Neither club disclosed financial details of the transfer, but media reports said the deal is worth up to €40 million ($46 million), with a further €5 million in add-ons.
The 27-year-old Danish midfielder made 141 appearances and scored 10 goals and made 12 assists for Sporting after joining from Italian club Lecce in 2023.
Hjulmand captained Sporting to back-to-back Portuguese league titles in 2023/24 and 2024/25, as well as a Taca de Portugal.
He has made 27 appearances for Denmark since making his international debut in 2023. A defensive midfielder, Hjulmand is known for his ball-winning ability, physical presence and reading of the game.
His arrival follows Atletico's signing this transfer window of Spanish left wing-back Alex Grimaldo from Bayer Leverkusen.