Taylor has had two spells in charge of the Gills, leading them to promotion to League One via the playoffs in 2000 in his first tenure at the club.
The 64-year-old then returned to Priestfield 13 years later following the sacking of Martin Allen, but was himself dismissed after 14 months in charge.
A statement on the Gillingham website read: "Following meetings with chairman Paul Scally this afternoon, Gillingham Football Club can confirm that Ady Pennock will be continuing as head coach for the 2017-18 Sky Bet League One season.
"Furthermore, we are delighted to announce that Peter Taylor will be returning to the MEMS Priestfield Stadium as our new director of football. He will oversee recruitment and all footballing policy."
Most recently, Taylor has been with Indian Super League franchise Kerala Blasters and also worked as an assistant with the New Zealand national team.