The 22-year-old defender's spell at Villa Park could reportedly become permanent next summer.
The 22-year-old, who can play anywhere across the backline, previously enjoyed loan spells at Spanish side Granada and French outfit Bordeaux over the past two seasons and will now look to get his first taste of Premier League football during his stint at Villa Park.
Speaking to the club’s official website following confirmation of the deal, manager Tim Sherwood said: "I am very pleased to bring Tiago into the football club. He's someone I have been aware of for some time and I am looking forward to working with him.
"He's a young guy who I believe will enhance the group here."
Born in London to an English father and Portuguese mother, Tiago joined Sporting Club de Portugal as a trainee in 2004 before rising through the ranks to earn his first-team debut in November 2011.
The Portugal Under-21 international went on to make 14 total appearances for the Primeira Liga giants before sealing a £7 million switch to Liverpool in September 2013, but he is still to make his senior bow for the Reds.
Most comfortable at centre-back, Villa's 12th summer signing will have to compete with the likes of team captain Micah Richards, Ciaran Clark, Jores Okore and now Joleon Lescott for minutes this term, but he could well turn into a long-term investment if he impresses over the course of the campaign.
According to the Liverpool Echo, the claret and blues have paid £1 million loan fee to Liverpool and have the option to make his spell permanent next summer for between £6 million and £9 million.