Sources had told ESPN the Ligue 1 club was unlikely to pay a loan fee but were expected to cover Saliba's wages, worth in the region of £40,000-a-week.
Nice will not have an option to buy Saliba as Arsenal view the 19-year-old as an exciting prospect for the future but manager Mikel Arteta and his coaching staff believe he needs regular game-time elsewhere to toughen him up for Premier League action.
"William Saliba is a player with a huge amount of talent and potential. We're confident he will have a great career with us but we must remember that he is still only 19 years old and has a lot of time ahead of him," Arsenal technical director Edu said in a statement.
"William experienced a very challenging time last year, with his playing time limited by injury and the early ending of the Ligue 1 season due to the pandemic.
"So together with William, we have decided that spending the rest of the season on loan with Nice is the best way for him to develop. We will be keeping in close contact with William during his time with Nice and look forward to seeing him make good progress until the end of the season."
In December, sources told ESPN that Nice were interested in a deal for Saliba after Arsenal held concerns over whether the defender was ready for the Premier League.
Saliba preferred a move back to France although there are staff members at the club who believe he would benefit from a spell in a league as fiercely competitive as the Championship.
The centre-back is yet to make a senior appearance following his £27 million move from Saint-Etienne in July 2019 when Arteta's predecessor Unai Emery was in charge.
Saliba was loaned back to the Ligue 1 club for the 2019-20 campaign but returned to London last summer in anticipation of beginning his Arsenal career.
However, Saliba was subsequently not registered for either Premier League or Europa League football this term with sources having told ESPN that Arteta and his staff harbouring concerns over his positioning and tendency to dive into tackles.
A second loan spell back at Saint-Etienne collapsed at the 11th hour in September due to an issue with paperwork and he was subsequently linked with several Championship clubs but a deal failed to materialise.
Saliba has struggled to settle in England after a difficult year in which he has suffered with off-field issues but signed a deal with a Arsenal to 2024 and remains focused on making a success of himself at the club in the years to come.