Lai, 78, an outspoken critic of China's ruling Communist Party who founded the now-defunct Apple Daily, will stay in prison because he was sentenced to 20 years weeks ago after being convicted in another case brought under a China-imposed national security law.
That came more than five years after he was arrested under the law, which was used in a years-long crackdown on many of Hong Kong's leading activists.
His plight has evoked grief over the city's loss of press freedom and sparked an international outcry, though the city's authorities insist his case had nothing to do with media independence.
The conviction that was overturned on Thursday was from an earlier fraud case in which prosecutors alleged that a consultancy firm controlled by Lai had used office space that his media business rented for publication and printing purposes.
Lai was sentenced to five years and nine months in prison in 2022 after being found guilty of two fraud charges.
A lower court judge found that Lai and his co-defendant Wong Wai-keung had concealed that the firm was occupying space and had violated the lease agreement, saying he had used his media organisation as a protective shield.
He also fined Lai $HK2 million ($A359,000).
Judges at the Court of Appeal wrote in their judgment that while Apple Daily Printing had breached the lease terms by allowing the firm to use part of the space, it did not owe a duty to disclose its breach.
They said even if it had owed and breached that duty, the same could not be attributed to Lai and Wong as matter of law.
The trial judge's "reasoning in concluding that the applicants were liable for the concealment as the prosecution contended is unsupportable", they said.
They also ruled that the prosecution had failed to prove beyond reasonable doubt that the defendants had made false representations, throwing out both convictions and sentences.
Neither defendant appeared in court.
The ruling could reduce Lai's total prison time.
The judges handling Lai's national security case allowed the two sentences to be served concurrently for only two years, with the other 18 years to be added after the fraud sentence.
The government said the Department of Justice would consider whether to appeal.
The lengthy sentence has raised concerns that he could spend the rest of his life in prison.
Lai's children have repeatedly raised concerns over their 78-year-old father's deteriorating health in prison, and expressed hopes that a visit by US President Donald Trump to Beijing in March could help secure the release of their father, a British citizen.
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