Aim Measurement of health‐related quality of life in people with dementia is a challenge, because of their special characteristics and the difficulties that this term entails itself. The present study aimed at assessing the psychometric properties of the EQ‐5D rated by a familiar or a professional caregiver of institutionalized older adults with dementia. Methods We analyzed the EQ‐5D psychometric properties from 525 questionnaires rated by proxy, in a sample of institutionalized older adults with dementia. Results The mean EQ‐5D index score was 0.11 ± 0.38, and 51.54 ± 21.47 for the visual analog scale. The intraclass correlation coefficient was 0.72. Regarding internal consistency, Cronbach's alpha was 0.64, and the item‐total correlation ranged from 0.33 to 0.53. Exploratory factor analysis identified a functional and a subjective factor, accounting for 67.35% of the variance. Convergent validity of EQ‐5D with Quality of Life Alzheimer's Disease by proxy and Quality of Life in Late‐stage Dementia scales was satisfactory (r = 0.36–0.58). The EQ‐5D showed appropriate discriminative validity among patients grouped into several categories. Multiple linear regression models, using EQ‐index and visual analog scale as dependent variables, identified dependence level, proxy characteristics, leisure and comorbidity as determinants of quality of life. Conclusions Despite some limitations in the more subjective dimensions, the proxy‐rated EQ‐5D showed satisfactory psychometric properties in the present study, suggesting that it is a valid and alternative instrument to assess quality of life in institutionalized older people with dementia. Geriatr Gerontol Int 2014; 14: 346–353.