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: Link Here

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
    focus es 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 a n 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 derive d 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 a ssigned 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 C ontribution 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, o ur recommendation is that Funds contact their legal counsel and tax
advisors to :

• Reassess investee entity classifications and portfolio composition;
• Review proposed in‑kind contribution s 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.