Benitez left Newcastle United after three years on Sunday following the expiration of his contract on Tyneside, after he and Magpies owner Mike Ashley could not agree a new deal.
The 59-year-old moves to China with a vast wealth of experience having managed the likes Real Madrid, Valencia, Chelsea, Liverpool, Inter Milan and Napoli.
Benitez won the Champions League with Liverpool in 2005 and also won the Spanish La Liga title and UEFA Cup with Valencia in 2004.
Benitez will replace Choi-Kang Hee, who resigned as Dalian Yifang manager on Monday, and will earn £12m a year.
"I have had offers of greater financial significance during my career, but they weren't the project I was looking for," said Benitez.
"What I have found at Dalian is an incredible project that has arrived at the perfect time and this has been a major factor in my decision.
"We've accepted the challenge of leading a superb project with the full backing and confidence of the club's leadership team.
"This club has all the components that we were looking for to start a new chapter with the maximum motivation."
Dalian Yifang lie 10th in the 16-team Chinese Super League after 15 round of matches.
Benitez will be reunited with Marek Hamsik, whom he managed at Napoli between 2013 and 2015, while Belgium winger Yannick Carrasco is also at the club.
