The 28-year-old World Cup winner joined Arsenal from Valencia in August 2016 and has since been a prominent part of their backline.
Mustafi makes 151 appearances during his time at the club.
Gunners Boss Mikel Arteta said: "Musti has been a key player for us for a long period of time.
"He played a very important part in my first season as manager and I’d like to thank him for his professionalism and for always being ready when called upon. Everybody at Arsenal wishes Musti well at Schalke."
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