The 20-year-old's future at Anfield came under scrutiny towards the end of the 2022-23 campaign, which saw him start just four Premier League games, the last of which came in October.
However, Liverpool were keen to block any permanent exit for the youngster, and have instead sent him out on loan to Leipzig for next term.
The deal is not thought to contain any obligation or option to buy, meaning that Carvalho will return to Merseyside next summer.
"As a young player, it's a big step for me to move from England to the Bundesliga and RB Leipzig," Carvalho told Leipzig's official website.
"I'm joining a strong side, one that has been very successful in recent years. Now, I want to help build on this and am looking forward to taking on a new challenge.
"My goal is to play as much as possible, in the league, the cup and especially in the UEFA Champions League.
"RB Leipzig have a reputation for giving young players these kinds of opportunities, which is why this is the perfect club for me to continue my development at."
Leipzig board member Max Eberl added: "Fabio Carvalho is a huge talent - the fact that Liverpool signed him recently just proves that.
"He is quick, agile, full of tricks and creative. He likes to get shots away and can also set his teammates up.
We will give Fábio the time he needs to settle in here and to adjust to life in a new country and with a new club. We are looking forward to him improving our attacking game and to have another option in this department."
The attacking midfielder joined Liverpool from Fulham last summer and scored three times in 21 outings during his first season at Anfield.
The two clubs could yet do more business between each other on Friday too, with talks over a move to Merseyside for Dominik Szoboszlai understood to be at an advanced stage ahead of his release clause expiring tonight.