The Ecuadorian international thrived on a season-long loan deal at Osasuna last campaign and is now expected to leave Vicarage Road on a permanent basis this summer.
He will arrive at the Yellow Submarine this week and replace the void left by Alberto Moreno, who suffered a long-term injury during pre-season and is now expected to miss much of the campaign.
Estupinan made 39 appearances for Osasuna last season having also enjoyed loan stints at Real Mallorca and Almeria in the second division in Spanish football.
Estupinan made his senior debut in football aged just 15 with local side LDU Quito and whilst he has been permanently on the books of both Udinese and now Watford, he never played for either club.
His arrival will continue a busy summer for Villarreal, who have appointed Unai Emery as boss and signed Valencia duo Dani Parejo and Francis Coquelin, alongside loaning Real Madrid youngster Takefusa Kubo for the campaign.