Understanding Investment Allowance

An investment allowance is an allowance granted to a company that has incurred an expenditure on plant and equipment. Section 32 (1) of the Companies Income Tax Act Cap C21 LFN 2004 (as amended) provides that where a company has incurred an expenditure on plant and equipment, there shall be allowed to that company an investment allowance as provided in subsection (2) of this section and shall be in addition to an initial allowance under the Second Schedule of this Act. The rate of the allowance is 10% of the actual expenditure incurred on such plant and expenditure. Unlike initial and annual allowances, investment allowance will not reduce the Tax Written-Down Value (residue) of a qualifying capital expenditure.

However, no investment allowance will be granted or would be withdrawn if already granted, if any of the following events occurs within a period of 5 years from the date the expenditure was incurred:

  1. any sale or transfer of the asset representing the expenditure made by the company incurring the expenditure otherwise than to a person acquiring the asset for a chargeable purpose or for scrap;
  2. any appropriation of the asset representing the expenditure made by the company incurring the expenditure to a purpose other than a chargeable purpose;
  3. any sale, or transfer or other dealing with the asset representing the expenditure by the company incurring the expenditure, being a case where it appears that the expenditure was incurred in contemplation of the asset being so dealt with, and being a case where it is shown either –  
  • that the purpose of obtaining tax allowances was the sole or main purpose of the company for incurring the expenditure; or
  • that the incurring of the expenditure and the asset being so dealt with were not bona fide business transactions or were artificial or fictitious transactions, and were designed for the purpose of obtaining tax allowances.

If investment allowance has been granted and has not been withdrawn, the Act requires the company to give a notice to the Federal Inland Revenue Service, if any of the above events occurs.

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