The deal has cost the Gunners £60 million up front, with an extra £7.5 million in add-ons, according to reports.
Eze, who was released by Arsenal at the age of 13, returns to the red half of north London, 14 years later.
Read more: Eberechi Eze could be the missing piece in Arsenal's title-chasing jigsaw
Mikel Arteta has already splashed some cash this summer, with the arrivals of Martin Zubimendi, Viktor Gyokeres, Noni Madueke, Cristhian Mosquera, Christian Norgaard and Kepa Arrizabalaga - a total of £195m.
But it's the signing of Eze, taking the club's total spending to around £263m, who will get the Arsenal fans most excited, especially after beating Spurs to his signature.
Manager Mikel Arteta said in a statement that he was excited to add Eze to their attack.
"We are absolutely delighted to bring Eberechi to Arsenal," Arteta said on the club's website.
"He is a powerful and exciting player who will give us a new dimension in our attacking game. What stands out just as much as his talent and intelligence as a player is the way he has worked hard throughout his career to get where he is today.
"His journey, his mentality, and his ambition are exactly what we want in our team, and we love how much it means to him and his family to be joining our club. We all look forward to start working with Eberechi soon."
Joining Queens Park Rangers in 2016, Eze made his breakthrough in the 2019/20 season, being voted as QPR's Player of the Year, before moving to the Premier League with Crystal Palace in 2020.
During five seasons at Selhurst Park, Eze scored 40 goals and provided 28 assists in 169 appearances for the club, with his crowning moment coming in May, when he scored the winning goal in the Eagles’ historic FA Cup final victory over Manchester City.
Eberechi will wear the number 10 shirt and will officially join up with his new teammates after Saturday's match against Leeds.