The 34-year-old Kapanen spent the last five seasons with the Flyers and tallied five goals and three assists in 74 games last season. He added two goals in 16 postseason games as the Flyers went to the Eastern Conference finals.
Kapanen, a native of Vantaa, Finland, is a part-owner of KalPa Kuopio, the team he plans to play for next season. Kapanen got his start with KalPa in 1989.
"It's time to move on," Kapanen said at a news conference. "The plan is to play [in Finland] hopefully a couple more years, obviously depending on my health."
Kapanen said the injuries he has struggled with in recent seasons and his decreased playing time led to his decision to return home. He hopes to play at least one more full season of hockey before retiring from the sport.
"I don't want to leave the game on terms of disappointment and bitterness," he said. "I want to go out having fun and playing the way I grew up playing hockey."
A two-time All-Star, Kapanen had 458 points (189 goals, 269 assists) in his 12-year career with the Flyers and the Hartford Whalers-Carolina Hurricanes. Hartford selected him in the fourth round of the 1995 entry draft.
"I know he wants to continue to play and I think it's great he wants to play in Finland," Flyers general manager Paul Holmgren said. "I think it's important for these guys to play as long as they can."
Kapanen is a three-time Olympian, playing for Finland in the 1994, 1998 and 2002 games.