In its decision in the case of Carles Puigdemont, the Schleswig-Holstein state court said the former Catalan leader could be extradited on embezzlement charges, but not rebellion.
The charge of rebellion is not recognized in Germany and the court said related German statutes such as that against treason did not apply, because his actions "did not rise to this kind of violence."
The charges are in connection with the Catalan regional government's unauthorized referendum last year on independence from Spain and a subsequent unilateral declaration of independence by the separatist-controlled regional parliament.
The Spanish government rejects Catalan independence.
Puigdemont hailed the decision as a victory, tweeting "we have defeated the central lie of the (Spanish) state. German justice denies that the referendum of October 1 was rebellion."
The decision means that if he is extradited, Puigdemont can only stand trial in Spain on embezzlement charges over allegations he misused public funds, court spokeswoman Christine von Milczewski said.
Rebellion carries a maximum sentence of 30 years in prison, while misuse of public funds carries up to 12 years.
German state prosecutors told The Associated Press they still would have to formally decide on the extradition request, but said that they would do so "soon" and did not plan on appealing the ruling.
Puigdemont fled Spain to avoid jail and has been living in the German city of Hamburg as he fights extradition. The court said in its ruling that he can remain free.
Puigdemont's press spokesman, Joan Maria Pique, issued a short statement saying that without the rebellion charge the "main Spanish accusation falls."
"Catalan political prisoners should be freed NOW," he said. "He remains free. And there are options to rebut the embezzlement."
Quim Torra, the Catalan region's current president and a fervent separatist, said the dropping of rebellion charges was "wonderful news."
"This demonstrates once again the mistakes and lies behind a legal case which should never have been opened. We will win in Europe," Torra tweeted.
Barry Hatton in Lisbon contributed to this story.
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