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The US-backed Syrian Democratic Forces (SDF) said the "caliphate" of the Islamic State was spreading five years after the defeat of militants in Syria.
The SDF fighters raised victory flags in Baghuz, the last bastion of the jihadist group.
At its height, the IS controlled 88,000 square kilometers of land extending across Syria and Iraq.
Despite the loss of territory, the group is still considered a major threat to global security.
IS maintains a presence in the region and has affiliates in several other countries such as Nigeria, Yemen, Afghanistan and the Philippines.
How did the final battle unfold?
The Kurdish-led SDF alliance began its final badault on IS early in March, with the remaining militants entrenched in Baghuz village in eastern Syria.
The alliance was forced to slow down its offensive after finding that a large number of civilians were also on site, sheltering in buildings, tents and tunnels.
Thousands of women and children, including foreign nationals, have fled the fighting and suffered severe shortages to the IDP-run IDP camps.
Many ISF fighters have also abandoned Baghuz, but those who remain have resisted fiercely by deploying suicide bombers and car bombs.
"Syrian democratic forces declare the total elimination of the so-called caliphate and territorial defeat at 100% of Isis [the IS group]Mustafa Bali, head of the SDF press office, tweeted.
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"On this unique day, we commemorate thousands of martyrs whose efforts made victory possible."
US President Donald Trump said ISIL was defeated at the end of last year, announcing plans to withdraw its US troops, which alarmed the allies and led to the resignation of senior officials. The White House has since said that some US forces would stay in the area.
Why are there still concerns about EI?
The EI originated from al-Qaeda in Iraq as a result of the invasion of Iraq by the United States in 2003.
He joined the rebellion against Syrian President Bashar al-Assad in 2011. In 2014, he had seized a strip of land in both countries and proclaimed a "caliphate" .
Earlier, the EI had dominated nearly eight million people and generated billions of dollars from oil, extortion, theft and kidnapping, using its territory as a base for form to launch foreign attacks.
- The rise and fall of the Islamic State
- Why is there a war in Syria?
The fall of Baghuz is a major moment in the campaign against the IS. The Iraqi government has declared the victory against the militants in 2017.
But the group is far from being defeated. US officials estimate that the ISE could have 15,000 to 20,000 active armed members in the region, many of them in dormant cells, and that it will regain its insurgent roots while attempting to rebuild.
Even as his defeat in Baghuz was imminent, IS issued a provocative audio recording allegedly from his spokesman Abu Hbadan al-Muhajir, claiming that the caliphate was not over.
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