The Spain striker agreed a two-year deal with the Rossoneri over the summer but has struggled to find form at San Siro and has been widely reported to be on the verge of returning to boyhood club Atletico Madrid.
Both Chelsea and Milan confirmed on Saturday that an agreement has been reached to make the 30-year-old's move to Italy permanent, with the transfer set to be completed on January 5.
However, it remains to be seen whether Torres will then secure a switch back to La Liga, with Italy international Alessio Cerci believed to be heading in the other direction as part of the deal.
"Fernando Torres is to join AC Milan on a permanent basis," a statement released via Chelsea's official websitereads.
"The striker moved to the San Siro on a two-year loan deal in August and on January 5 he will complete a permanent transfer to the Serie A side.
"Chelsea Football Club thanks Fernando for his service during the past four seasons and wishes him the very best for the future."
Milan also released a short statement on their official website to corroborate the news.
Atletico president Enrique Cerezo had previously hinted at the club's interest in the forward as speculation over his future mounted this week.
Cerci denied earlier on Saturday that he had reached an agreement with Milan over a switch to San Siro despite numerous reports in both Spain and England that the 27-year-old had accepted the chance to move as part of the deal to take Torres back to Vicente Calderon.
