DDEC Issues Administrative Order 2026-002 Clarifying Certain Operational and Compliance Rules for Private Equity Funds

On March 11, 2026, the Puerto Rico Department of Economic Development and Commerce (“DDEC”) issued Administrative Order No. DDEC 2026-002 (the “Order”) establishing operational and compliance guidelines applicable to Private Equity Funds and Puerto Rico Private Equity Funds operating under tax exemption grants issued under Act 60-2019, as amended (“Act 60”; (the Funds are collectively referred to as “Act 60 Fund” or “Act 60 Funds”). The DDEC indicated that the Order was issued in consultation with the Office of the Commissioner of Financial Institutions (“OCFI”) in response to questions and concerns regarding the eligibility of certain investments in Act 60 Funds and with the objectives of maintaining the long-term financial integrity of these funds and promoting transparency, uniformity, and efficiency in the administration of the program.

The Order sets out specific administrative rules to: (i) clarify which entities will be considered actively engaged in a Puerto Rico trade or business and, therefore, eligible investments by an Act 60 Fund; (ii) establish when contributions of securities, notes, and other property will be allowed; (iii) prevent the reinvestment by the Act 60 Fund in entities related to the accredited investor (to avoid “capital recycling"); (iv) clarify when a contribution by an accredited investor will be considered invested for purposes of claiming the income tax deduction for contributions made to the Fund (“Tax Deduction”);  and (v) define the investor’s “net contribution” for purposes of computing the Tax Deduction.

Key Takeaways

• DDEC defines which entity will be considered engaged in an active trade or business and, therefore, an eligible investment by the Act 60 Fund.

In general, the Act 60 Fund must invest a minimum amount of its contributed capital in certain securities issued by entities engaged in an active trade or business that, at the time of their acquisition, were not publicly traded.  The Order defines an “entity engaged in an active trade or business” as an entity that participates in a direct, continuous and regular manner in the exploitation of a business or economic activity in Puerto Rico, generating income from active commercial operations.  To be considered actively engaged in a trade or business, 80% of the gross income for the taxable year must be attributable to the business or economic activity in which the entity is actively engaged.  The Order provides examples of entities that will be considered actively engaged in a trade or business and also provides for certain look-through rules for flow-through entities and subsidiaries.

• In-kind contributions are allowed, but subject to retention and reinvestment requirements.

The Order clarifies that accredited investors may contribute stock, securities, notes, and other qualifying investments to an Act 60 Fund as in-kind assets. However, those contributions will be subject to retention and reinvestment rules intended to prevent short-term or purely tax-driven transactions. In particular, the contributed asset or, if disposed of, an amount equal to its tax basis as adjusted for any gain or loss realized on such disposition must generally remain in the fund for at least 24 months from the date of contribution to comply with the 80% investment requirement under Section 2044.03 of Act 60. If the asset contributed is sold earlier, the resulting proceeds must remain in the fund and be reinvested within a 6-month period. The Order also clarifies that real property is not an eligible in-kind contribution for this purpose.

• The Order imposes rules to prevent related-party “capital recycling.”

The Order adopts rules to prevent “capital recycling”. This refers to structures in which an accredited investor (i)  contributes capital to an Act 60 Fund and the fund then uses the capital contributed (directly or indirectly) to make loans to an entity owned or controlled by that same investor, or (ii) contributes equity interests in an entity (directly or indirectly controlled by such accredited investor prior to the contribution) and cash to be used by the Act 60 Fund to make loans or capital contributions to the contributed entity. Generally, the Order provides that an Act 60 Fund cannot invest in an entity related to an accredited investor that owns 20% or more of the fund, unless the investment is directed to new business activity, expansion of operations, or job creation. To support an investment in a related entity of an accredited investor, the Act 60 Fund must prepare and submit a detailed analysis that justifies its impact on the Puerto Rico economy. For this purpose, a related entity is an entity in which the investor has a 20% or more of ownership interest or control.

• An investor’s contribution is not considered “invested” for the Tax Deduction purposes until the Act 60 Fund reinvests the investment of the accredited investor in certain qualifying investments.

The Order provides that the Tax Deduction for cash contributed to the Act 60 Fund can be claimed by the investor when the cash contributed is invested by the fund in specific eligible projects, activities, businesses, or other specific assets that comply with the parameters set forth in the Order; or at the time the Act 60 Fund receives as a capital contribution other property that does not include cash.

• The Tax Deduction is limited to the investor’s “net contribution.”

The Order establishes that only the “net contribution” made by the investor can be claimed as a Tax Deduction.  The “net contribution” is defined as the amount contributed to the Act 60 Fund, less any amount returned to the investor within a 120-day period in the form of a loan from the fund. The full amount contributed to the Act 60 Fund can be claimed as a Tax Deduction if as of the date of the contribution there is an investment plan duly documented and available for review by the OCFI and the Office of Incentives.

The Order became effective immediately upon issuance and applies to contributions made to Act 60 Funds after March 11, 2026. Act 60 Funds holding grants issued before the publication of the Order may elect to apply one or more of its provisions of the Order as of the effective date of their grants.

Private equity fund sponsors, managers, and investors with existing or contemplated Puerto Rico fund structures should review their governing documents, contribution mechanics, investment portfolio criteria, and internal compliance procedures considering the Order. In particular, special attention should be given to: (i) the characterization of target entities as entities actively engaged in a PR trade or business; (ii) the treatment of in-kind contributions to the Act 60 Fund; (iii) investments involving related parties of investors; (iv) the timing and documentation of reinvestments made by the Act 60 Fund for purposes of the Tax Deduction; and (v) any loan feature that could reduce the investor’s contribution to the Act 60 Fund or otherwise be viewed as capital recycling.