Chelsea's signing of Kovacic was in part conditioned by the fact the Premier League club have been hit with a transfer ban covering two transfer window.
The Blues are unable to sign players this summer after being slapped with a transfer ban for breaking Federation Internationale de Football Association rules.
Chelsea are now banned from registering new signings until the summer of 2020 after being found guilty of breaching rules when signing youth players.
The Blues announced the permanent acquisition of Los Blancos Mateo Kovavic today, who joins the club in a reported €50 million (R805 million) following his loan stint.
"We had a successful year, winning the Europa League and I hope I can make a big contribution in the coming seasons", Kovacic said.
And, the move paid off to an extent as the 25-year-old finally managed to feature week-in week-out at club level.
However, Kovacic was already registered having spent last term in west London.
"The club wishes to thank Kovacic for these years of commitment, professionalism and exemplary behaviour, and wishes him good luck in his next step".
Chelsea are now banned from signing players after breaching transfer rules, but Kovacic is exempt as he was already registered with the club as a loan player.
Stamford Bridge chiefs will need to shift at least one foreign player to make room for Kovacic, however, to fulfil Champions League guidelines.
Kovacic failed to score during his first season with Chelsea but showed his ability to dribble through midfield easily, while he also possesses tidy passing range.