CARRIED INTERESTS AND THE TAXATION OF PROFITS FROM PETROLEUM OPERATIONS UNDER NIGERIA’S FISCAL REGIME

INTRODUCTION

Carried interests are a long-standing feature of Nigeria’s petroleum contracting framework. In petroleum operations, a “carried interest” refers to a financial arrangement where one party shares in a project’s profits without having to pay for it upfront. This arrangement involves a party referred to as the “Carried Party”, not having to pay for exploration, drilling, production costs or such other expenses associated with a project, depending on the terms of the carried interest. The party who consents to pay the expenses of the Carried Party is referred to as the “Carrying Party”.

The defining characteristic of a carried interest is that the Carried Party typically contributes non-cash value, such as technical expertise or other services, while the Carrying Party assumes the financial risk of upstream operations. Before the Carried Party receives its portion of profits, the Carrying Party recovers its expenditures from either the sales proceeds of production or an allocation of hydrocarbons, often including a premium as an incentive for taking the risk.

A threshold question, which is central to the tax analysis that follows, is whether the Carrying Party holds a formal equity interest in the licence or lease, or whether it participates purely as a service provider or under a Production Sharing Contract (“PSC”) without holding any interest in the licence. The answer determines which tax regime applies and, as discussed below, is not a question the Petroleum Industry Act 2021 (“PIA”) or the Nigeria Tax Act 2025 (“NTA”) resolves in a uniform manner.

This briefing note examines the tax treatment of carried interest arrangements under three structural categories: (i) equity-based joint venture arrangements; (ii) pure service or farm-in arrangements under a Financial Services Agreement (“FSA”); and (iii) PSCs.

TAXATION OF PETROLEUM OPERATIONS AND CARRIED INTERESTS

A.  The Petroleum Industry Act 2021

The PIA represents a significant shift from Nigeria’s former fiscal regime. It replaced[1] the 85% Petroleum Profits Tax (“PPT”) under the Petroleum Profits Tax Act with a dual tax system comprising Hydrocarbon Tax (“HCT”),[2] which applies to profits from crude oil, condensates and natural gas liquids derived from associated gas and produced in the field upstream of the measurement points; and Companies Income Tax (“CIT”),[3] which applies to the total profits of companies engaged in upstream petroleum operations.[4]

Critically, the charge of HCT under Section 261 of the PIA is levied “upon the profits of any company engaged in upstream petroleum operations”.[5] The definition of “upstream petroleum operations” in Section 318 of the PIA is pivotal: it means “the exploration for, appraisal of, development of and winning or obtaining of petroleum in Nigeria by or on behalf of a company on its own account for commercial purposes…”[6] Accordingly, a Carrying Party that does not hold a licence or lease and that provides financing or services to a licence holder is not conducting petroleum operations for its own account as it is conducting them on behalf of the licence holder. The structural question of whether a party holds a formal equity interest in the licence is therefore the determinative factor in assessing whether HCT is applicable.

Section 84 of the PIA permits a licensee or lessee to enter into a contract with a third party for the exploration, prospecting, production or development of crude oil or natural gas.[7] However, such a contract does not confer on the third party any interest in the licence or lease. The PIA further recognizes, under Section 85(2)(c), the risk service contract, which is, a contract under which the financial risk-bearing party recovers costs by a payment in cash or in kind from petroleum produced from the applicable area[8], as a distinct contractual model that is separate from a concession or equity-based joint venture. Additionally, Section 302(1) of the PIA provides that any company, concessionaire, licensee, lessee, contractor or subcontractor involved in upstream petroleum operations shall be subject to the Companies Income Tax Act.[9] This provision is instructive: it singles out contractors and subcontractors separately from licensees and lessees, strongly indicating that the legislature did not intend them to be subject to HCT, which attaches only to the profits of licence- and lease-holding entities engaged in upstream petroleum operations.

B.  The Nigeria Tax Act 2025 and the Tax Treatment of Carried Interests

The NTA addresses the taxation of parties involved in petroleum operations across three distinct structural frameworks, each of which must be considered separately.

