Olympique Lyonnais will now also be allowed to play in the Europa League, UEFA said on Friday, with Nottingham Forest also said to be in line for a spot in the same competition.
Palace had qualified for the Europa League by winning the FA Cup last season, while Lyon reached the competition by finishing sixth in Ligue 1.
A move to relegate them to France's domestic second-tier Ligue 2 over their poor finances was overturned on Wednesday, a decision UEFA's Club Financial Control Body (CFCB) had been waiting for before ruling on the multi-club ownership case.
"Consequently, the CFCB First Chamber pursued the assessment of the documentation submitted by Olympique Lyonnais and Crystal Palace and concluded that the clubs breached, as at March 1, 2025, the multi-club ownership criteria," UEFA said in a statement.
As both Lyon and Palace had qualified for the Europa League, the French club was allowed to keep their place as they finished higher in their respective league, with Palace finishing 12th in the Premier League.
The Eagle Football Group are majority owners of Lyon while their chairman John Textor also owns a controlling stake in Palace.
Textor later resigned from Lyon's board of directors with Michele Kang appointed chairwoman and president.
Palace said last month New York Jets co-owner Robert Wood "Woody" Johnson had signed a legally binding agreement to buy Eagle Football Holding's stake in the Premier League club, subject to approval from the Premier League.
However, Palace had missed the March deadline to comply with the multi-club ownership rules.
"Honestly, I am stunned. We did everything possible to separate from the club, as UEFA would ask, with a sale process that began before the deadline, and a sale that will occur well before the draw," Textor told Reuters.
"Now we have sold out of a club that I love, to help Palace fans continue this dream year, only to have another off-the-pitch decision lay waste to an historic sporting victory."
Lyon had been demoted by the DNCG, French football's financial watchdog, in November due to the poor state of their finances but their relegation to Ligue 2 was overturned by its appeals committee.
Palace can still appeal against the decision at the Court of Arbitration for Sport but if UEFA's decision stands, the rules could allow Nottingham Forest to play in the Europa League if they fulfil the admission criteria.
Forest had finished seventh last season and originally qualified for the Conference League while fifth-placed Aston Villa and Palace had qualified for the Europa League.
Palace chairman Steve Parish was also shocked by the decision.
"We're devastated. It's a bad day for football. It's a terrible injustice," Parish told Sky Sports.
"I do believe nobody wants to see this. I don't think UEFA wants to see this. We've been locked out of a European competition on the most ridiculous technicality. Supporters of all clubs should be devastated for us.
"Everyone knows we're not part of a multi-club set-up. We're caught up in a rule that wasn't put there for us. This is a ludicrous decision. We will ask the appeal court to listen to our argument."
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