Following more than a decade plying his trade in England, Williams returned home at the start of the 2016/17 season to join Perth Glory, where he made 18 appearances in all competitions.
The versatile 28-year-old will link up with his new Victory teammates when pre-season training commences on July 6.
"We've had really positive discussions with Rhys and we're thrilled to officially welcome him to the club," said head coach Kevin Muscat.
"Rhys is the first piece of the puzzle as work begins on building our squad for what is sure to be an exciting 2017/18 season.
"It's well known that we like versatility in our squad and not only is Rhys an outstanding defender, he is also very good on the ball and is equally comfortable playing as a full-back or even in midfield.
Williams, who has signed a two-year deal through until the end of the 2018/19 season, cannot wait to get acquainted with his new teammates.
"I had some things to weigh up in terms of a couple different offers, but ultimately it was my conversations with Kevin (Muscat) that convinced me Melbourne Victory was the right place to sign," said Williams.
"I obviously watched the Grand Final and was impressed with how hard the boys worked for each other, and that's a testament to the culture because they just kept fighting."
"The ACL is something I've really enjoyed watching since returning home (from England) and I'm looking forward to being involved next season," said Williams.
Williams is currently on holiday and will commence his move to Melbourne next month.
In other squad news, Thomas Deng will return to Victory following a year-long loan to PSV Eindhoven in the Netherlands, while Max Beister's loan deal from 1. FSV Mainz 05 has expired.