Puerto Rico’s new Administrative Order establishes operational and compliance guidelines for private equity funds

The Department of Economic Development and Commerce (DDEC) of Puerto Rico issued Administrative Order No. DDEC 2026-002 (Order) on March 11, 2026, establishing comprehensive operational and compliance guidelines for private equity funds (PEFs) operating under Law 60-2019, known as the Puerto Rico Incentives Code (Incentives Code).

This alert summarizes the key provisions of the Order and its practical implications for PEFs.

Investment guidelines

PEFs are required to meet certain investment thresholds by investing in entities that are engaged in an “active trade or business” (Active Portfolio Companies, or APCs). The Order introduces new definitions for regulating these thresholds. Under this framework, only investments in entities that derive (directly or indirectly) at least 80 percent of their gross income from active trade or business operations in Puerto Rico will be treated as an investment in an APC. Investments in purely passive entities (those generating income primarily from interest, dividends, royalties, or capital gains) do not qualify toward meeting these investment requirements.

Additionally, the Order states that that an entity may consider the following activities in determining whether it qualifies as an APC: 1) the activities of a pass-through entity that is engaged in an active trade or business and in which the APC is a member and 2) the activities of entities taxed as corporations provided certain ownership thresholds are met.

This new guidance aims to ensure that the tax benefits of the PEF program foster genuine economic activity in Puerto Rico.

Guidelines for in-kind contributions to PEFs

The Order establishes guidelines for contributions of stocks, securities, notes, and other similar investments (Securities) to PEFs. These guidelines aim to ensure the eligibility of a deduction claimed by Accredited Investors for contributions to a PEF and the treatment of any gain that may be derived by a PEF on a subsequent sale of the securities. The guidelines state that:

• Securities contributed to a PEF should remain in the PEF for a minimum of 24 months from the date of contribution, and


• If the securities are disposed by the PEF before the 24-month period expires, the proceeds must remain in the PEF and, within a 6-month period of such disposition, be invested in accordance with the requirements of the Incentives Code and shall remain invested until at least 24 months from the original contribution date.

The Order further confirms that the deduction provided to Accredited Investors for contributions to a PEF is based on the tax basis of the contributed asset, not on its market value at the time of contribution. Additionally, the Order confirms that real estate properties are not eligible to be contributed to PEFs.

Anti-recycling measures

The Order implements anti-recycling measures to ensure that investments made by PEFs foster economic activities in Puerto Rico. It establishes a general prohibition on PEFs reinvesting in entities related to an Accredited Investor who holds at least 20-percent interest in the PEF[1], with a narrow exception permitting such investments when directed toward new economic activity such as business lines, operational expansion, or job creation. Where investments in related entities are permitted, the PEF must maintain detailed economic impact documentation available to the government throughout the term of the decree, and any invested funds must be retained by the related entity for a minimum of 24 months from the date of investment before being distributed back to the Accredited Investor. Taken together, these measures are designed to prevent the circular flow of capital in which investors receive back their own contributions through related-entity transactions.

Timing of investment for deduction purposes

The Order clarifies when a PEF is deemed to have invested cash received from an Accredited Investor for purposes of the available deduction. The investment is considered made when the cash is invested in and allocated by the PEF to specific projects, activities, businesses, or assets that meet the eligibility criteria established in the Order and the Incentives Code. In addition, the investment may be considered made when the PEF receives a non-cash capital contribution.

Net contribution calculation

The Order also establishes rules for calculating the “net contribution” of an Accredited Investor for purposes of the deductions under Section 2042.03(d)(1) of the Incentives Code.

If an Accredited Investor contributes an amount to the PEF and, within 120 days from the contribution date, takes a loan from the same PEF, the contribution amount for deduction purposes is calculated by subtracting the loan amount from the total amount contributed. For example, if an Accredited Investor contributes $100,000 and subsequently receives a $90,000 loan from the PEF within 120 days, the net contribution for deduction purposes is only $10,000.

The full deduction may be claimed on the initial contribution if 1) the loan is granted more than 120 days after the contribution, or 2) there is a documented investment plan in place at the time of contribution, and such documentation is maintained and available for review by the government during the term of the decree.

Prohibited activities

The Order reinforces that PEFs must comply with the investment requirements of the Incentives Code and operate as a diversified investment entity. Therefore, the Order does not permit using paid-in capital contributed by Accredited Investors to 1) invest in ineligible entities under the Incentives Code or 2) grant loans and financing to individuals.

Practical implications for PEF clients

Fund managers and Accredited Investors are encouraged to review their current investment structures and planned transactions in light of the new guidelines. Specific focus may be given to:

• Ensuring that in-kind contributions (or the proceeds from the sale of such in-kind contributions) remain in the PEF for at least 24 months,


• Maintaining adequate documentation for any investments in related entities,


• Structuring loan arrangements to avoid reduction of the net contribution calculation, and


• Confirming that investments are directed toward APCs or mixed entities meeting the 80-percent gross income threshold.

Effective date

The Order takes effect immediately, except for provisions concerning in‑kind contributions to PEFs, anti‑recycling measures, and net contribution calculations, which will apply only to contributions made to a PEF after the Order’s publication date. PEFs that already had a decree may choose to apply one or more of the Order’s provisions as of the effective date of their decree.

For more information, please contact the authors.

 

_{[1] Even though the Order refers to a 20-percent interest in the PEF, a more conservative reading would apply this requirement to a 20-percent interest in a series of a PEF as well.}