not just how long but how much. An overseas company with a branch or office in the UK can expect to pay one yearly payment of corporation tax at a rate of 21% based on profits from UK activities. In Germany the position is more complicated with a company paying two different taxes. First there’s trade tax which is set by the local authority. For larger towns, rates are between 14-17% and for smaller towns, rates are between 12-16%. Then there’s corporate tax at 15%.
- Law and regulation
The EU as a whole is a fairly law abiding region. While this is obvious, sometimes it is worth remembering the enormous value in doing business in a jurisdiction where the rule of law is recognised and upheld by the vast majority of residents.
In terms of the laws and regulations themselves, naturally, depending upon your view, there is either too much generally or not enough. Or at least, maybe there is not enough cloud-specific regulation. Given cloud is a regional or even global sector, it is important that regulators think about how to adopt solutions on a regional or global scale for them to work. The calls to establish a European Cloud could put the UK and Germany on a level playing field with each other and possibly give them an advantage over those cloud providers outside Europe from selling to customers inside Europe. When I’m asked for my advice on this, I say it’s best that regulation is not rushed and not too specific on the technology as otherwise it will be out of date the minute it’s passed into law. Also, these issues are better dealt with on the basis of an open global market. Having isolationist or protectionist policies is probably a backward step when the market is global. But, having a base inside Europe is better than not having one.
So what about the “red tape” factor and how far this slows down the ability to do business? There is not enough space for me to go into detail of all the regulations that will likely affect you if you do business in the UK and compare them against those of the other EU countries. But the World Bank has ranked all the countries in the world in order of how good they are for doing business in 2015. At number eight, the UK is the highest Western European country, one place behind the US and six places ahead of Germany. Again, UK is a strong contender to establish European operations.
- Data security and sovereignty
Data security and sovereignty are key topics in the cloud sector but ones which are often widely misunderstood. Most people know that the collection, processing and storage of personal information about a living individual, including an email address, must be compliant with EU data protection laws. After that, general awareness becomes more patchy.
Under the DPA, as long as the data protection principles are complied with and the country where the information is being transferred to has an adequate level of protection for data subjects, a data transfer agreement is enough to legitimise the transfer.
I regularly advise on data protection issues and often end up correcting misunderstandings of the law. For example, I’ve had non-lawyers tell me that UK law prohibits the transfer of data outside the UK. The law doesn’t say that. I’ve spoken to US cloud providers who say they have been told they must set up their EMEA operations in Germany as otherwise they will be excluded from trading with German customers. That’s also not the case and I have set them straight on that. Sometimes these misunderstandings can be explained by businesses which adopt a data policy that is more restrictive than the law. This stricter interpretation leads those in the business to believe the policy says the same as the law. Other times, it is simply misinterpretation by a business to suit its business interests. After all, keeping data in the country of origin can provide a boost for local providers to the exclusion of providers outside the country.
It’s worth remembering, it is the customer who will be primarily responsible under data protection laws. The cloud provider will normally store and process data on behalf of the customer and will have to follow the customer’s instructions. The new data protection regulation is aimed at truly harmonising the position throughout the EU. Until then, there is the perception that the approach to data protection is far stricter in Germany than in the UK. It’s true, there are some key differences between the UK Data Protection Act and the German Bundesdatenschutzgesetz, and in my view, they favour a UK operation rather than a German one. For example, BDSG requires express consent in writing in advance from the data subject whereas the DPA does not require explicit consent in the same way. Further, if a company has a data security breach, under BDSG, the data controller must inform the authorities and the data subjects but no such general obligation currently exists under the DPA – this will change under the regulation. Finally, under BDSG, in the absence of explicit consent, there must be a legal basis for the transfer of data outside of the European Economic Area and the data recipient must ensure an adequate level of data protection. Under the DPA, as long as the data protection principles are complied with and the country where the information is being transferred to has an adequate level of protection for data subjects, a data transfer agreement is enough to legitimise the transfer.
- Culture and language barriers
It is always a risk doing business in a country where you don’t have an awareness of the culture or an understanding of the language. English is the second most widely spoken language in the world (after Mandarin) when you include those speaking it as a second language. The English language also dominates the EU, with 52% speaking it natively or as a foreign language compared to 27% for German. Of course, English is the most widely spoken language of the USA too, the home of many cloud providers and currently the world’s largest economy.
- Localise your contracts
It’s also important to ensure you get your contracts properly drafted to ensure you not only protect your risks but also give the customer some reassurances. US public cloud contracts are notorious for shifting most of the risk to the customer – “as is” service, poor service credits and a complete exclusion of all liabilities including for loss of data. This may work fine in the US, but doesn’t sit well in the UK where you may struggle to enforce a complete exclusion of all liability. Customers want a more balanced approach that protects them too. I regularly advise customers looking to migrate to the cloud and these are exactly the issues I warn them about. When cloud providers instruct me to draft or update their cloud contracts, I flag these as areas for consideration. Providers are keen to stand out from a very crowded market and selling better provisioned private or hybrid cloud addressing these issues can be a great way of doing this. Therefore you should make sure you localise your cloud contract to ensure you don’t generally fall foul of English law.
If you’re looking to set up your European or EMEA cloud operation, the UK is the natural choice. The UK economy is growing faster than the Eurozone, it has a thriving cloud sector and an affordable and straightforward tax regime. It also has strong legal system and a fair approach to cloud contracting. And, in a world that is increasingly using English to communicate, you must not underestimate the importance of a country with 64m people where the main language is English.
Cloud Lawyer and Commercial Contracts
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