Bloomberg

Businesses may get 10-year tax holidays and preference for state orders.

Businesses in the Skolkovo innovation hub could be treated to unprecedented incentives, including tax holidays of up to 10 years and special privileges in state tenders, sources with knowledge of the plans told Vedomosti.

President Dmitry Medvedev has ordered the government to develop by the end of May a special legal regime for the innovation city in Skolkovo that would stimulate investment. Discussions are already under way to ease taxes and requirements in the law on state purchases, a member of the commission on modernization and a Kremlin official told Vedomosti.

Tax holidays for companies working in the innovation city could last for seven to 10 years, the Kremlin official said. The tax rates for profit, property and land could be reduced to zero, while employers' monthly insurance payment for employees could be reduced to 4,800 rubles ($165), he said.

That would suggest a 14 percent annual rate, compared with the current rate of 26 percent, which rises to 34 percent in 2011.

But the Kremlin source cautioned that no final decisions had been made.

The Economic Development Ministry had prepared similar measures for all innovative companies that registered in self-regulating professional organizations. But talks on the plan stalled in the government because of disagreements with the Finance Ministry regarding the procedure for determining which innovative companies would qualify.

Now the Economic Development Ministry is proposing the same terms for the innovation city, where no one is questioning the competence of those selecting the companies, an official at the ministry said. Participants in the Skolkovo project will be selected by the commission on modernization, which is overseen by the president, the source added.

Another possible benefit for innovators is that they could receive co-financing from the budget and the right to sell their output to the state without the usual limitations under the law on state purchases, a member of the commission on modernization said. Otherwise, the state would have to conduct a tender to purchase innovative goods from the Skolkovo participants, and that could allow cheaper but lower-quality products to win, the source said.

The law on state purchases includes an article that allows the state to place an order with the only available supplier at the starting price, and the system has already been used for the construction of infrastructure needed for the 2012 Asia-Pacific Economic Cooperation summit in Vladivostok, said Alexander Stroganov, chief executive of the State Orders Placement Center.

The Economic Development Ministry has not received any proposals on the matter, said Anna Katamadze, deputy director of the ministry's department on state regulation of the economy. She said the ministry had prepared amendments to the law that would create a special system for state orders of innovative goods but that the government first needs to set criteria for what qualifies as innovation.

Privileges on state orders would be the main incentives, said Grigory Sizonenko, director of systems integrator IVK. He proposed using tax incentives to stimulate demand from Russian companies for innovation products as another way to help the Skolkovo project.

Regardless of the final incentives, they will be in demand, said Andrei Shtorkh, a spokesman for Viktor Vekselberg's Renova Group. Companies with innovative projects need to complete them regardless, and tax breaks would make that easier, he said.

It is important that doing business in the innovation city be as liberal as possible in terms of administrative costs, alongside tax benefits and looser oversight, said Sergei Belousov, chief of tech company Parallels. He said that was one of the most important conditions, topped only by the presence of intelligent people.

The real innovators are people with scientific backgrounds, not businessmen, so it must be simple to rent offices, register companies and even connect to the Internet, Belousov said.

Olga Uskova, president of Cognitive Technologies, said it was still entirely unclear who would determine what companies deserve the tax breaks and what criteria they would use. It would be wrong to provide the incentives just because companies are located at Skolkovo, she said.

"A poorly thought out tax regime could lead to the innovation city turning into a domestic tax haven, with space there going to companies close to officials, not to innovators," Uskova said.