Kabak, 20, is a highly-rated central defender and joins Liverpool initially on loan, for a fee believed to be £2.5 million with an option to buy also in the contract, sources have told ESPN.
Jurgen Klopp's side have moved to sign two central defenders on transfer deadline day with Kabak joining Preston's Ben Davies at the Premier League champions.
The signings of Kabak and Davies were announced just as Liverpool confirmed that Joel Matip is ruled out for the remainder of the campaign on Monday with an ankle ligament injury.
"He is only 20 now. He plays in his second club [in Germany]; he is at Schalke and unfortunately they are in a bad position in the moment. For him, I think it's a really good moment to make the move because, like each player in the world, you need a stable team around you and that's what we can deliver," Klopp said of Kabak.
Liverpool have been linked with several centre-backs in this transfer window as they battled a growing injury list. They are without Virgil van Dijk, Joe Gomez, and now Matip for the rest of the season.
With his options at central defence depleted, Klopp turned to midfielders Jordan Henderson and Fabinho to fill in at centre-back, while youngsters Nathaniel Phillips and Rhys Williams have also stepped into the void.
But with Liverpool defending their Premier League crown and also facing a Champions League round-of-16 clash against RB Leipzig, Klopp has moved to bring in reinforcements.