The Dictator star pledged to make his next movie with the studio under his own Four By Two Films banner as part of the three-year agreement.
Under the terms of the contract, Paramount will establish a development fund for Baron Cohen to generate projects in his native UK and unearth new talent there.
"Sacha is a comic genius. A wildly talented writer, actor and filmmaker. Beyond that, he is the rare global comedy star. On behalf of all of us at Paramount, we welcome Sacha and look forward to The Dictator and many more great pictures for years to come," said Paramount chairman and CEO Brad Grey.
Baron Cohen created a stir at last month's Academy Awards, walking the red carpet as his Dictator character General Aladeen and spilling an urn full of ashes onto E! presenter Ryan Seacrest.
The Dictator, directed by Larry Charles, is released on May 11 in the US and May 16 in the UK.
Watch a trailer for The Dictator below: