David Brooks, named player of the tournament, had given the Young Lions the lead, but Ake Arnaud Loba's late penalty took the match to a shootout.
Jean Thierry Lazare had his effort saved by Huddersfield's Ryan Schofield, as Leeds United midfielder Ronaldo Vieira struck the winning kick.
Head coach Neil Dewsnip's England team was mainly aged 19 or under.
Gareth Southgate was in charge when an England Under-21 side beat France 2-1 in the 2016 Toulon Tournament final.
At this year's event, England won all three of their group games against Angola, Cuba and Japan and defeated Scotland 3-0 in the semi-finals.
England will face Venezuela in the Under-20 World Cup final on Sunday (kick-off 11:00 BST) live on BBC Two and online.
England won a second successive Toulon Tournament with victory on penalties over the Ivory Coast after a 1-1 draw.