The deal, announced on the Twitter feed of the champions, was widely expected although there was plenty of speculation a European rival could try to lure Simeone away from the club.
The former Argentina captain has transformed Atletico since taking over at the end of 2011, leading them to their first domestic league title in 18 years last term and putting them back among Europe’s elite.
Atletico won the Europa League at the end of Simeone’s debut season in charge and reached the final of the Champions League in 2013-14 where they lost 4-1 to Real Madrid after extra time.
They thrashed Chelsea 4-1 to claim the 2012 European Super Cup, won the King’s Cup a year later by beating Real in the final and defeated their neighbours over two legs to secure the Spanish Super Cup in August.
“I have chosen to be here because I am convinced the club will continue to grow,” Simeone told a news conference.
“Because it is strong, there is enthusiasm and there are people here whose desire to participate is stronger each day.”