In today’s digital economy, datacentres are the backbone of global business. From financial institutions to e-commerce platforms, governments to cloud providers, datacentres handle the storage, processing, and transfer of vast volumes of sensitive data. The rise of artificial intelligence, cloud computing, and 5G has only intensified their importance.
But with opportunity comes regulation. The law on datacentres is increasingly complex, cutting across data protection, cybersecurity, land use, environmental regulations, taxation, and cross-border compliance. For businesses planning to establish a datacentre, the risks of overlooking legal requirements can be immense—ranging from multimillion-dollar fines to reputational damage.
This article explores the legal landscape around datacentres, highlights key considerations during setup, and provides a framework for due diligence and risk management.
Understanding the Law on Datacentres
Regulatory Landscape
Datacentres fall under a patchwork of regulatory regimes depending on their location and services. Broadly, laws can be grouped into four categories:
- Data Protection and Privacy – e.g., GDPR in Europe, CCPA in California, Malaysia’s PDPA, or Singapore’s PDPA. These laws dictate how personal data is stored, accessed, and transferred.
- Cybersecurity and Critical Infrastructure – Many countries treat datacentres as critical infrastructure. Operators may need to comply with cybersecurity regulations such as NIST (U.S.), Cybersecurity Act (EU), or Malaysia’s National Cyber Security Policy.
- Land, Zoning, and Environmental Laws – Datacentres consume vast amounts of electricity and water. Compliance with zoning permits, environmental impact assessments, and energy efficiency requirements is essential.
- Commercial and Tax Laws – Contracts with clients, SLAs (Service Level Agreements), intellectual property considerations, and tax incentives or obligations also shape datacentre operations.
Why Legal Compliance is Crucial
Failure to comply with datacentre laws can result in:
- Hefty fines (e.g., GDPR fines reaching 4% of global turnover).
- Regulatory shutdowns.
- Breaches of trust with clients, potentially leading to litigation.
- Reputational damage in industries where trust is everything.
Key Considerations When Setting Up a Datacentre
1. Site Selection and Land Use Law
- Zoning Regulations: Ensure the land is zoned for industrial or IT infrastructure use.
- Environmental Approvals: Large-scale datacentres may require environmental impact assessments, particularly if water or power consumption is significant.
- Seismic, Flood, and Fire Risk: Local building codes and insurance requirements must be factored in to reduce operational risks.
2. Energy and Sustainability Obligations
Datacentres are energy-hungry—accounting for nearly 1% of global electricity use. Governments are tightening rules around carbon footprints. For example:
- The EU requires compliance with the Green Deal and carbon neutrality targets.
- Singapore introduced the Resource Sustainability Act, restricting new datacentre approvals unless they meet strict energy efficiency requirements.
Sustainability is no longer optional—it’s both a legal and reputational imperative.
3. Data Protection and Privacy Laws
- Jurisdictional Reach: A datacentre in Malaysia hosting European data must still comply with the GDPR.
- Consent and Access Control: Operators must ensure mechanisms for lawful access, data minimisation, and breach notifications.
- Cross-Border Transfers: Many countries restrict or impose conditions on data being transferred abroad.
4. Cybersecurity and Compliance
Datacentres are prime targets for cyberattacks. Regulations often mandate:
- Minimum security standards (firewalls, intrusion detection, encryption).
- Mandatory reporting of data breaches within specified timelines.
- Independent audits and certification (e.g., ISO/IEC 27001).
5. Contracts and SLAs
Clients entrust mission-critical data to datacentres. Strong contracts are vital, covering:
- Service Levels: Uptime guarantees (99.99% vs 99.999%) and penalties for failure.
- Liability and Indemnity: Caps on damages and exceptions.
- Data Ownership and IP: Clear clauses on who owns the stored data.
- Exit Strategy: Terms for data migration or transfer if the contract ends.
Legal Due Diligence for Datacentre Projects
Before breaking ground or acquiring an existing datacentre, robust legal due diligence is essential.
Corporate and Ownership Checks
- Verify land titles and ownership.
- Review existing licenses, permits, and approvals.
- Assess any ongoing litigation or regulatory issues.
Regulatory Compliance Review
- Data protection certifications.
- Environmental clearances and compliance with emissions or sustainability laws.
- Energy agreements with utility providers.
Financial and Tax Considerations
- Tax incentives or grants (many governments incentivize datacentres for digital economy growth).
- Withholding tax on cross-border payments (relevant for cloud operators with international parent companies).
- Transfer pricing rules if the datacentre is part of a multinational group.
Cybersecurity Readiness Audit
- Review existing IT and cybersecurity policies.
- Identify gaps relative to regulatory standards.
- Assess incident response capabilities.
Risk Considerations in Datacentre Operations
Operational Risks
- Downtime: Even a few minutes of downtime can cause millions in losses. Legal liability for downtime must be addressed in contracts.
- Third-Party Vendors: Risks from reliance on external contractors for cooling, security, or IT services.
Legal and Compliance Risks
- Changing Regulations: Governments often update laws on data sovereignty and energy efficiency.
- Extraterritorial Laws: A local operator may still fall under foreign jurisdiction (e.g., U.S. CLOUD Act).
Political and Geopolitical Risks
- Trade Wars: Export restrictions on chips or servers can disrupt operations.
- Data Sovereignty: Countries may mandate that critical national data be hosted domestically.
Reputation and Trust
- Clients entrust datacentres with their most sensitive assets—personal data, financial transactions, intellectual property. A single breach can undo years of trust and lead to legal claims.
Key Takeaways
1. Compliance is Complex but Essential – Datacentre operators must navigate a multi-layered regulatory landscape spanning privacy, cybersecurity, environment, and commercial law.
2. Due Diligence is Non-Negotiable – Land ownership, regulatory compliance, cybersecurity readiness, and contractual obligations require thorough review before setup.
3. Sustainability is the Future – Governments are clamping down on energy-intensive datacentres. Meeting green standards is now a legal and business imperative.
4. Contracts Define Liability – Well-drafted SLAs protect operators and give clients confidence.
5. Stay Adaptive – Laws will evolve alongside technology. Datacentre operators must monitor and adapt continuously.
FAQs: Law on Datacentres
1. Do datacentres need special licenses to operate?
Yes, depending on the jurisdiction. Licenses may include zoning permits, environmental approvals, and IT/cybersecurity certifications.
2. How do privacy laws affect datacentres?
Privacy laws dictate how personal data is stored, accessed, and transferred. A datacentre must comply with local laws and, if hosting international data, with extraterritorial laws like the GDPR.
3. What are the biggest risks of running a datacentre?
Risks include downtime, cybersecurity breaches, regulatory non-compliance, and reputational harm. Contracts and robust compliance frameworks help mitigate these.
4. Can foreign companies own datacentres in Malaysia or Singapore?
Generally yes, but subject to local investment and ownership laws. In some cases, strategic assets may face foreign ownership restrictions.
5. Why is sustainability important for datacentres?
Governments now regulate carbon footprints. Non-compliance may result in denial of permits, fines, or reputational backlash.
Kevin Wu is the editor and focuses on curating stories and articles relevant for the modern-day business owner and corporate leaders in the South-east Asia region. More about Kevin Wu
This article was contributed and sponsored by Kevin Wu & Associates, a full-service law firm based in Kuala Lumpur with practice areas in corporate, dispute resolution, criminal, family office and company secretarial services. KWA offers preliminary consultation and legal advisory to all Temasek Post readers.
Email: office@kevinwuassociates.com
WhatsApp: +60108278164
