Geelong made the announcement on Thursday afternoon, only hours after his manager Liam Pickering said he was optimistic Chapman would find a new AFL home if he left the Cats.
Chapman has been one of the stars of their great era, playing in all three premierships and winning the 2009 Norm Smith Medal.
He is a two-time All-Australian and won the Cats' 2006 best and fairest award.
Chapman has played 251 senior games since his 2000 debut, but injury restricted him to only eight matches this season.
It is understood he will speak on Thursday night at Geelong's best and fairest function.
"The history of Geelong (would) not be able to be written without a huge chapter focusing on Chappy's contribution," Geelong coach Chris Scott said in a club statement.
"Paul's record speaks for itself, but it doesn't show the fierce competitor and the determination to succeed that he has displayed every day.
"His contribution is greater than the numbers and awards.
"Chappy will go down as a legend of this club.
"He has decided that he would like to extend his career and we wish him well.
"Regardless of where he goes from he, he will always be remembered as a Geelong icon.
"It has been a privilege to coach Chappy and I look forward to catching up with him in the years to come."
Earlier on Thursday afternoon, Pickering said it was disappointing Chapman would not end his AFL playing career at Geelong.
"I'm not sure about the other clubs - I have a couple I've been speaking to," Pickering said.
"He'll find a home, he's too good a footballer.
"I'd love to have seen him finish his career there, but it doesn't appear that's going to be the case."