Stuart Clancy, a Conservative councillor on Broadland District Council in Norfolk, was arrested by police in September 2014.
The Crown Prosecution Service said there was "insufficient evidence for there to be a realistic prospect of a conviction for any offence".
The council, on which he represents Taverham South ward, welcomed the news.
"We are very pleased that this issue has been resolved and Councillor Clancy can now put this difficult period behind him," said a spokeswoman.
The council said the investigation was not connected to his council work.

Lawrence, who competed for Wales at the 2014 Commonwealth Games, finished her swim, bike and run in a total time of four hours, nine minutes and 11 seconds on the Sunshine Coast.
The 26-year-old was nearly two minutes ahead of Australian two-time winner Melissa Hauschildt.
Fellow Welsh competitor Leanda Cave won the same title in 2012.
No further action is to be taken against a deputy council leader arrested on suspicion of fraud.
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Swansea triathlete Holly Lawrence has won the women's half ironman 70.3 World Championship in Australia.