1.  Non-Company Persons Engaging in Upstream Operations

Section 77(1) of the NTA prohibits a person, other than a company, from lawfully engaging in upstream petroleum operations on their own account or jointly with any other person with a view to sharing profits; doing so constitutes an offence.[10] Where such a person nonetheless benefits from profits arising from upstream petroleum operations, Section 77(2) of the NTA provides that the person shall be subject to HCT and income tax, in addition to penalties under the Nigeria Tax Administration Act 2025.[11] The same rule is replicated for the PPT regime in section 101(1) of the NTA.[12]

2.  Equity-Based Joint Ventures: The HCT and CIT Regime

Section 77(3) of the NTA provides that where two or more companies are engaged in upstream petroleum operations in partnership, in a joint venture or under any scheme or arrangement, tax shall be charged and assessed in accordance with subsection (4). The critical feature of subsection (4) is that the apportionment of profits, outgoings, expenses, liabilities, deductions, qualifying expenditure and tax chargeable on each company shall be made in accordance with the equity interest of the parties under the jointly executed arrangement.[13]

Section 77(5) and (6) further empower the Nigeria Revenue Service (the “Service”) to make regulations for ascertaining the tax to be charged on each company so engaged. These regulations may modify the operation of the NTA; provide for the apportionment of profits, outgoings, liabilities, qualifying expenditure and tax; or require that tax be computed as if the entire arrangement were carried out by a single company, with the resulting liability apportioned among the participants.[14] However, the regulations must not impose a greater burden of tax on any company than would have applied if each company were taxed strictly in proportion to the benefits it enjoys under the arrangement.[15]

It is important to note that the dual tax regime (HCT and CIT) in Sections 77(3)–8 of the NTA, and the parallel provisions in Section 101(3)–6 for the PPT regime,[16] presuppose that the companies concerned hold equity interests in the licences or leases under which the operations are conducted. The apportionment mechanism is explicitly tied to “the equity interest of the parties under a jointly executed arrangement”. It is arguable that a Carrying Party that has no equity interest in the licence therefore falls outside this framework and cannot be subjected to HCT on that basis alone.

3.  The Carrying Party Under a Pure Service or FSA Arrangement: CIT Only

Where a party provides a ‘carry’ under a pure service contract or FSA without acquiring any interest in the underlying licence or lease, they would not be subject to HCT. Such a party is not a licensee or lessee; it is a contractor. It finances and manages operations on behalf of the licence holder and receives remuneration, whether in cash or in the form of an allocation of hydrocarbons, as a contractual fee for its services.

Under the PIA and NTA, HCT is a tax on the profits of companies “engaged in upstream petroleum operations” in respect of their licence or lease area. It is arguable that a contractor under a pure FSA arrangement is not engaged in upstream petroleum operations for its own account. It is engaged in them on behalf of the licence holder. It has no chargeable oil or chargeable gas of its own in the sense contemplated by the HCT provisions, because it holds no interest in the petroleum field. Accordingly:

(a)     The Carrying Party under a pure FSA arrangement is not liable to HCT, whether under the PIA or the NTA. It is not a “company engaged in upstream petroleum operations” within the meaning of Section 261 of the PIA or the HCT chapter of the NTA, since it does not hold a licence or lease and does not conduct operations for its own account.

(b)  The remuneration received by the Carrying Party, whether paid in cash or through an allocation of hydrocarbons, constitutes income from the provision of services and is chargeable to CIT only, pursuant to Section 302(1) of the PIA (which subjects contractors and subcontractors to CIT) and the general income tax provisions of the NTA. Where remuneration is received in the form of hydrocarbons, the value of those hydrocarbons must be brought to account as income in the computation of CIT. That said, it is necessary to mention that such hydrocarbons need to be subject to HCT and CIT in the hands of the license or lease holder.

(c) For operations under unconverted OPLs and OMLs, the Carried Party, being the licence holder, remains subject to PPT. The Carrying Party, having no equity interest, remains subject to CIT alone on its contractual remuneration.

4.  Carried Interests Under Production Sharing Contracts

A PSC creates a more nuanced position. Under a PSC, the National Oil Company (as “holder” of the licence) and the international oil company (“contractor”) jointly conduct operations, with the contractor bearing exploration risk and recovering costs from an allocated share of production (cost oil) and thereafter, sharing profit oil with the holder in a defined ratio.

