Denmark will pay an annual fee of €15m (£12.8m) for an initial period of five years, and will also help fund green energy in the country.
The rented cells are meant to house convicted criminals from non-EU countries due to be deported from Denmark after their sentences.
Danish laws would apply to any prisoners in the rented cells.
Kosovo has between 700 and 800 unused prison spaces.
The two governments signed a "political declaration" of intent on Monday which will run for an initial period of five years, a joint statement said.
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