The Brazilian talent will return to his former club in a bid to find regular first-team action and push for titles, which he failed to do at Arsenal
The Brazilian midfielder, who will be officially presented by Sao Paulo on Tuesday, has become the first signing of the club's new coach, Adilson Batista.
Denilson stated at the end of the season he was looking to leave London after a frustrating campaign in which he only made six starts in the Premier League.
The 23-year-old will now return to the club he left in 2006 to pursue his career abroad and has declared he will do his best to claim silverware.
"I am very pleased to return. I want to help Sao Paulo become Brazilian champions," Denilson told Lancenet.
"I have returned because of my family and Sao Paulo. This is the club where I was raised, where I started, who have a very beautiful history. I am realising a dream."
Denilson has confessed that one of the reasons he has decided to accept a new challenge is because of the Gunners' title drought, as he is looking to get his hands on a trophy in his homeland.
"It was complicated, I was five years there and unfortunately we did not win anything. Now, with my head at Sao Paulo, I think I will do that," the player added.
"I hope to resolve everything as soon as possible to return to work and continue my career here [in Brazil]."