Last month, Federer revealed his intention to play on the clay this season after a two-year absence.
The Swiss star last played at the French Open in 2015 when he was beaten by fellow countryman Stan Wawrinka.
But in the build-up to this year’s Roland Garros, which begins on May 26, Federer will take his talents to Madrid.
“Federer is one of the best players of all time, it’s no secret,” said Feliciano Lopez, the director of the Mutua Madrid Open.
“We are happy because his return to Madrid is a gift to the tournament, but above all the fans will be able to see a unique player in the Caja Magica.
“Having the Swiss player back on clay with Djokovic and Nadal is going to be unmissable.”
Federer has won the Madrid Open three times – once when the event was played on hard courts in 2006, twice on the clay (2009, 2012).
Manolo Santana, honourary president of the tournament, added: “Roger’s presence in the Caja Magica will make this year’s Mutua Madrid Open special.
“It doesn’t matter that he’s 37 because he still has that unmistakable class; the innate talent that has made him one of the best of all time.
“Being able to enjoy his tennis is something that no fan of the sport should miss.”
Earlier this month, Federer stated he would only play one tournament before competing in Paris.
“Probably I plan only one tournament before Roland Garros,” Federer said.
“I do not want to play much more, prefer to train more and prepare well for the grass season.
“I certainly do not want to start pumping it out.
“Monte Carlo is probably too early.”
Federer has won 11 titles on clay, including the French Open in 2009.
Novak Djokovic and Rafael Nadal are also expected to play at the Madrid Open.