Because the outlay is under £10m, Tottenham do not have to announce Defoe's signing to the stock exchange.
The decision to forego a possible £10m from Portsmouth meant that both clubs were able to claim satisfaction with the deal.
Defoe also now becomes the most expensive English forward yet after his move back to Tottenham took the combined transfer fees in his career to more than £35m.
He cost Portsmouth £9m last year and had previously attracted fees of £1.1m and then £7m when moving from Charlton to West Ham and then on to Tottenham.
Confirmation that a fee had been agreed between the clubs emerged early on Tuesday, with Defoe, who scored 64 goals in 177 games during his first spell at Tottenham, then spending much of the day at the club's Chigwell training base to agree a five-year contract and take a medical. He was introduced to supporters at before the Carling Cup semi-final against Burnley.
Having not played any domestic cup matches this season, Defoe will be available for the second leg of the tie against Burnley and the rest of the club's FA Cup campaign, including the fourth-round tie against Manchester United.
The structure of the Defoe deal, and the moderate cash outlay, means that manager Harry Redknapp still has funds available and is able to step up his bid for Middlesbrough's Stewart Downing.
Having also lost Lassana Diarra, Portsmouth are striving to agree new deals with England full-back Glen Johnson and midfielders Richard Hughes and Sean Davis.
Tottenham were, however, still awaiting formal approval for the Defoe transfer from a Premier League board as Rule L19 forbids players returning to clubs within a year. However, the rule was introduced to stop clubs abusing the loan system, and no objection is expected to the Defoe transfer.
How deal unfolded
Portsmouth could claim most satisfaction after holding out for an unusual deal for Jermain Defoe that will effectively be worth £19 million.
Last January, Tottenham sold Defoe after he refused to sign a new contract and they agreed a £9m transfer with Portsmouth that could potentially have risen to £11m.
Yet when negotiations started last week about Defoe's possible return to White Hart Lane there was £6m outstanding in payments to Spurs from that deal. A sell-on clause meant Spurs were entitled to £4m – even if they were the buying club.
Eventually, it was agreed that Tottenham would pay around £9m for Defoe and forego the possible outstanding £10m.