"Italdesign becomes a permanent member of the global Volkswagen family," chairman Martin Winterkorn said in a statement.
VW will buy 90.1 percent of the shares in Italdesign Giugiaro, while the Giugiaro family will hold on to the remainder.
"The Volkswagen group will be continuing its model initiative over the coming years and will benefit from the capacity and competence of Italdesign," Winterkorn said.
"The company will therefore be making an important contribution to our 2018 global growth strategy," he said.
The Italian firm was founded in 1968, posts annual sales of around €100 million ($123 million) and employs some 800 workers, the VW statement said.
VW has worked with the Italian design firm since the 1970s, when it helped develop the Golf 1 model, one of the German group's biggest successes.
Italdesign was founded by Giorgetto Giugiaro and Aldo Mantovani, and has worked with car makers worldwide, including Fiat, Renault, Ford, Toyota and the China Automotive Company.
VW, meanwhile, has worked in the past year on a series of acquisitions, and already owns a broad range of car companies including Audi, Bentley, Lamborghini, Seat, Skoda, and the Swedish heavy truck group Scania.
By the end of the year, VW is also expected to finalise a takeover of Porsche, and it has bought almost 20 percent of the Japanese brand Suzuki.
Shares in VW showed a loss of 3.59 percent to 65.71 euros in midday trading, while the DAX index of leading German stocks was off by 2.56 percent overall. Share in rival car makers BMW and Daimler posted losses similar to that of VW.