Daimler and Geely have agreed to form a joint venture company to run Smart, with each firm owning 50 per cent and having three seats on the board of directors.
As was planned before today's announcement, Smart will become an all-electric brand from 2020 onwards.
It will also continue to focus on inner city-friendly vehicles, although the "product portfolio is also planned to be extended into the fast-growing B-segment".
The brand's new models will be styled by Mercedes-Benz and engineered by Geely. Production of the next generation of vehicles will commence in 2022 at a factory in China for sale both locally and across the world.
Until then Smart will continue making the Smart ForTwo hatch and cabriolet in Hambach, France. Production of the Smart ForFour will continue alongside its twin-under-the-skin, the Renault Twingo, at Renault's Novo Mesto factory in Slovenia.
The future of Smart's main factory in Hambach - previously referred to as Smartville - has been guaranteed by an investment of €500 million ($802 million) from Daimler, which will use the facility to produce a new "compact electric vehicle".
Since the beginning of production in 1997, Smart struggled to make money. Evercore ISI, an industry analyst, estimates the marque could be losing up to €700 million ($1.1 billion) per year.
In 2018 Geely's chairman, Li Shufu, bought a 9.7 per cent stake in Daimler, making him the largest single shareholder in the company.
While Geely owners Volvo Cars, a competitor to Mercedes-Benz in the luxury car arena, it is working with the German automaker on a China-only ride sharing service.