The widespread use of caffeine in food and drug industries has caused great environmental pollution. Herein, an efficient caffeine-degrading strain Paraburkholderia caffeinilytica CF1 isolated from a tea garden in China can utilize caffeine as its sole carbon and nitrogen source. Combination of chromatographic and spectrophotometric techniques confirmed that strain CF1 adopts N-demethylation pathway for caffeine degradation. Whole genome sequencing of strain CF1 reveals that it has two chromosomes with sizes 3.62 Mb and 4.53 Mb, and a 174-kb mega-plasmid. The plasmid P1 specifically harbors the genes essential for caffeine metabolism. By analyzing the sequence alignment and quantitative real-time PCR data, the redundant gene cluster of caffeine degradation was elucidated. Genes related to catalyzing the N-1-demethylation of caffeine to theobromine, the first step of caffeine degradation were heterologously expressed, and methylxanthine N-1-demethylase was purified and characterized. Above all, this study systematically unravels the molecular mechanism of caffeine degradation by Paraburkholderia.