The agreement, which will include around 4,000 job cuts across both Thyssenkrupp and Tata, comes just hours after the German group's labor representatives, who hold around half of the company's board seats, said they would "examine" the proposal at a meeting this weekend, noting that "if in the end our conditions are fulfilled and the whole unit is debt-free then it's a possibility".
"Under the planned joint venture, we are giving the European steel activities of Thyssenkrupp and Tata a lasting future", said CEO Thyssenkrupp Dr. Heinrich Hiesinger.
The proposed 50:50 joint venture - thyssenkrupp Tata Steel - will be focused on quality and technology leadership, and the supply of premium and differentiated products to customers, with annual shipments of about 21 million tonnes of flat steel products.
Tata Steel last month reached a landmark deal that will allow it to reduce 15 billion pounds ($20 billion) in pension liabilities, long seen as the main hurdle in talks between the companies, which have lasted more than a year and a half.
Tata Steel, a subsidiary of one of India's biggest industrial groups, has faced numerous issues with its European steel business.
The two foresee annual synergies of 400 million euros (S$646.02 million) to 600 million euros and the venture will be closer in size to Europe's top producer, ArcelorMittal.
Roy Rickhuss, chair of the steel coordinating committee representing UK unions Unite, GMB and Community, said the unions recognise the industrial logic of the deal, but will still press Tata to confirm it will invest in the relining of Port Talbot's blast furnace No. 5.
Business Secretary Greg Clark said the announcement was an "important step" for the steel industry. In particular we will be pressing Tata to demonstrate their long term commitment to steelmaking in the United Kingdom by confirming they will invest in the reline of Port Talbot's Blast Furnace No.5.
Shares in Tata Steel rose 2% on news of the deal in Mumbai, while those in ThyssenKrupp opened 5% higher in Frankfurt.
"With Tata Steel, we have found a partner with a very good strategic and cultural fit".
thyssenKrupp now said that the negotiations about the details of the transaction and the due diligence shall be finalized by signing of the transaction at the beginning of 2018.
The two groups said the memorandum of understanding is a preliminary agreement and will be called Thyssenkrupp Tata Steel upon completion.
"Beyond a clear performance orientation, we also share the same philosophy of corporate responsibility towards employees and society".