The prosecutor had argued that the blaze which broke out at the Malmö Shia Muslim community centre on October 11th last year was started in order to spread fear in the name of Isis. No one was injured, but smoke damage repair costs amounted to one million kronor ($113,000).
But Malmö District Court dismissed the terror charges in its ruling on Friday.
"One of the prerequisites to consider the fire in question as a terror offence is that the act could have seriously damaged the state of Sweden. For that, acts of a completely different and much more serious nature are required and according to the district court that has not been the case. The act should instead be classified as arson," said judge Lennart Strinäs in a statement.
The court also writes in the verdict, seen by The Local, that the prosecutor had failed to prove beyond reasonable doubt that the 30-year-old man was guilty of arson, noting that neither a forensic examination of the crime scene nor any eye witnesses had produced enough evidence to prove he started the fire.
The prosecutor had argued that police searching his computer had found a description of how to make a detonator and propaganda films showing Isis soldiers fighting and killing "infidels" and a picture of an Isis flag. He had also himself reported the fire to the Isis-controlled news agency Aamaq, she told the trial.
"It appears to be obvious that [the man] sympathizes with IS [Isis], something which could indicate he had a motive to start the fire, but does not prove that he did," the court stated in its ruling on Friday.
The fire raised eyebrows in Sweden after it was claimed by terror group Isis back in October, with one expert suggesting at the time that the claims should be taken with a "pinch of salt". It again made headlines in February after the White House included it on a list of "under-reported terror attacks", despite The Local and other Swedish outlets reporting extensively on the case.
Friday's ruling was expected, following the district court's decision to release the man from custody earlier this month pending the judgment. However, his freedom did not last long. Security police Säpo detained him immediately afterwards, as The Local reported yesterday. According to newspaper Sydsvenskan, Säpo opened a case under Sweden's Act on Foreign Immigration Control arguing that they believe there is evidence he has links with Isis and should therefore have his residence permit revoked and be deported.