Tottenham also announced they are entering a partnership with Real Madrid. The agreement will see the two clubs working together in respect of players, coaching and commercial relationships.
Real Madrid confirmed the news on their official website, saying: "Real Madrid and Tottenham Hotspur have reached an agreement for the transfer of the player Luka Modric, who will remain attached to the club for the next five seasons. Both clubs have also formalised an agreement of collaboration."
Spurs are likely to use the money from the Modric transfer to fund an improved bid for Shakhtar Donetsk attacker Willian, though the club may not be willing to go as high as the Ukrainians' asking price of £20 million.
Meanwhile, Jermain Defoe will remain at the club amid interest from QPR, with Villas-Boas content with having the England striker, Emmanuel Adebayor and Harry Kane as striking options.
Spurs boss Andre-Villas Boas has already stated his intention to add to his squad before the transfer window closes on Friday.
They have made three signings this summer, with Emmanuel Adebayor moving from Manchester City for £5m, midfielder Gylfi Sigurdsson joining from Hoffenheim and Jan Vertonghen signing from Ajax. Although centre-back Michael Dawson seems set to stay despite Spurs accepting a bid from QPR for the player. He couldn't agree personal terms.
The Modric deak could just be the first of a flurry of activity this week before the transfer deadline.
Aston Villa manager Paul Lambert will hold talks with club owner Randy Lerner in the next 48 hours as he looks to bring in two more new signings before the transfer window closes.
Arsenal manager Arsene Wenger said he could make further signings after admitting his side lacked a cutting edge in the 0-0 draw with Stoke.
The result means the Gunners have failed to score in their opening two Premier League games after selling Robin van Persie to Manchester United.
"We always felt we were dangerous, but we couldn't finish it off. We have work to do in the final third," he said.
"We are active and there could still be action in the transfer market."
Stoke City manager Tony Pulis says he wants to freshen up his squad before the end of the transfer window, as he closes in on signing Tom Huddlestone and Maurice Edu.
Meanwhile, Michael Owen, 32, expects to sign for a new club within a week. The former Manchester United and England striker, left Old Trafford in May and is a free agent. Stoke and Everton are said to be interested.