The 20-year-old midfielder featured 17 times for Rossoneri last season in the Italian top flight as the San Siro club almost missed out on European qualification after endangering themselves with FFP regulations.
It was thought that boss Gennaro Gattuso could once again utilise the Italy Under-21 international for the upcoming term in a similar way to the back end of last year.
However, as Milan stated via their official website on Monday, that will not be the case, with the player leaving the club initially on a one-year loan which will become a permanent switch at the end of the agreement.
"AC Milan announces the agreement for the player Manuel Locatelli to join US Sassuolo Calcio on a loan deal with an obligation to buy," the statement read.
"AC Milan wishes Manuel the best of luck in his future sporting career, thanking him for his professionalism and commitment to the club."
According to Football Italia, the initial loan fee is in the region of around €2m, which will then be topped up by a further €10m plus €2m in bonuses in 12 months' time.
The Manuel Locatelli era at Milan has come to an end as he's been sent to a Sassuolo in a deal worth around €12m total between loan and buyout.— Matteo Bonetti (@TheCalcioGuy) August 11, 2018
Will be remembered for his two screamers against Juventus and Sassuolo two seasons ago. Other than that, never asserted himself
The report also claims that despite Locatelli's age and ability, Milan have included no buyback clause in the agreement.
The midfielder made 63 appearances for the club before falling down the pecking order under Rino.