The actor will produce the modern-day update of the classic novel through Infinitum Nihil, the company he heads with his sister Christi Dembrowski, reports Entertainment Weekly.
Jeff Morris and writer-director Steve Pink will collaborate on the screenplay for the untitled pitch based on Miguel de Cervantes's 17th-century book.
Don Quixote tells the tale of a minor nobleman who becomes convinced that he is a knight errant.
With his foolish squire Sancho Panza, he embarks on a series of misadventures caused chiefly by his delusions.
Depp has previously been attached to Terry Gilliam's famously ill-fated attempts to adapt the novel for the big screen.
Infinitum Nihil also produced Depp's Dark Shadows, The Rum Diary, his forthcoming Lone Ranger movie and Martin Scorsese's Hugo.
Watch the trailer for Lost in La Mancha - a documentary about Gilliam's doomed attempt to make a Don Quixote film - below: