The Brazilian struggled to secure a regular role in Arsene Wenger's side but has heavily featured for the South American club on his short-term switch last year
The 24-year-old already spent the last campaign at the Brazilian club after being unable to cement a regular first-team role in Arsene Wenger's side.
"Arsenal rightly did not want to let Denilson go at the beginning, because of his quality and his good campaign here," Sao Paulo's director, Adalberto Baptista, told the club's official website.
"But fortunately, we spoke with Arsenal's directors and it was settled that the player will stay. I am sure that he will keep helping us a lot in this period."
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"I am very relieved, this is a big happiness. Now, I have to be even more focused and work hard to help Sao Paulo win titles again," said the midfielder.
"I am ready. I spent some days outside Sao Paulo to rest, so I am ready to get back on track and train with my team-mates. We have a very big game on Sunday."