"I'm so happy to be here and to have this opportunity to stay. I love this club and I still have the ambition of a young player," the 32-year-old told the club's website.
"It means a lot to reach another European final and we still have the opportunity to finish in the top three of the Premier League this season and I will continue to try to do my best to help the team."
After falling down the pecking order under former boss Antonio Conte last season, Luiz has emerged as a key player under manager Maurizio Sarri.
"He's set the perfect example to those around him throughout the campaign and been a huge influence on and off the pitch," Chelsea director Marina Granovskaia said.
"With the Europa League final still to come, we hope to finish off the season with silverware and David will be central to that success in Baku and beyond."
Luiz has made 246 appearances and scored 18 goals for the club in two spells, rejoining them in 2016 after spending three seasons at French side Paris St Germain.
Third-placed Chelsea travel to Leicester City on Sunday for their final league match of the season. The Europa League final is on May 29 in Baku.
(Reporting by Shrivathsa Sridhar in Bengaluru; Editing by Toby Davis)
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