Boss Andre Villas-Boas has beaten Arsenal manager Arsene Wenger to the prized signature of Holtby, 22, who is out of contract with Schalke in the summer.
Holtby is the son of an English father - a former soldier from Liverpool - and a German mother.
He has played three times for the full German national side, and he is the current Germany U21 captain.
A creative midfielder, he began his career with Alemannia Aachen in the German second division before joining Schalke in the summer of 2009.
He has made 75 appearances for the Gelsenkirchen-based club in all competitions, scoring 11 times.
Spurs confirmed: "We're delighted to announce that we have reached agreement with Lewis Holtby to join the club in July from Schalke."
Holtby was one of the most sought-after players of the January transfer window, with Wenger confirming earlier on Friday that he was keen on the midfielder.
Holtby, who turned down the offer of a new contract with Schalke, will join Spurs on a free transfer.
On Thursday Tottenham assistant manager Steffen Freund said of his compatriot: "For Lewis it will not be a problem (adapting to English football).
"He is half-English, he loves the Premier League. He is captain of the U21s for Germany, he will lead the team at the European Championship in Israel."