The telecommunications, media and technology (TMT) sector is one of the most steadily growing sectors in our region and elsewhere. In this newsflash our TMT team take a closer look at the main market trends and shifts over the last year, and share insights as to what 2022 may bring.
Limitless scaling possibilities for digital businesses, confidence in businesses originating from Baltics
Globally, business leaders are looking for ways to accelerate growth in their organisations, and digital businesses tend to offer the most promising possibilities for scaling business. Compared to other sectors like industrials, energy or logistics, tech- and data-driven digital businesses (e-commerce, software production, IT, other tech companies) are less affected by global and local challenges such as hiring staff, changes in regulatory frameworks, geographical limitations on business, or restricted automation possibilities. Inevitably, digital transformation of other businesses will continue to be the priority for organisations seeking to improve scaling of their existing business model.
International investors demonstrate a lot of confidence in the Baltics and businesses originating from this region. This trend is proven by the recent record-high investments by global players in Bolt, Vinted, Pigu Group and other targets from the Baltics. Investors show confidence in local management teams and their capabilities to grow business in global markets.
Stock options are the new black in the region as alternatives to higher salaries
Although this unique corporate structure, where the employees are involved in the ownership of the business, has been known for ages, employee stock option plans are only now becoming a common component of the remuneration package in businesses run from the Baltics. This trend was driven by an ever-improving tax environment, allowing employees to receive shares in the company they work for in a tax-free way. However, the conditions according to which the provision of the shares to the employees are exempted from taxation vary throughout the Baltic states, and currently, Latvia is taking the leading position in offering a favourable tax environment for implementation of such instruments.
Urgency to adapt operations to digital economy taxation
Digitalisation has undermined the traditional structures of doing business. Therefore, new ways of characterising income derived from cross-border and extra-territorial businesses that have little or no presence in the countries where their customers are based have been defined by changing the rules related to tax administration. As of November 2021, 137 OECD member countries have reached an agreement on the two-pronged framework, with Pillar One addressing taxation rights and the distribution of profit of digital platforms by directing taxation to the countries where the value of such online business is actually created, and Pillar Two imposing a minimum tax rate. The new rules are to be implemented by 2023.
At the same time, a new set of rules expanding the reporting obligations of digital platform operators (from 2023) and payment institutions (from 2024) will be implemented. This is expected to increase tax transparency in the digital economy; however, the side-effect will be to lead digital businesses to shoulder an administrative burden as EU directives oblige digital platform operators as well as payment institutions to collect, store and provide data about their clients to the tax authorities. Furthermore, it is also intended to impose disclosure requirements for crypto-asset services providers and issuers, as well as for e-money institutions, within the next few years.
Heightened cybersecurity risks will increase demand for data protection compliance
Digital transformation and the greater volume of data being processed has exposed organisations to new online and digital risks. Cyber incidents and data breaches are not a matter of “if”, but “when”.
Simultaneously, legislators are introducing complex and rapidly evolving laws and regulations, such as the proposals for EU’s ePrivacy Regulation and NIS2 Directive. Once adopted, the complicated legal environment, together with the growing threat to cybersecurity and data privacy, will likely increase demand for data protection compliance from both regulators and data subjects.
EU is looking to set the standard for AI regulation
The EU is set to adopt a risk-based approach to regulating artificial intelligence (AI) and is looking to “set the standard” for AI regulation, as it did with the GDPR for data protection. The proposed AI Regulation follows a risk-based approach, differentiating between uses of AI that create (i) an unacceptable risk, (ii) a high risk, (iii) a limited risk, and (iv) low or minimal risk. AI systems that pose an unacceptable risk are to be prohibited, while high-risk AI applications will be subject to multiple new restrictions.
The definition of an AI system aims to be technology-neutral and future-proof. It includes software that is developed with AI techniques and approaches, such as statistical and machine learning approaches, as well as search and optimisation methods. The regulation is proposed to have extraterritorial scope, applying to any provider placing AI on the market or putting AI into service in the EU, regardless of where that provider is established.
EU’s ePrivacy Regulation overhaul: stronger rules and broadened scope of application
The proposed ePrivacy Regulation includes rules for both communications content and metadata and provides the possibility to ban unsolicited communications by email, SMS and automated calling machines. The new rules of cookies provide users with an easy way to accept or refuse tracking cookies and other identifiers in privacy settings of a browser.
The revised privacy rules are to apply to new players providing electronic communications services such as WhatsApp, Facebook Messenger and Skype. It has been also proposed that the rules apply to users located in the EU, even if the processing of their data takes place outside the EU or the service provider is located in a non-EU country.
The number of domain names registered grew rapidly in 2021, raising concerns for domain name protection
The global pandemic has increased the motivation for businesses to become more accessible online. This can be concluded on the basis of the fact that the number of domain names registered grew rapidly throughout 2021 in the Baltic States, and this is expected to continue into 2022 as well. There were 12,223 new “.lt”, 12,022 new “.ee” and 40,202 new “.lv” domain names registered during 2021. This use of local domain names demonstrates a change in consumer behaviour: consumers now trust local websites more than those with foreign or multi-national domains.
However, the increasing number of domains registered has raised some concerns in relation to domains being registered by domain squatters (also known as cybersquatters). This results in various domain names being sold on the “secondary market” for a slightly higher price than the original registration fee. Where a domain name registration infringes a third party’s rights – for example, exclusive rights to a trademark – there are grounds for a dispute over the domain name.
Implementation of Directive (EU) 2019/790 “on copyright and related rights in the Digital Single Market” under development
Implementation of Directive (EU) 2019/790 is currently in progress in the Baltic states and is expected to continue throughout 2022. The directive will supplement the existing copyright legislative framework with new provisions in the areas of remuneration and content availability on online platforms.
Users of copyrighted works will soon have to fulfil a new obligation: to provide the author with regular information on the usage of its work not less than once a year. It is also expected that the Directive will introduce local copyright laws with more detailed procedures for determining the liability for unauthorised use of copyrighted works.
Online content-sharing service providers will not only be ordered to process and resolve authors’ complaints, but will also be obliged to invest efforts into avoiding repeated infringements. Thus, the new legislative changes will result in the necessity for online platforms to develop or upgrade their existing mechanisms for protecting copyright.