Seoul's Unification Ministry says the Koreas reached the agreement during talks Wednesday at the border village of Panmunjom.
It says athletes from the two Koreas will march together under a "unification flag" depicting their peninsula during the opening ceremony in Pyeongchang.
The measures require approval by the International Olympic Committee, which will be consulted over the weekend.
The two countries have also agreed to form a shared women's ice hockey team in a historic moment for the peninsula. This will be the first time ever that a united team from the two Koreas has competed in the Olympics.
This follows the announcement, made earlier today, that North Korea will be sending a 230-person cheering squad to next month's Games as part of the country's 550-strong delegation, which will start arriving in South Korea on 25 January.
North and South Korea opened talks over the Winter Olympics last week - the first time in two years the two nations have been in dialogue.
This has offered respite from rising tensions over Pyongyang’s nuclear ambitions, which it is pursuing in defiance of United Nations sanctions.
Despite an apparent thaw in relations between the two Koreas, Japan has urged caution over the North’s “charm offensive”.
“It is not the time to ease pressure, or to reward North Korea,” Japanese Foreign Minister Taro Kono said. “The fact that North Korea is engaging in dialogue could be interpreted as proof that the sanctions are working.”
The initial proposals to form a joint ice hockey team were also met with apprehension, with concerns being raised raised that South Korean players could lose their place to competitors from the north.
Unification Ministry spokesman Baik Tae-hyun said on Wednesday that the government is aware of public concerns that adding North Korean players could displace South Koreans who have made the team.
Before Wednesday's announcement, South Korean President Moon Jae-in, during a visit to a training centre, told players: “I don’t know if it will happen, but a joint team will be a good opportunity for ice hockey to shed its sorrow as a less-preferred sport as many Koreans will take interest."