Danish authorities had initially announced plans to rent prison cells in the small Western Balkan country in December.
A deal to send 300 prisoners from Denmark to Kosovo for €15 million per year was signed, authorities in Copenhagen said.
The move is aimed to ease overcrowding in Danish prisons, which are now at overcapacity.
"We have now signed an innovative agreement that will ensure better capacity in our overcrowded prisons and relieve the pressure on our prison officers," Justice Minister Nick Haekkerup said in a statement on Wednesday.
The prisoners that will be sent to Kosovo are foreign detainees who are due to be deported after their sentences. They are expected to be moved to a facility in Gjilan — 50 kilometres from the capital Pristina — at the start of 2023.
The EU member state had previously announced its plans to rent prison cells in the small Western Balkan country of about 2 million in December.
Parliaments of both countries still have to approve the project.
Last year, the EU country has also passed a controversial law that allows asylum seekers to be transferred abroad while their applications are being processed.
"With this agreement, Denmark is also sending a clear signal to foreigners from third countries who have been sentenced to deportation: your future is not in Denmark, so you should not serve your sentence there," Haekkerup said.
The prison population in Denmark has jumped by 19% to more than 4,000 between 2015 and early 2021.
During the same period, the number of prison guards in the country fell by 18%, according to national statistics.