Countries signed up to the Schengen agreement cannot imprison illegal migrants for crossing borders once inside the passport-free zone, the European Court of Justice (ECJ) has ruled.
It comes as a further blow to efforts to curb the migration crisis, with many Schengen countries having already reintroduced border controls that had been dismantled a decade ago.
Over one million migrants and refugees have entered the area over the past year and a half, with numbers expected to pick up again this summer.
The Luxembourg court ruling said EU rules prevent the jailing of non-EU migrants who have crossed a border if deportation procedures have not already been brought against them.
The EU court ruled in favour of a Ghanaian woman who was detained by French police at the Channel Tunnel while on a bus from Belgium.
French authorities had asked Belgium to readmit her, but the ECJ ruled in favour of her appeal, saying this was against the EU’s “return directive (laws)” on deporting migrants.
The Schengen agreement, signed by 26 European countries, has come under strain as the continent has seen the biggest movement of people into Europe since World War Two.
Earlier, the UN said 10,000 people have died attempting the journey to Europe since 2014.
UNHCR, the UN refugee agency, said 2,814 people had lost their lives so far this year.
The EU has announced plans to promote investment in African countries from which most migrants are coming, in an attempt to stem the flow of people.
In March, it struck a deal with Turkey in an attempt to halt the flow of Syrian migrants using the Aegean route.
The vast majority of casualties this year have died on crossings between Libya and Italy.
Authorities in Libya last week said they had found the bodies of more than 100 migrants after three boats capsized off the coast.