The 33-year-old resigned as Porto manager on Tuesday.
Villas-Boas, who led Porto to a domestic double as well as winning the Europa League last season, replaces Carlo Ancelotti, who was sacked in May after failing to win a trophy in his second season.
Villas-Boas moves to London after Chelsea paid £13.3 million to trigger an escape clause in his contract and becomes the club's seventh manager since Roman Abramovich took over in 2003 and the youngest in the Premier League.
A club statement read: "Andre was the outstanding candidate for the job. He is one of the most talented young managers in football today and has already achieved much in a relatively short space of time.
"His ambition, drive and determination matches that of Chelsea and we are confident Andre's leadership of the team will result in greater successes in major domestic and European competitions.
"Andre will bring his coaching experience back to a club he is already very familiar with, having previously worked here for three years.
"He has always been highly regarded at Chelsea and everyone here looks forward to welcoming him back and working with him."
Villas-Boas worked at Chelsea as a scout under Jose Mourinho, who left Porto seven years ago to join the Premier League club.
Porto have moved swiftly to appoint a replacement coach, with Vitor Pereira stepping up into the hotseat after apparently turning down the chance to move to England with Villas-Boas.
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