The Belgian centre-back was shown a straight red card by referee Mike Dean for a challenge on Jack Wilshere with 14 minutes remaining at the Emirates Stadium.
City were quick to announce their intention to appeal and, following a Football Association disciplinary hearing, have now confirmed their claim for wrongful dismissal has been upheld.
"The defender was dismissed for serious foul play during his side's match against Arsenal on Sunday, January 13, 2013.
"As a result, Kompany's three-match suspension has been withdrawn with immediate effect."
The news will come as a big relief to manager Roberto Mancini, who is already short of central defensive options with Kolo Toure on Ivory Coast duty at the African Nations Cup and Micah Richards injured.
Joleon Lescott and Matija Nastasic are the club's only other fit and available senior centre-halves.
Dean's decision was widely criticised as Wilshere had taken a heavy touch and Kompany, in lunging towards the Arsenal man, made clear contact with the ball before his opponent.
Kompany took to Twitter after the game to state his case.
He wrote: "No grudges against the referee, I understand the difficulty of the job.
"About the tackle: If the ball is overrun by the opponent and a 50/50 challenge occurs, collision is inevitable.
"Ultimately I'm a defender: Appeal may work or not. I will never pull out of a challenge, as much as I will never intend to injury a player."
City were already 2-0 up when the incident occurred and held onto their lead without further alarm.