The 24-year-old midfielder joined Arsenal in 2006, and despite a promising couple of years, the Brazilian ultimately failed to make the grade at the Emirates Stadium.
Arsene Wenger shipped Denilson out on loan to Sao Paulo in 2011, a deal that was extended this season, and the report claims the Brazilian club are ready to make the move permanent in the next couple of weeks.
Sao Paulo vice-president Joao Paulo de Jesus Lopes told UOL: "I believe we'll reach an agreement with Arsenal. We have heard from Denilson that he doesn't want to return to England, that he wants to stay here with us.
"I think our relations with Arsenal with help that to happen."
The young midfielder has a handful of caps for Brazil under-17s, but has never lived really up to the promise he showed, and the promise that convinced Wenger to bring him to London from Sao Paulo seven years ago.
Back in his home country, Denilson has rediscovered some of that form, and has become an important part of a successful Sao Paulo squad.
After a difficult start - he was sent off twice in his first three matches - Denilson has gone on to make 45 league appearances for the Brazilian club, helping them to win the Copa Sudamericana last year.