I'm also facing issues with installing Windows 11 in Windows 365 Business.
I have tried provisioning a new Cloud PC today and it still installs Windows 10. After assigning Windows 11 Update to an Azure AD Group where the Cloud PC is a member, I get the update in Windows Update. After downloading and installing I'm reaching the reboot phase but after that it boots back into Windows 10 and giving error code 0x80070002. Any thoughts on how to fix this issue?