Pioli left Milan after the 19-time Italian champions finished second last season, 19 points behind champions Inter, and following lacklustre runs in the Champions League and the domestic cups.
Fonseca last managed French side Lille, and was also in charge of AS Roma from 2019-2021.
"AC Milan can confirm that Paulo Fonseca has been appointed as the head coach of the men's first team," the club said in a statement.
Fonseca, who was a defender during his playing days with Portugal's Barreirense and Estrela Amadora, started his managerial career with the youth team of Estrela Amadora in 2005 before taking charge of Porto in 2013, followed by stints with Braga and Ukrainian side Shakhtar Donetsk.
He won the Portuguese Super Cup with Porto in 2013, the Cup of Portugal with Braga in 2015-16, as well as the Ukrainian Premier League with Shakhtar Donetsk three times in a row.
"The club would like to wish Paulo and his staff a warm welcome," Milan said.
Pioli, who led the Rossoneri to their first Serie A title in over a decade in 2022, was brought on board in 2019 and left last month.
