A settlement at the site was possibly established in the 11th century. Milich Castle was first mentioned in an 1136 deed by Pope Innocent II as a property of the cathedral chapter of the Diocese of Wrocław. The name possibly refers to a legendary founder or is derived from Polish: miły, ""pleasant"", ""friendly"". It is listed as a possession of the Polish Archdiocese of Gniezno in an 1154 deed issued by Pope Adrian IV, it is later also mentioned under the Latin name Milicium in a 1249 document by Duke Przemysł I of Greater Poland. The Polish name Mylicz first appeared in the Liber fundationis episcopatus Vratislaviensis (Book of endowments of the Bishopric of Wrocław) manuscript written about 1305 at the behest of Bishop Henry of Wierzbnej.

Upon the death of Prince Bolesław III Wrymouth in 1138, Milicz became part of the Polish Duchy of Silesia, ruled by Duke Bolesław I the Tall from 1163, and was the seat of a castellany. The citizens received town privileges in 1245. In 1294 the area was conquered by Duke Henry III of Głogów and from 1313 belonged to the Silesian Duchy of Oels (Oleśnica), which itself became a Bohemian fiefdom in 1329. In 1358 the Wrocław bishops finally sold their Milicz estates to the Piast duke Konrad I, whose successors had a Gothic castle built. The Oleśnica dukes held the town until in 1492 the line became extinct and the duchy was finally seized as an expired fief by the Bohemian Crown. In 1494 King Vladislas II of Bohemia granted Milicz to his chamberlain Sigismund Kurzbach, who installed the autonomous Silesian state country of Milicz and Żmigród (Trachenberg). The Milicz part was acquired by the Maltzan noble family in 1590.

Militsch was conquered by the Kingdom of Prussia upon the First Silesian War in 1742, and was part of the German Empire from 1871. When after World War I the Greater Polish portions of eastern Germany were ceded to form the renascent nation of Poland, the town ended up close to the Polish border. Conquered by the Red Army during the Vistula–Oder Offensive, it was awarded to the Republic of Poland in 1945 after Nazi Germany's final defeat in World War II, and the remaining German-speaking population was expelled.

Milicz is the site of one of the six Churches of Grace, which the Silesian Protestants were allowed to build with the permission of Habsburg emperor Joseph I, also King of Bohemia, given at the Altranstädt Convention of 1707. The half-timbered house of worship finished in 1714 today serves as Catholic parish church dedicated to Saint Andrew Bobola.

The castle of the Oleśnica dukes erected in the 14th century was destroyed in World War II. The Maltzan dynasty left a Late Baroque-Neoclassical palace erected in 1798 with an English garden, the first in Silesia. Since 1963 the building is the seat of a secondary forestry college.