Puerto Rico imposes stricter controls on private capital funds.

By THE STAR STAFF 

The Puerto Rico Department of Economic Development and Commerce (DDEC by its acronym in Spanish) has imposed stricter controls on private capital funds under the island’s Incentives Code (Act 60‑2019) to ensure that the tax benefits tied to those investment vehicles translate directly into productive economic activity, business expansion and job creation.

The new measures were formalized through Administrative Order DDEC 2026‑002, signed by DDEC Secretary Sebastián Negrón Reichard. According to the agency, the order responds to growing questions and concerns regarding the eligibility of certain investments and seeks to establish clearer parameters for administering and deploying private capital within Puerto Rico’s economy.

Developed in coordination with the Office of the Commissioner of Financial Institutions and the Treasury Department, the guidelines are designed to strengthen transparency, consistency, and the overall effectiveness of the program while safeguarding the financial integrity of the funds and maximizing their economic impact.

Private capital funds play a key role in Puerto Rico’s economic development strategy by providing accredited investors with a vehicle to channel capital into companies operating on the island. In return, investors may claim tax deductions for contributions used to finance industrial or commercial activity. However, DDEC identified gaps in definitions and operational criteria that, while legally permissible, could result in investments lacking meaningful economic impact.

To address this, the order introduces detailed definitions for three types of entities: The first is private entities or businesses engaged directly in economic activity in Puerto Rico, generating at least 80% of their income from real commercial operations with employees, facilities, or assets on the island. Only investments in active entities qualify for tax incentive purposes.

The second are passive entities, which earn income primarily from financial returns -- such as dividends, interest, royalties, rent, or capital gains -- and do not generate direct economic activity in Puerto Rico. Although funds may invest in passive entities, such investments do not qualify for tax incentives.

A third category is mixed entities, which combine active and passive activities. They may qualify for incentives only when at least 80% of their income is derived from active economic operations.

For the first time, the government has created explicit criteria to determine whether a fund’s investment genuinely promotes business activity, limiting incentives strictly to investments in active or qualifying mixed entities.

Another major component of the order is the prevention of “capital recycling” -- a practice in which investors contribute capital to a fund only for those same resources to flow back into companies they already control, without creating new economic activity.

Under the new rules, private capital funds generally may not invest in entities linked to any investor holding 20% or more of the fund, unless the investment is directed toward new business activity, significant expansion or job creation.