New Administrative Order Governing Private Equity Funds

On March 11, 2026, the Puerto Rico Department of Economic Development and Commerce ("DDEC") issued Administrative Order No. DDEC 2026‑002 ("Order") establishing detailed operational, investment, and compliance guidelines for Private Equity Funds operating under Act 60‑2019.

This Order is issued in consultation with the Office of the Commissioner of Financial Institutions in response to recurring questions raised by many interested parties. It formalizes the legal framework governing Private Equity Funds and introduces significant clarifications to align tax incentives with substantive economic activity in Puerto Rico while maintaining the long-term financial integrity of Private Equity Funds. With this purpose, the Order establishes five objectives discussed in this article. 

We highly recommend reading this alert alongside our recent publication about Private Equity Funds: Understanding Private Equity Funds in Puerto Rico: Structures, Tax Incentives, and Compliance Considerations under Act 60-2019

Who does this apply to?

The Order applies to all Private Equity Funds and Puerto Rico Private Equity Funds (“Funds”) that hold tax-exemption decrees granted by the DDEC.

Certain requirements discussed below, marked with a star, specifically In-Kind Contributions, Anti-Recycling Capital Rules, and Net Contribution Requirements, apply to contributions made to these Funds after the issuance of the Order.

When is it effective?

The provisions of the Order take effect immediately upon issuance, except for the starred items mentioned above, which are effective for contributions made prospectively.

What are the five objectives?

1. New Definitions for Investee Entities

The Order classifies investee entities for purposes of determining compliance with Act 60-2019’s investment thresholds:

• Entities Actively Engaged in Trade or Business:
  Must conduct direct, continuous, and regular operations in Puerto Rico and derive at least 80% of gross income from active business activities on the island. The Order focuses on businesses that have personnel and assets in Puerto Rico and that generate income by actively participating in business activities in Puerto Rico.
  
  • In the case of pass-through entities, their members will be treated as conducting the activities of such entities. In addition, when analyzing entities in an ownership chain, the first entity, or the general partner of the first entity, with a controlling voting interest in the chain of corporate entities, will be treated as conducting the activities of its controlled subsidiaries.
  • If the entity that issues the securities acquired by the Fund is a Puerto Rico passthrough entity with foreign subsidiaries, for the investment to qualify as a Puerto Rico investment, only if, during the preceding 3-year period these foreign subsidiaries either derived 80% or more of their gross income from Puerto Rico sources or had income that was or was treated as, income effectively connected with the conduct of a Puerto Rico trade or business.
• Passive Entities:
  Entities earning income primarily from passive sources such as dividends, interest, royalties, rents, or capital gains. Investments in securities issued by passive entities do not count toward the required investment percentages of 15% (if a Private Equity Fund) or 60% (if a Puerto Rico Private Equity Fund), hereinafter “Investment Requirements”.
  
  
• Mixed Entities:
  Entities with both active and passive activities, provided 80% or more of gross income derives from active business operations.

Only investments in Entities Actively Engaged in Trade or Business or Mixed Entities count towards the Investment Requirements.

2. Restrictions on In‑Kind Contributions

The Order imposes strict rules on contributions of non‑cash assets (e.g., securities, notes, equity interests), as follows:

• In‑kind contributions or the basis from any in-kind assets, adjusted by any gain or loss resulting from their disposition, must remain invested in the fund for a minimum of 24 months after the contribution is made.
• Investor deductions are based on the tax basis of the asset contributed, not fair market value.
• If a sale or exchange of the in-kind assets is made before the 24-month period, the entire proceeds must remain invested for the rest of the term. Funds must ensure that the cash and cash equivalents do not exceed 20% of the capital invested in the fund.
• Real estate contributions are not eligible as in‑kind investments.
• Cash equivalents with maturities under one year are permitted but do not count towards the Investment Requirements.

3. Anti‑Recycling Capital Rules

To prevent the recycling of investor capital through related‑party structures, the Order provides that:

• Funds generally may not invest in entities related to an investor owning 20% or more of the Fund . A related entity is an entity in which the investor has 20% or more of its property or control.
  
  • An exception applies if the investment supports new activities, operational expansion, or job creation.
• Funds must prepare and retain economic impact documentation about related entity investments for regulatory review, including but not limited to employment creation, new business lines, etc.
• Immediate distributions or repayments to the investor related to the related entities where the Funds invested are discouraged; related entities must retain capital for at least 24 months after such investment.

4. Clarification on Timing of Investment for Deduction Purposes

For purposes of the special deduction of 60% (Puerto Rico Private Equity Fund) or 30% (Private Equity Fund), an investment is considered made when:

• Cash is invested in and assigned by the Fund to eligible projects or activities, or
• Non‑cash property is contributed to the Fund.

All allocations must be properly documented and tied to activities with measurable economic impact in Puerto Rico.

5. “Net Contribution” Requirement for Investor Deductions

The Order clarifies that:

• If an investor contributes capital and receives a loan from the fund within 120 days, the initial contribution amount is reduced by the loan amount. Therefore, the Net Contribution will be net of the loan.
• Only the investor’s Net Contribution qualifies for the special deduction.
• Full deductibility may still apply if loans occur after 120 days or are supported by a contemporaneous, documented investment plan.

The Order also mentions that the following are considered ineligible activities and investments: (i) using the contributed capital to the Fund to invest in activities ineligible under Act 60-2019, and (ii) using the contributed capital to the Fund to loan money to individuals.

Takeaways

Funds must comply with all Act 60-2019 requirements and be diversified. In light of this Order, our recommendation is that Funds contact their legal counsel and tax advisors to:

• Reassess investee entity classifications and portfolio composition;
  
  
• Review proposed in‑kind contributions to ensure compliance with the Order’s requirements;
  
  
• Adjust internal documentation to avoid exposure to related‑party investment restrictions when accepting new investments;
  
  
• Strengthen required documentation supporting economic impact and investment timing for subsequent investments; and
  
  
• Update internal protocols to notify investors that new investor financing arrangements could reduce deductible contributions.

Our tax professionals are available to help you navigate these new compliance requirements and assess their impact on your Fund’s structure. Please feel free to contact us to discuss how we can assist you.