The Royal Dutch Football Federation (KNVB) said in a statement that it had "reached an agreement with Ronald Koeman over his appointment as the Dutch national coach."
Koeman has "just signed a contract which ties him to Oranje with immediate effect up to and including the 2022 World Cup" in Qatar, it added.
Nic-Jan Hoogma, currently with Heracles, was also named a top sports director by the KNVB.
The new chance for glory for 54-year-old Koeman, comes after he was sacked by Premier League team Everton in October following a string of defeats which saw the Toffees fall into the relegation zone.
Koeman takes up the national reins at the Netherlands from Dick Advocaat, who had been one in a raft of unsuccessful appointments for the Oranje since 2014.
Advocaat arrived in May for a third stint as national coach, but stepped down seven months later after failing to steer the struggling European heavyweights into the World Cup finals in Russia.
It was a massive humiliation for the football-mad Dutch, causing much soul-searching, and an added blow to national pride after the team also missed Euro 2016.
For Koeman, the return home sees him come full circle, back to the nation where he first laced up football boots.
He had already been earmarked in 2014 to replace Louis van Gaal, who left to join Manchester United after taking the Dutch squad to third place in the World Cup in Brazil.
Instead, the Royal Dutch Football Federation (KNVB) appointed another stalwart Guus Hiddink, who was then replaced by Danny Blind, followed by Advocaat -- all in just over three-and-a-half years.
During that time the national team slumped from one disappointment to another.
An attack-minded central defender, Koeman picked up 78 Dutch caps as a player between 1982-94, scoring 14 goals. He represented his country in the 1990 and 1994 World Cups, and helped his team to victory for the first time in the 1988 UEFA European championships.
Football in the genes
Tuesday's announcement marks Koeman's 10th managerial post since starting his coaching career at Vitesse in 2000, having already served as Hiddink's assistant with the Dutch national team at the 1998 World Cup.
He was also an assistant coach to Van Gaal.
The younger brother of former international team-mate Erwin Koeman, and the son of ex-Dutch international Martin Koeman, he made his debut at 17 playing for FC Groningen in 1980.
He later transferred to Ajax, where he became known for his powerful right-foot. Stints at other Dutch clubs followed including PSV Eindhoven as well as Feyenoord.
In between, he played as part of the so-called "Dream Team" at Barcelona from 1990-1995 scoring the winning goal in the 1992 Champions League final.
"Koeman's sacking at Everton came as a gift from heaven for the KNVB," the popular De Telegraaf said.
But a tough baptism awaits, with friendlies lined up against two teams heading to the World Cup: England on March 23 in Amsterdam, and Portugal three days later.
The Dutch will then face world champions Germany and France in the new UEFA Nations League in September and October.
Koeman will be carrying a nation's hopes that he can turn their football fortunes around.