Hincapie made 39 appearances during his debut season in England, helping the side to their first Premier League title in 20 years as well as the Champions League and EFL Cup final.
The 24-year-old Ecuadorian international joined the Gunners last September from Bayer Leverkusen, initially on loan but the club have confirmed on Thursday afternoon that the move has been made permanent.
“We are delighted to have activated the option to make Piero Hincapie’s transfer to us permanent from July 1.
“Everyone at the club is delighted to welcome Piero back with us.”
The Standard report that Hincapie has signed a five-year contract, committing his future to the club through to the summer of 2031.
Leverkusen said, external: "The conditions for the purchase option were met and defender Hincapie will therefore continue his career with the London club in the Premier League in the coming years."
Hincapie has featured in both of Ecuador's World Cup fixtures to date as they faced Ivory Coast and Curacao. They next face Germany later this week as they aim to book their place in the Round of 32.