The deal will enable VW to escape a tax bill of 1.5 billion euros. It also allows VW to speed up Porsche's integration into a multi-brand empire that aims to sell 10 million vehicles a year to become the world's no. 1 by 2018.
"We're wrapping up one of the most significant projects in the automotive world," VW Chief Executive Martin Winterkorn told reporters at the group's Wolfsburg headquarters.
"Together we are more capable than ever of becoming the best auto company on the planet," he said, adding that VW was poised to invest "massively" in new shared technologies and production.
Joint projects already underway include Porsche's next model, the Macan mid-size SUV, due for a 2014 launch. VW plants already provide the painted car bodies for some Porsche models and will build the Porsche Boxster in new factory in Osnabrueck, Germany.
Already a major player in emerging markets such as China, Russia and Latin America, Volkswagen will also need a bigger U.S. presence if it is to win and maintain the global crown.
Under CEO Winterkorn, VW last year opened a factory in Chattanooga, Tennessee, and is adding an Audi plant in Mexico.
Shares of Europe's biggest automaker rose strongly on Thursday after it agreed to buy the remaining half of the sports-car maker for 4.46 billon euros.
VW shares closed 5.1 percent higher, while Porsche SE stock fell 1.2 percent as analysts pointed to the news that Volkswagen would only pay about half the price that Porsche will carry on its balance sheet.
"VW is getting a good deal," said London-based Morgan Stanley analyst Stuart Pearson, predicting in a note to investors that its completion would lift VW earnings by 6 percent next year. "Porsche is the world's best premium car story."
The two companies share the same genealogical roots and analysts believe their common history will ensure the success of their integration, compared with other mega-mergers - like that of Daimler and Chrysler - which have failed.
Ferdinand Porsche, the founder of the sports car company and patriarch of the Porsche and Piech clans, invented the Volkswagen Beetle. His grandson Ferdinand Piech has ruled over VW for nearly 20 years first as CEO and then as Chairman.
Holding company Porsche SE had initially hoped to acquire Volkswagen in a leveraged buyout and plunder VW's coffers to fund the deal. The controversial plan hatched by Porsche SE's star CEO Wendelin Wiedeking drove a wedge between the two clans at the time, but they reconciled after Wiedeking's risky manoeuvre pushed the holding company to near bankruptcy.
The Porsches and Piechs agreed to sack him, raise 5 billion euros in a massive capital hike, sell their dealership group - Europe's largest - to VW and sign off on a distressed deal that would leave Porsche just another brand in VW's massive empire.
With Porsche's global sales running 20 percent above their previous record, the main challenge facing the maker of the iconic 911 coupe is to increase production capacity, Pearson added, and integration with VW may help.
The buyout price - 3.88 billion euros set by the original options, plus a share of expected dividends and other gains from the tie-up - takes VW's total outlay to nearly 8.4 billion euros for the entire business, excluding another 2.5 billion in assumed debt.
Since 2009, when the basic purchase price was fixed, Porsche's sales have soared and its debt repayments have fallen with interest rates.
VW now values Porsche at "clearly more than 20 billion euros" and will write up the business in its accounts, Chief Financial Officer Hans Dieter Poetsch said on Thursday, pointing to the brand's 18 percent-plus profit margin.
The companies had for months explored ways to avoid a tax bill of up to 1.5 billion euros that would have been incurred if the cash deal had gone through before August 2014.
Instead, by including a single share in the payment to Porsche SE, VW lawyers determined the transaction could go through tax-free under German law, leaving transaction levies of a little more than 100 million euros to pay.
VW's tax move has drawn political scrutiny, and the announcement came less than two days before Germany's Bundesrat, the upper house of parliament, begins debating the annual tax bill, amid growing calls for amendments to close the loophole.
"If global players can save billions in taxes with such tricks, taxpayers will feel someone's kidding them," former economy minister Rainer Bruederle said on Thursday.
The VW group - including brands as diverse as Skoda, Audi and Lamborghini - is currently ranked global no.3 after Toyota <7803.T> and General Motors , according to first-quarter deliveries data compiled by Ernst & Young.
Full VW-Porsche integration is expected to generate annual savings of 700 million euros and erase Porsche SE's remaining debt. It will boost VW's full-year earnings by more than 9 billion euros and reduce net liquidity by 7 billion, the company has said.
VW had planned to acquire the remainder of Porsche sports cars through a share-swap with Porsche SE, only to drop the merger plan last September in response to damages claims in the billions launched by U.S. and German investors who accused Porsche SE's former management of bilking investors.
By purchasing the Porsche manufacturing business instead - a fall-back option included in the original tie-up agreement - VW sidesteps the issue, leaving ongoing litigation risk with the Porsche SE holding, which will remain an independent company. (Writing by Laurence Frost; Editing by Will Waterman, Giles Elgood and Bernadette Baum)