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Probably a combination of different inputs, like timezone, regional, GPS (if computer supports that) and figuring out public IP. Knowing Microsoft, they'll try their hardest to avoid flagging a computer as within EEA if they possibly could.

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I wonder how this works, if I buy a laptop in the EU as a EU citizen and travel to for example the US, I still expect them to adhere to the rules where I bought it.

I don't think that's how regulations apply in general. Usually they're scoped to the geographical location + your sovereign status, but not just your sovereign status.

For example, I don't think it's realistic to expect a US citizen traveling to a EU country having to follow US regulations and laws, nor the opposite.

So I'm not sure it would apply in this case either, but I'm not even sure what regulation/law made Microsoft add this change to the update in the first place. If we can figure that out, I guess we could figure out the real answer to your question without guessing.

hopefully the "inside EEA" flag will be stored somewhere in registry

Or better yet, a registry flag to enable browser choice.

That’s what the “default browser” setting is for. Microsoft just deliberately choses to ignore it in some parts of Windows, and instead hardcodes Edge.

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