The 23-year-old, who had two years left on his contract with the Eredivisie club, has put pen to paper on a four-year deal with the Italian outfit.
Hiljemark captained his country to their first ever European Under-21 Championship title in the Czech Republic last month as they beat Portugal on penalties in the final.
A statement from Palermo read: “Palermo announced they have acquired Oscar Hiljemark from PSV Eindhoven.
“The Swedish midfielder joins us on a permanent transfer and has signed a four-year contract with the Rosanero club.”
Hiljemark made 49 appearances for PSV following his arrival from Elfsborg in January 2013.
Palermo, coached by Giuseppe Iachini, finished 11th in Serie A in the 2014/15 campaign.