However, as Kovacic was already registered with the club having spent last term on loan at Stamford Bridge, Chelsea have been able to sign the Croatia global permanently on a five-year deal for a fee reported to be in the region of £40million.
Madrid have now received over 100m euros from player sales in this transfer window, following the 40m euros that Atletico Madrid paid for Marcos Llorente and AC Milan's 20m euro capture of Theo Hernandez.
Former Chelsea striker Jimmy Floyd Hasselbaink said earlier this year that signing Kovacic would be a bad idea. I am very happy to be able to join permanently.
Chelsea techincal director Marina Granovskaia had her say on Kovacic's signing as well, noting Kovacic's ability as the reason he was bought from Real.
"Real Madrid and Chelsea have agreed the transfer of the player Mateo Kovacic", the La Liga side said in a statement.
With Chelsea's ban, imposed because over their past recruitment of foreign minors, Chelsea will not be able to sign players that aren't now registered with the club.
"The club wants to thank Kovacic for all these years of dedication, professionalism and exemplary behaviour, and wishes him good luck in his new stage".
He initially moved to West London from the Spanish capital a year ago and featured 51 times under previous boss Maurizio Sarri.
He has now completed a permanent move, with the Blues expected to appoint Frank Lampard as their new manager in the coming days.