Left-handed opener Masood played under Arthur during the latter's three-year tenure as Pakistan head coach from 2016-19 and was a key target for Arthur upon being appointed as Derbyshire head of cricket last month following a stint as Sri Lanka head coach which started in early 2020.
"Playing county cricket in England is something I've always wanted to do, so when Mickey approached me to join Derbyshire, I jumped at the chance," the 32-year-old Masood said. "He's perhaps been the greatest influence in my career and I'm looking forward to working with him again at Derbyshire.
"It's an exciting time for the club and hopefully I can contribute at the top of the order and use my experience to help the younger players in their development."
Masood has made 25 Test appearances for Pakistan, scoring four centuries - including 156 against England at Emirates Old Trafford in 2020 - and has six Test fifties to his name. Despite an impressive record in List A matches in Pakistan, Masood has played only five ODIs.
In T20s, he captained the Multan Sultans side which topped the PSL table before being knocked out during the play-off stages in 2020 and was part of the team which won the 2021 PSL title last June.
Masood first played in England early in his career, scoring a Stamford School-record 1,237 runs at an average of 103 in 2009, and he played three first-class matches for Durham University.
He will be available for all formats throughout Derbyshire's 2022 campaign, starting with their first LV= County Championship fixture in April.
Ryan Duckett, Derbyshire's chief executive, said: "Shan is an immensely talented batter and was a key target for head of cricket, Mickey Arthur, in his plans to develop the Derbyshire squad.
"He knows Mickey's standards and what is expected both in training and out in the middle and I'm looking forward to seeing what his experience brings to Derbyshire."