Holtby, whose father is English, had been offered improved terms to stay on in the Bundesliga but, after seeking out specialist psychological help, he has decided to move to Spurs.
"Tottenham are a huge club both in England and worldwide," said Holtby. "They have great fans and a top manager and I want to fulfil my dreams.
"I would have opted to stay put with Schalke had I not received this offer from England. It was not an easy decision for me and not one I could make in a day. I spoke about it with my agent and also my mind coach. We went over everything, but they left the final decision to me.
"I had the offer of a great new deal from Schalke. I thought about it, but asked myself about what I had already experienced in the Bundesliga and what I still have in front of me. I have always made my own decisions, including whether to stay on at school or to concentrate on my football.
"Andre Villas-Boas convinced me about his club's philosophy of football and I play to make my dreams come true."