The NTA, in Sections 102 to 113, makes specific provision for deep offshore and inland basin PSCs that are yet to convert under the PIA.[17] Under this regime:

(a)  The holder pays all royalties, concession rentals and PPT on behalf of itself and the contractor, out of the allocated royalty oil and tax oil. The Service issues separate tax receipts in the names of the holder and contractor.[18]

(b)  The chargeable tax on petroleum operations in the contract area is split between the holder and the contractor in the same ratio as the split of profit oil as defined in the PSC. This is a specific statutory recognition of the contractor’s taxable participation in the petroleum operations notwithstanding that the licence is held by the holder alone.

(c)  Under a PSC structure, therefore, the contractor’s profit oil allocation is subject to PPT (for unconverted OPL/OML-based PSCs). However, the PSC framework is fundamentally different from a pure FSA arrangement: the contractor under a PSC is expressly recognized by statute as a participant in petroleum operations, and the fiscal framework specifically contemplates and apportions tax between holder and contractor. It is that statutory recognition (absent under a pure FSA) which subjects the PSC contractor to PPT on its profit oil share rather than CIT alone.

C.    Apportionment Of Tax Liability In Upstream Arrangements

Where two or more companies participate in upstream petroleum operations under an equity-based joint venture, the NTA authorizes the Service to make regulations for determining the tax attributable to each company. These regulations may modify the operation of the NTA; provide for the apportionment of profits, outgoings, liabilities, qualifying expenditure and tax; or require that tax be computed as if the entire arrangement were carried out by a single company, with the resulting liability apportioned among the participants. The Service is further empowered to adopt any basis it considers appropriate, including where operations are partly carried out by an operating company whose expenses are reimbursed by co-venturers. However, these regulations must not impose a greater tax burden on any company than would apply if each company had been taxed strictly in accordance with the proportion of benefits it enjoys under the arrangement. These powers are set out in Section 77 of the NTA (for PPL/PML operations) and are replicated, in respect of the PPT regime, under Section 101 of the NTA.

Importantly, the apportionment framework under Sections 77 and 101 of the NTA is designed for equity participants, that is, companies that hold defined interests in a jointly executed arrangement. The framework is not apt for a pure service or FSA arrangement, under which there is no “equity interest” to apportion and no jointly executed upstream arrangement in the statutory sense. In such arrangements, the appropriate tax instrument is CIT applied to the Carrying Party’s net service income, and the licence holder’s own tax position (HCT and CIT for PPL/PML assets, or PPT for unconverted OPL/OML assets) is unaffected by the existence of the carried interest arrangement.

CONCLUSION

The tax treatment of carried interest arrangements under Nigerian petroleum law is not uniform. It turns on the structural form of the arrangement and, in particular, on whether the Carrying Party holds any equity interest in the relevant licence or lease.

Where the arrangement is an equity-based joint venture (whether under a concession or an incorporated joint venture), both the Carried Party and the Carrying Party hold interests in the licence, and both are subject to the dual tax regime of HCT and CIT (for PPL/PML operations) or PPT (for unconverted OPL/OML operations), with liability apportioned in accordance with their respective equity interests under Sections 77 and 101 of the NTA.

Where the arrangement is a pure service or FSA arrangement in which the Carrying Party holds no interest in the licence or lease, the Carrying Party is a contractor, not an equity participant. It is not subject to HCT, which attaches only to the profits of companies conducting upstream petroleum operations for their own account as licence or lease holders. The Carrying Party’s remuneration whether in cash or in kind (hydrocarbons) is subject to CIT only. The licence holder’s own tax position remains governed by its applicable regime (HCT and CIT for PPL/PML assets; PPT for unconverted OPL/OML assets).

Where the arrangement is a PSC, the NTA provides a specific statutory framework under which both the holder and contractor are recognized as participants in petroleum operations, and the chargeable tax on petroleum operations in the contract area is split between them in the profit oil ratio defined in the PSC. Under an unconverted OPL/OML-based PSC, the contractor’s profit oil allocation is accordingly, subject to PPT, pursuant to the express provisions of sections 102 to 113 of the NTA.

Effective compliance across all these structures requires clear contractual documentation of the nature and basis of the carried interest arrangement, accurate tracking of qualifying expenditure and cost recovery, and careful analysis of whether the Carrying Party holds or acquires any interest in the licence or lease, since that question, more than any other, determines the applicable tax regime.

Please do not treat the foregoing as legal advice, as it only represents the public commentary views of the authors. All enquiries on this should be directed to the key contacts.

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