The Drosophila Swiss Cheese (SWS) protein and its vertebrate ortholog Neuropathy Target Esterase (NTE) are required for neuronal survival and glial integrity. In humans, NTE is the target of organophosphorous compounds which cause a paralyzing axonal degeneration and recently mutations in NTE have been shown to cause a Hereditary Spastic Paraplegia called NTE-related Motor-Neuron Disorder. SWS and NTE are concentrated in the endoplasmic reticulum and both have been shown to have an esterase function against an artificial substrate. However, the functional mechanisms and the pathways in which SWS/NTE are involved in are still widely unknown. Here, we show that SWS interacts specifically with the C3 catalytic subunit of cAMP activated protein kinase (PKA-C3), which together with orthologs in mouse (Pkare) and human (PrKX) forms a novel class of catalytic subunits of unknown function. This interaction requires a domain of SWS which shows homology to regulatory subunits of PKA and, like conventional regulatory subunits, the binding of SWS to the PKA-C3 inhibits its function. Consistent with this result, expression of additional PKA-C3 induces degeneration and enhances the neurodegenerative phenotype in sws mutants. We also show that the complex formation with the membrane-bound SWS tethers PKA-C3 to membranes. We therefore propose a model in which SWS acts as a noncanonical subunit for PKA-C3, whereby the complex formation regulates the localization and kinase activity of PKA-C3, and that disruption of this regulation can induce neurodegeneration.