The Italian giants have secured Silva's future following the decision to reject a €46 million approach from Paris Saint-Germain last month - a fee that would have made him the most expensive defender in history.
The 27-year-old was believed to be close to joining the French side until club president Silvio Berlusconi vetoed the move.
A statement on the club's official website read: "An important decision taken in difficult times and faced with a unique economic proposal.
"Thiago Silva is not simply a champion who tackles and wins back the ball, who with his team-mates, wins, draws or loses the match. Thiago Silva himself embodies the class and style of Milan, the charisma of a club that loves the game but also the result and behaviour.
"And so his stay with the Rossoneri, decided by president Berlusconi, preserves the Milan identity."
Silva’s agent responded to the failed transfer by demanding a new and improved deal for his client, which has extended his previous contract by one-year.
Silva has risen to become one of the best defenders in world football following his arrival at the San Siro in January 2009 from Fluminense.
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