γ‐Secretase is an aspartyl protease complex that catalyzes the intramembrane cleavage of a subset of type I transmembrane proteins including the β‐amyloid precursor protein (APP) implicated in Alzheimer's disease. Presenilin (PS), nicastrin (NCT), anterior pharynx defective (APH‐1) and presenilin enhancer‐2 (PEN‐2) constitute the active γ‐secretase complex. PEN‐2, the smallest subunit, is required for triggering PS endoproteolysis. Stabilization of the resultant N‐ and C‐terminal fragments, which carry the catalytically active site aspartates, but not endoproteolysis itself, requires the C‐terminal domain of PEN‐2. To functionally dissect the C‐terminal domain we created C‐terminal deletion mutants and mutagenized several evolutionary highly conserved residues. The PEN‐2 mutants were then probed for functional complementation of a PEN‐2 knockdown, which displays deficient PS1 endoproteolysis and impaired NCT maturation. Progressive truncation of the C‐terminus caused increasing loss of function. This was also observed for an internal deletion mutant as well as for C‐terminally tagged PEN‐2 with a twofold elongated C‐terminal domain. Interestingly, only simultaneous, but not individual substitution of the highly conserved D90, F94, P97 and G99 residues with alanine interfered with PEN‐2 function. All loss of function mutants identified allowed PS1 endoproteolysis, but failed to stably associate with the resultant PS1 fragments, which like the PEN‐2 loss of function mutants underwent proteasomal degradation. However, complex formation of the PEN‐2 mutants with PS1 fragments could be recovered when proteasomal degradation was blocked. Taken together, our data suggest that the PS‐subunit stabilizing function of PEN‐2 depends on length and overall sequence of its C‐terminal domain.