After a season of few first-team opportunities, the 23-year-old will rejoin Sao Paolo, the club he left in 2006 to join the Gunners.
"I will be playing in Brazil next season as I felt that this is a good opportunity for me to play regular first-team football," Denilson told Arsenal's official website.
"I move away with sadness because I have so many friends at Arsenal and everyone has always been so supportive to me.
"I'm now focused on doing well in Brazil next season, but will always be looking out for the Arsenal results."
Denilson made 153 appearances for Arsenal, scoring ten goals.