Generation of 11-cis-retinol from all-trans-retinyl ester in the retinal pigment epithelium is a critical step in the visual cycle and is essential for perception of light. Recent findings from cell culture models suggest that protein RPE65 is the retinoid isomerohydrolase that catalyzes the reaction. However, previous attempts to detect the enzymatic activity of purified RPE65 were unsuccessful, and thus its enzymatic function remains controversial. Here, we developed a novel liposome-based assay for isomerohydrolase activity. The results showed that purified recombinant chicken RPE65 had a high affinity for all-trans-retinyl palmitate-containing liposomes and demonstrated a robust isomerohydrolase activity. Furthermore, we found that all-trans-retinyl ester must be incorporated into the phospholipid membrane to serve as a substrate for isomerohydrolase. This assay system using purified RPE65 enabled us to measure kinetic parameters for the enzymatic reaction catalyzed by RPE65. These results provide conclusive evidence that RPE65 is the isomerohydrolase of the visual cycle.