"Ma will continue as the executive chairman of the company over the next 12 months to ensure a smooth transition to Zhang", a statement from Alibaba said.
The company said he will pass on the reins to trusted lieutenant Daniel Zhang.More news: The many examples of Trump officials resisting the President
He relinquished the role of chief executive in 2013.
Mr. Zhang had previously served as Taobao's chief financial officer, president of Tmall.com and as Alibaba's chief operating officer before succeeding Jonathan Lu as chief executive.
"Teachers always want their students to exceed them, so the responsible thing to do for me and the company to do is to let younger, more talented people take over in leadership roles", Mr Ma said in a statement on the day of his 54th birthday.
The company, founded at a time when the industry was still dominated by state-owned firms and entrepreneurship was seen as a risky career path, has grown to have more than 66,000 full-time employees and a market value of some $420 billion.More news: Djokovic wins his 14th career Grand Slam title at US Open
Ma said he will continue to be a member of the Alibaba Partnership and focus his new free time on philanthropy. He has also established a scholarship programme in Australia.
Alibaba is one of the world's most valuable companies - its shares almost doubled in value previous year.
Alibaba maintained robust revenue growth in the first half of 2018, but its profit margins have been squeezed by big-ticket investments as it battles to maintain pole position in payments and e-commerce.More news: Bears LBs Khalil Mack, Roquan Smith Ready For Roles Against Packers