Puerto Rico Issues New Guidance on Private Equity Funds Under Act 60: Administrative Order DDEC 2026-002 Introduces New Compliance and Anti-Abuse Rules

Overview

On March 11, 2026, the Puerto Rico Department of Economic Development and Commerce (“DDEC”) issued Administrative Order No. DDEC 2026-002 (the “Order”), establishing new compliance guidelines for Private Equity Funds (“PEFs”) under the Puerto Rico Incentives Code (Act 60-2019, as amended).

The Order significantly increases regulatory oversight by introducing anti-abuse provisions and stricter economic substance requirements.

Key Highlights

1. New Entity Classification Framework

The Order clarifies that only investments made in active entities qualify as eligible investments under Act 60 and provides detailed guidance on how to determine whether an entity is considered “active,” “passive,” or “mixed” based on the nature of the income generated and the level of operational activity in Puerto Rico. 

An entity will be treated as active if it is engaged in a trade or business in Puerto Rico, supported by employees and operational presence, and if at least 80% of its gross income is derived from such active operations.

Conversely, entities that primarily generate income from passive sources such as interest, dividends, rents, or capital gains, will be classified as passive even if they are organized in Puerto Rico or hold Puerto Rico-based assets.

The Order also recognizes “mixed entities” but requires that they meet the same 80% active income threshold to be treated as qualifying investments. This effectively limits the ability to include passive investment vehicles within a qualifying structure unless their passive component is incidental.

2. Stricter Rules on In-Kind Contributions

The Order establishes specific requirements for contributions of assets in-kind, emphasizing that such contributions must be made with a bona fide business purpose of promoting economic activity in Puerto Rico. To meet this requirement, the contributed assets must generally remain invested within the PEF for a minimum period of 24 months. If the asset is sold or otherwise disposed of before the end of this period, the proceeds must continue to be reinvested in qualifying investments for the remainder of the holding period.

Importantly, the Order explicitly excludes certain assets, such as real property, from qualifying as in-kind contributions, and imposes limitations on the extent to which funds can be held in cash or cash equivalents.

3. Capital Recycling Anti-Abuse Rules

The Order introduces restrictions on related-party investments and circular capital flows, specifically targeting structures where an investor contributes capital to a PEF and the fund subsequently deploys that capital back into entities controlled by that same investor. As a general rule, PEFs are now prohibited from investing in entities related to an investor that owns 20% or more of the fund. 

However, an exception may apply where the investment demonstrably supports new business activity, operational expansion, or job creation. In such cases, the fund must maintain supporting documentation and the invested capital must remain deployed in the related entity for a minimum period (generally 24 months).

4. Revised Timing for Tax Deductions

The Order clarifies that, for purposes of the tax deduction allowed under PEFs provisions of Act 60, an investment is considered made only when the PEF actually deploys and allocates the contributed capital into specific eligible projects, activities, or assets. Merely contributing funds to the PEF is insufficient to trigger the deduction. The fund must demonstrate that the capital has been assigned to identifiable investments, properly recorded in its accounting records, and that such investments meet the required economic development criteria.

5. Net Contribution Concept

The Order introduces the concept of “net contribution,” defined as the total capital contributed by the investor reduced by any loans or financing received from the same PEF, whether directly or indirectly. This rule is intended to prevent the artificial inflation of deductions through internal leverage arrangements.

Practical Implications for Taxpayers and Fund Managers

In light of the Order, taxpayers and fund managers should consider a reassessment of existing PEF structures to ensure compliance with the new rules related to (i) passive holding entities, (ii) in-kind contribution restrictions, (iii) related-party investments, (iv) timing for tax deduction, and (v) internal financing arrangements.

AT RSM Puerto Rico, we may assist you in evaluating the implications of the new rules established by Administrative Order No. DDEC 2026-002. Please contact our Tax Advisors at tax@rsm.pr, or 787-751-6164.

This article was written by our Tax Advisory Director Myrna Y. Medina Massanet, Esq.