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The 18-year-old midfielder will move back to Brazil until the end of June.
Santos helped Vasco earn promotion to the top-flight last year before joining Chelsea in January, reportedly costing the Blues £18million.
Despite being highly rated, Santos was unable to secure a work permit for the United Kingdom, though reports suggest Chelsea are confident he will qualify for one next season.
Palmeiras had apparently been leading the race for Santos, but negotiations were said to have broken down due to a disagreement on the length of the loan.
It was claimed Chelsea wanted Santos back for next season, whereas Palmeiras wanted him until the end of their campaign, meaning he would not have been back at Stamford Bridge until December.
Santos captained Brazil to success in the South American Under-20 Championship glory last month, finishing joint-top scorer with six goals.