The Utrecht court found the publication by the Dutch arm of the Arab European League was intended to provoke debate, and fell within the boundaries of freedom of speech laws.
In a written ruling, the court said Thursday the image was insulting and offensive to Jews. But it said the AEL intended to spur a public discussion on why European media are willing to publish cartoons mocking Islam's prophet Muhammad while the Holocaust is taboo.
According to the BBC, the group published the cartoon last year after a decision by Dutch prosecutors not to put MP Geert Wilders on trial for distributing cartoons of Muhammad.
The AEL said that, despite publishing the cartoon, it accepts the reality of Nazi genocide against Jews during World War II.
Public prosecutors had demanded a fine.