Kovacic spent last season on loan at Chelsea, where he made 51 appearances in all competitions and won the Europa League in May.
Chelsea are unable to sign players in the summer transfer window as a result of their two-window transfer ban which they are appealing at the Court of Arbitration for Sport, but the terms of their agreement with Real Madrid regarding Kovacic’s loan deal entitles them to sign him permanently regardless.
Kovacic’s future was shrouded in uncertainty early Monday with his name missing from Chelsea’s list of released players going into next season.
The Croatia international’s future has now become clearer after signing a five-year contract at Stamford Bridge, and the three-time Champions League winner has expressed his delight in staying put at the Europa League holders.
Kovacic said: ‘I really enjoyed my season on loan with Chelsea, I feel comfortable at the club and like London and the Premier League very much. I am very happy to be able to join permanently.
‘We had a successful year, winning the Europa League and I hope I can make a big contribution in the coming seasons.’
Chelsea director Marina Granovskaia added: ‘Mateo proved what an accomplished player he is during his season on loan with us and we are delighted to welcome him to the club on a permanent basis.
‘He already possesses extensive experience at club and international level and we are sure he will be a big success with Chelsea over the next five years.'
