European football's governing body UEFA had accused the club of violating financial fair play (FFP) regulations over the past three seasons and the Court of Arbitration for Sport ruled in their favour.
"AC Milan is excluded from participating in UEFA club competitions of the sporting season 2019/2020 as a consequence of the breach of its FFP break-even obligations" for the past three seasons, the court ruled.
UEFA initially found the Italian giants, who had qualified for the Europa League next season, guilty in June last year of violating financial rules which broadly limit club expenditure to club income in any given year.
However, CAS referred the matter back to UEFA judging that an European ban was disproportionate.
Ultimately UEFA action against the club was suspended pending the outcome of arbitration, resulting in Friday's decision following agreement between UEFA, the club and CAS.
The announcement follows the club's adoption of spending curbs in recent months designed to return its finances to a better state and which saw the departure of coach Gennaro Gattuso.
The Serie A giants, who missed out on a Champions League spot by one point to city rivals Inter, are one of several clubs, including Paris Saint-Germain and Manchester City, to have been investigated for breaching UEFA's rules, whereby clubs cannot spend more than they generate by their own means.
AC Milan have fallen foul of UEFA's financial rules since they spent 200 million euros ($225 million) on transfers in the summer of 2017.
The club insist however that their finances should improve under American hedge fund Elliott Management Corporation, who took control last summer when former Chinese owner Li Yonghong defaulted on the loan he had taken to buy the club in 2017 from former Italian prime minister Silvio Berlusconi.
