Dutch great Davids will step into the role immediately and is set to be heavily involved in the lead-up to, and throughout, the FIFA World Cup later this year.
The 49-year-old, who was nicknamed 'Pitbull' by Van Gaal when the pair worked together at Ajax in the 1990s, has taken over from Henk Fraser who is leaving to become head coach of FC Utrecht.
Davids said: "I am not only proud but also very enthusiastic that I can continue my career as a coach together with such a renowned coach as Louis van Gaal and that I can work with the absolute best of the Netherlands."
His role will be that of 'second assistant'. Van Gaal's first assistant is another veteran of the great Ajax teams of the 1990s, Danny Blind.
Van Gaal announced in April he had undergone treatment for prostate cancer, and declared that had been a success. He will lead Netherlands at Qatar 2022 before stepping down to be replaced by Ronald Koeman, and the veteran boss believes Davids can make a positive contribution to the Oranje.
Seventy-year-old Van Gaal, in his third spell as Netherlands coach, said: "I am delighted that Edgar Davids will join our technical staff.
"After it was clear that Henk Fraser will focus entirely on FC Utrecht from next season, I asked Edgar if he wanted to become my – second – assistant at the Oranje squad.
"Our paths have crossed regularly in the past and I am convinced that he will fill this role in an excellent way. The players can take full advantage of his experience as an international at four international final tournaments, among other things."
Davids has little experience of hands-on coaching, and none at the highest levels of the game, but his playing career was highly successful, taking in stints with the likes of Ajax, AC Milan, Juventus, Barcelona, Inter Milan and Tottenham Hotspur. His coaching roles have come at Barnet, Telstar and Olhanense.
He won 74 caps for Netherlands and captained the team 12 times, with tournament experience coming at three European championships and one FIFA World Cup.