Financial details were not disclosed but British media reported the German club paid 25 million euros for the former Arsenal captain.
Xhaka joins Xabi Alonso's Leverkusen after spending seven seasons with Arsenal in which he made 297 appearances, with 23 goals and 29 assists, and helped the club win two FA Cups.
Xhaka will return to the German league having had a four-year spell with Borussia Moenchengladbach before joining Arsenal in 2016.
"I know the league inside out and I watched it when I was in London. Bayer 04 is a club with an impressive history and ambitious targets," said Xhaka.
"Above all, I see it as a club with a great future. Everybody here is ambitious and wants to achieve something – I'm very much looking forward to the next few years."
