Berghuis agreed personal terms with the newly promoted Premier League club last week but his transfer was held up while a fee was negotiated between the two sides.
The 23-year-old, who is happy playing on either flank, scored 11 goals in 22 appearances to help AZ finish third last season and attracted the attention of Eredivise rivals PSV Eindhoven.
However, the Hornets beat PSV to secure their 10th signing of the summer transfer window in a deal understood to be worth around £4.6m.
Beghuis has played for Holland’s U19, U20 and U21 sides and earned his first call-up to the senior team ahead last month’s Euro 2016 qualifier against Latvia.
“I’m very excited to be here,” Berghuis told Hornets Player. “There were long discussions about whether I would come and I’m looking forward to playing here.
“I was happy at my old club but if you want to make steps in your career you have to take other steps and prove yourself again.
“This club wants to play football and I am a footballing player. I like it.
“(The Premier League) is the biggest competition with a lot of good teams. The teams are almost all good, instead of just two or three, and you have to prove yourself every week.
“Watford have a good vision and I know they want to stay in the Premier League.”
Berghuis will join fellow new recruits Jose Manuel Jurado, Miguel Britos, Sebastian Prodl, Giedrius Arlauskis, Matej Vydra, Jose Holebas, Etienne Capoue, Valon Behrami and Allan Nyom at Vicarage Road.