Fofana joined Chelsea from Norwegian side Molde in the January transfer window and made four appearances across all competitions.
The 20-year-old Ivory Coast international did not score in any of his appearances.
Fofana will now spend the upcoming season in Germany at a side that upset the odds to finish fourth in the last campaign to qualify for the UEFA Champions League.
Fofana told Union Berlin’s website: “Union have developed extremely strongly in the last few years and it excites me a lot to be a part of this in the coming season.
“The club has made a long and hard effort to find me and now I want to repay that with good performances.”
Union’s managing director of men’s professional football Oliver Ruhnert added: “David’s speed and his flexible offensive qualities are highly interesting for us.
“We want another goalscoring player who will give our attacking game additional impetus.”
Fofana has won three caps for the Ivorian national team.
