Milchan was born in 1944 in Rehovot, British Mandate of Palestine (now Israel). His family is Jewish, and he has a sister named Dalia. His mother was descended from European Jewish disciples of the Vilna Gaon who came to Palestine in the early 19th century, and he is the eighth generation of his family in the country. His Father owned a fertilizer company, which Milchan inherited at the age of 21 upon his father's sudden death. Over the years, Milchan turned the company into a successful chemical Business. He also earned a degree from the London School of Economics, before he and his company (Milchan Brothers Ltd.) were recruited to LAKAM, a secret Israeli intelligence organization responsible for obtaining Technology and material for Israel's nuclear program, and other highly secretive programs.

Milchan was an Israeli intelligence operative from the mid-1960s to the mid-1980s.

Milchan became involved in the American movie Business in 1977, after an introduction to American Producer Elliot Kastner. Most notable among Milchan's film collaborations was his early work with Martin Scorsese. He developed close friendships with Robert De Niro, and Directors Roman Polanski, Sergio Leone, Terry Gilliam and Oliver Stone. Milchan started his own production company in 1991 called New Regency Productions. Through his company Regency, in partnership with Warner Brothers, and later with Rupert Murdoch at 20th Century Fox, and other Business ventures, such as Puma AG, Milchan acquired a net worth estimated at about $5.1 billion as of 2015.

Speculation about Milchan's involvement in arms dealing and intelligence activities was sparked after the indictment in 1985 of Dr. richard Kelly Smyth, an aerospace executive and scientist who had made illegal shipments of Krytrons (nuclear triggers) through one of Milchan's companies. This remained largely in the category of rumor until biographers Meir Doron and Joseph Gelman wrote a controversial unauthorized biography of Milchan that was published in July 2011. The biography Confidential, which is largely sympathetic to Milchan, revealed in detail how he involved himself in espionage, big-ticket arms-dealing, and obtaining sensitive Technology and materials for Israel's nuclear weapons program. The research in Confidential - The Life Of Secret Agent Turned Hollywood Tycoon established that "at least through the mid-1980s [Milchan] was a full-fledged operative for Israel’s top-secret intelligence agency, Lekem. His activities included "buying components to build and maintain Israel’s nuclear arsenal" and supervising "government-backed accounts and front companies that financed the special needs of the entirety of Israel’s intelligence operations outside the country". Interviewed regarding Milchan's intelligence activities, Israeli President Shimon Peres stated:

Two years later, on November 25, 2013, on Israel's channel 2 documentary program Uvda, Milchan confirmed on camera the central claims in the book Confidential that had been released earlier. The announcement caused international interest in the story and was covered widely.

Milchan has produced over 130 films, such as Noah (2014), 12 Years a Slave (2013), Once Upon a Time in America (1984) (in which he also makes a cameo appearance as the chauffeur), Brazil (1985), Pretty Woman (1990), JFK (1991), Under Siege (1992), Natural Born Killers (1994), Boys on the Side (1995), Heat (1995), L.A. Confidential (1997), Fight Club (1999), Unfaithful (2002), Mr. and Mrs. Smith (2005), and Knight and Day (2010), among others, to his credit. He was a Producer on two more recent Oscar-winners for Best Motion Picture, 12 Years a Slave in 2014 and Birdman in 2015, but he was not listed as a Producer in the nominees list.

Milchan is a leading art collector, and in April 2015, CNBC ranked him at #3 in their list of "Hollywood's top 10 art collectors" with a collection valued at $600 million, equal with George Lucas, ranked #2, but some way behind David Geffen at #1, with a collection valued at $2.3 billion.