The change in CEO was part of a wider management shake-up, the carmaker said.
"In order to sustainably implement the new structure, there will be a number of changes on the board of management".
"Matthias Muller has done outstanding work for the Volkswagen Group".
Some analysts cheered the appointment of Mr Diess.
Diess told CNBC's Annette Weisbach at the company headquarters in Wolfsburg Friday that the most important thing is to cope with rapid changes affecting the auto industry.
Volkswagen surprised markets earlier this week when it revealed it was considering reshuffling its board and replacing Mueller.
German business newspaper Handelsblatt and national news agency DPA had all tipped Diess, head of the VW brand, as Mueller's successor.
Volkswagen AG's new top manager pledged to speed up the German carmaking giant's decision-making as it confronts a seismic industry change in technology while moving beyond its diesel-emissions scandal. The strategy also mandates that the automaker introduce 22 new electric models by the middle of the next decade.
Shares in Volkswagen were up 0.7 percent to 177.88 euros by 1415 GMT, against a similar rise for the STOXX 600 automotive index. Mueller, who formerly headed Porsche, took over as CEO unexpectedly in September 2015 when Martin Winterkorn resigned over the company's scandal over cars rigged to cheat on emissions tests.
This decision was made by the Supervisory Board of the company, the press service of the German brand.
Having joined from BMW just a few months before the cheating became public knowledge, Diess has the advantage of being largely untainted by dieselgate - giving VW a chance at a fresh start. Diess will be responsible for Group development and research and will also take on additional Group management roles alongside heading the Vehicle IT.
Since then, Diess has worked to cut costs and increase profits at the core Volkswagen brand. Europe's largest automotive group is poised to replace group chief executive Matthias Mueller this week with Diess, a cost-cutter hired in 2015 from BMW as it seeks fresh impetus for its recovery from an emissions scandal.
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