Froome, 33, had tested positive for excessive levels of Salbutamol following a urine sample at last September's Vuelta a España.
"On 28 June 2018, World Anti-Doping Agency (WADA) informed the UCI that it would accept, based on the specific facts of the case, that Mr Froome's sample results do not constitute an Adverse Analytical Finding," the International Cycling Union (UCI) said in a statement.
Read the UCI statement here.
"In light of WADA's unparalleled access to information and authorship of the salbutamol regime, the UCI has decided, based on WADA's position, to close the proceedings against Mr Froome."
In a release of its own, WADA said it accepted the UCI's decision and it would not appeal the ruling which they believed to be "the right and fair outcome for what was a very complex case".
Salbutamol is a common asthma medication that opens up the medium and large airways in the lungs. Some have argued that it offers performance-enhancing benefits, however medical studies have shown that to be a debatable claim.
Explaining their process, WADA said: "Mr. Froome provided the UCI with explanations, supported by expert opinions, in order to attempt to explain that the concentration of Salbutamol found in his sample resulted from the use of inhaled Salbutamol within the permissible maximum dose of 1600 mcg/24 hours, not to exceed 800 mcg per 12 hours...
"Based on a number of factors that are specific to the case of Mr. Froome...WADA concluded that the sample result was not inconsistent with the ingestion of inhaled Salbutamol within the permitted maximum dose."
The Briton had always denied any wrongdoing and has now been cleared to race in this year's Tour de France by the organisers, who had tried to prevent the rider from competing while under investigation.
"We started a procedure three weeks ago claiming that Chris Froome taking part in the Tour de France would damage the reputation of the race. But now that the UCI has cleared him there's no reason for us to prevent him from participating in the race," Tour de France director Christian Prudhomme told Reuters.
"Obviously the rules need to be changed when there is an adverse analytical finding a rider should be provisionally suspended," he said.
SBS will broadcast the Tour de France live in HD from 7-29 July.
Froome welcomed the news which means he can attempt to win a record-equalling fifth Tour when the race gets underway in Noirmoutier.
"I am very pleased that the UCI has exonerated me. While this decision is obviously a big deal for me and the team, it's also an important moment for cycling," Froome said in a statement.
"I understand the history of this great sport – good and bad. I have always taken my leadership position very seriously and I always do things the right way. I meant it when I said that I would never dishonour a winner's jersey and that my results would stand the test of time.
"I have never doubted that this case would be dismissed for the simple reason that I have known throughout I did nothing wrong...I appreciate more than anyone else the frustration at how long the case has taken to resolve and the uncertainty this has caused. I am glad it's finally over."
The Team Sky rider won the Giro d'Italia in May while the investigation was ongoing.
"We have always had total confidence in Chris and his integrity. We knew that he had followed the right medical guidance in managing his asthma at the Vuelta and were sure that he would be exonerated in the end, which he has been," Team Sky's team principal Dave Brailsford said.