Long non-coding RNAs (lncRNAs) have been implicated in the regulation of chromatin conformation and epigenetic patterns. lncRNA expression levels are widely taken as an indicator for functional properties. However, the role of RNA processing in modulating distinct features of the same lncRNA is less understood. The establishment of heterochromatin at rRNA genes depends on the processing of IGS-rRNA into pRNA, a reaction that is impaired in embryonic stem cells (ESCs) and activated only upon differentiation. The production of mature pRNA is essential since it guides the repressor TIP5 to rRNA genes, and IGS-rRNA abolishes this process. Through screening for IGS-rRNA-binding proteins, we here identify the RNA helicase DHX9 as a regulator of pRNA processing. DHX9 binds to rRNA genes only upon ESC differentiation and its activity guides TIP5 to rRNA genes and establishes heterochromatin. Remarkably, ESCs depleted of DHX9 are unable to differentiate and this phenotype is reverted by the addition of pRNA, whereas providing IGS-rRNA and pRNA mutants deficient for TIP5 binding are not sufficient. Our results reveal insights into lncRNA biogenesis during development and support a model in which the state of rRNA gene chromatin is part of the regulatory network that controls exit from pluripotency and initiation of differentiation pathways.