The Court of Cassation found that there had been a "fraudulent collaboration" between one of the judges who made the 2008 award, Pierre Estroup, and Tapie due to the "long-term, close and repeated" ties between Estroup and Tapie's lawyer Maurice Lantourne.
Tapie's team, appealing against a decision by a lower appeal court, argued that the accusation was "dragged in by its hair for purely political intentions".
The court threw out its claim that the lower court was not competent to judge the affair because it was "international", finding that it only affected operations that had taken place in France.
French Finance Minister Michel Sapin declared that the verdict "marked a turning point" and vindicated the decision to challenge the original award "in the taxpayers' interest".
Tapie ordered to pay back money
In December another court ordered Tapie to pay back the 404 million euros, which he has yet to do, having taken measures to protect his business interests and launched a separate appeal against that judgement.
A further investigation into alleged organised fraud is under way, involving Tapie, Estroup, Lanterne and Stéphane Richard, who is currently boss of telecoms operator Orange.
At the time of the award Richard was chief adviser to Lagarde, who was finance minister.
With suspicions of political interference in the 2008 case under Nicolas Sarkozy's presidency, Lagarde is fighting an order to appear before judges and will appeal against it at the Court of Cassation on Friday.