The German giant said in a statement that its supervisory board had approved on Thursday contracts determining details of the two firm's complex tie-up. Porsche's board was expected to follow suit on Friday.
The approvals are expected to draw a line under a fierce power struggle between the two automakers in recent years that counts Porsche's former boss Wendelin Wiedeking and its finance chief as casualties.
Porsche initially tried to acquire its much bigger German peer, but it ran out of funding as the financial crisis seized up credit markets. VW is now driving the deal, which is expected to be completed in 2011.
Porsche's core sports car operations are set to be integrated into VW as its 10th brand. As a first step, VW will acquire a 49.9-percent stake for €3.9 billion ($5.8 billion) by the end of this year.
VW's chief executive Martin Winterkorn was expected to make his first public appearance in his additional role as Porsche CEO at Porsche's earnings presentation next Wednesday.
Several of VW's institutional investors in recent weeks have criticised the poor visibility on Porsche's financial situation and pledged to resist the deal.
A capital increase using ordinary shares would have endangered the Geman state of Lower Saxony's voting stake, which gives it a blocking minority on important company decisions.
On completion of the merger, the state is set to remain the second-biggest shareholder, with a stake of 20.1 percent, and keep wide-ranging veto rights.
The Porsche and Piech families, which control Porsche, are expected to emerge as the largest shareholder of a combined company.
Analysts believe the two families might end up holding a stake in the range of between 30-45 percent, depending on the exact terms and conditions of the deal. Porsche Holding currently still controls 50.76 percent in VW.