The decision also means that the manufacturer will depart from the World Touring Car Championship after the 2016 season, with rallying preferred as the long-term option.
Driver Sébastien Loeb, who won nine WRC titles with Citroën and has recently been part of its touring car campaign, is set to leave the manufacturer to join sister brand Peugeot's Dakar Rally programme.
Yves Matton, Citroën Racing team principal, said: "We have never hidden our interest in the 2017 WRC regulations and the entire team is extremely motivated by this new challenge.
”With a view to managing our resources efficiently, we have decided to focus all our efforts on designing and developing our new World Rally Car.
“This is why Citroën will not be competing in the 2016 World Rally Championship as a works team."
Linda Jackson, chief executive officer of the Citroën brand added: “Rallying is a fascinating sport, which tests the performance, reliability and solidity of the cars and drivers in some magnificent settings.
“The category is taking off again, with increasingly widespread live television coverage and the arrival of China on the calendar in 2016.
“In 2017, the appearance of a new generation of cars, which are purported to be very attractive, will coincide with our renewed involvement.
“Everything will therefore be in place for us to write a new chapter in our history. Given the brand’s rich heritage, this challenge had to be ambitious.
“We will however be modest in our approach, gradually stepping up our objectives to the very top.”
Citroën hasn't clarified whether WRC driver Kris Meeke will be retained to develop the 2017 rally car, although its other driver, Mads Ostberg, will leave the team.