The Italy-based team said on their website (www.scuderiatororosso.com) that Red Bull had taken up the option on the Spaniard's contract ahead of this weekend's Austrian Grand Prix.
"We are very happy that Carlos continues with us, because he has shown a very good performance since he is with Scuderia Toro Rosso and I am convinced that he will be very competitive and strong in 2017 as well," team principal Franz Tost said.
Sainz, whose father and namesake was a world rally champion, had been linked to a number of other teams on the paddock rumour mill.
He joined Toro Rosso last year and has scored 18 points in eight races this season.
Any hopes of moving up to the senior Red Bull Racing team in the immediate future appeared to have ended when 18-year-old Dutch driver Max Verstappen was promoted from Toro Rosso to partner Australian Daniel Ricciardo.
Both Verstappen, who won on his debut for Red Bull in Spain in May, and Ricciardo have contracts to the end of the 2018 season.
Red Bull principal Christian Horner told reporters that he expected Russian Daniil Kvyat, demoted to make way for Verstappen, to stay at Toro Rosso next year.
"I think Dany Kvyat is continuing his development, he is finding his feet now and there isn't an obvious candidate knocking on the door at the moment that would warrant that seat," he said.
(Reporting by Alan Baldwin, editing by Ed Osmond)
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