Judges Jeremy Poon, Anthea Pang, and Derek Pang said in the judgement at the Court of First Instance that they allowed the appeal from Lai, and another defendant in the case, to proceed, as a lower court judge had "erred".
"The Court of Appeal gave them leave to appeal against their conviction, allowed their appeals, quashed the convictions and set aside the sentences," the judges wrote in a media summary of their judgement released on Thursday.
Even with the quashing of the fraud conviction and sentence, Lai will still remain imprisoned for 20 years in a separate national security case over two counts of conspiracy to collude with foreign forces and one for publishing seditious materials.
That case has drawn global criticism from rights groups and countries including the US and Britain.
Lai was sentenced in December 2022 to five years and nine months in jail after being found guilty of breaching the lease terms of his now-defunct newspaper Apple Daily's headquarters by concealing the operation of a private company, Dico Consultants Ltd, in the building.
Another Next Digital executive, Wong Wai-keung, 61, was found guilty of fraud and jailed for 21 months.
"In conclusion, we hold that Apple Daily Printing did not owe a duty to the corporation to disclose its breach of the user restrictions or the non-alienation clauses occasioned by Dico's occupation and use of the said premises. With respect, the judge erred," the judgement read.
In the earlier ruling, Judge Stanley Chan wrote that Lai was aware of the need to apply for a licence from the Hong Kong Industrial Estates Corporation for Dico to operate at the headquarters and had "acted under the protective umbrella of a media organisation".
It was not immediately clear if the prosecution would appeal.
Lai's son and daughter have repeatedly raised concerns over their 78-year-old father's deteriorating health and warned that he might die in prison.
They could not be reached for immediate comment after Thursday's ruling.
Rights groups and numerous democratic countries have called for Lai's release.
