The Toffees had an initial £30m bid rejected for the 23-year-old winger on Wednesday after resigning their interest in the Crystal Palace’s Wilfried Zaha, before making a dramatic last-hour second bid for the Nigerian international.
The deal was submitted before the 5pm deadline but did not get confirmed until four hours later.
Iwobi is Everton’s seventh and final signing of the summer transfer window, following the additions of goalkeeper Jonas Lössl, right-back Djibril Sidibe, midfielders Andre Gomes, Fabian Delph and Jean-Philippe Gbamin, and striker Moise Kean.
Of the deal, manager Marco Silva said: “Alex was one of our main targets for this window and I believe he is a fantastic signing for Everton. He is a direct and skilful winger and attacking midfielder who always works very hard for his team.
“He is still young but already with a lot of top-level experience – 100 Premier League matches, more in Europe and many international games.
“It was important for me to have one more quality option for our attacking positions to add to what we have with Richarlison, Bernard and Theo Walcott.
“Alex fits exactly the profile of player I want in my model. He is hungry to join Everton and take the next step in his career, to help us compete with the strongest teams in the league and reach his potential at our club.”
Iwobi joined the Arsenal academy in 2004 and made 149 appearances for the club, scoring 15 goals in four seasons as a professional.
Everton sold winger Ademola Lookman to RB Leipzig earlier in the window and Silva had been insistent a replacement was brought in.