Additionally, Mourinho has agreed to exchange the one-year sentence for a €182,500 fine. In addition, he must pay a penalty of about €1.98 million (£1.74 million).
Mourinho still has to pay almost 2 million euros ($2.2 million) to tax authorities as part of the deal.
The claim was filed against Mourinho a year ago on two counts of tax fraud committed before the Portuguese left the Bernabeu in 2013 to return to Chelsea for a second spell as their manager.
The agreement still has to be validated by a judge.
Mourinho defrauded the tax authorities of €3m.
The settlement is the latest in a line of tax cases involving players and managers from Spain's two biggest clubs, Real Madrid and Barcelona.
Prosecutors believe by ceding his image rights to a series of companies based in tax havens.
Image rights cover the use of a person's likeness, voice, signature and mannerisms - and can be very lucrative for footballers and managers.
Another former Real Madrid star, Xabi Alonso, is also facing charges over alleged tax fraud amounting to about €2m, though he denies any wrongdoing.
Mourinho was charged of two tax-related crimes, each equating to six months in jail.
The prison sentence was later commuted to a further fine of 252,000 euros, equivalent to 400 euros per day of the original term.
Portuguese football legend Jose Mourinho, who made a surprise appearance at a hockey game between two KHL teams in Russian Federation, suffered an unfortunate mishap right after he symbolically dropped the puck on the ice.