An agreement designed to allow US companies access to the personal data of European citizens has been deemed invalid by a Luxembourg Court.
The decision follows concerns that US intelligence agencies have been collecting data outside of the terms of the agreement and that Facebook has been collaborating with them.
The Safe Harbour treaty between the EU and US that came into effect in 2000 was designed to provide a streamlined way for US firms to get data from Europe without breaking its information protection rules.
Safe Harbour allows US companies to self-certify that they are carrying out the required steps to ensure that electronic personal records do not fall into the wrong hands.
The EU forbids personal data from being transferred to and processed in parts of the world that do not provide adequate privacy protections.
The Luxembourg Court ruled that the treaty could no longer be maintained because it is presided over by United States law enforcement agencies that could not be trusted to uphold the terms of the agreement following recent snooping revelations.
The court found that legislation allowing the authorities access to the content of electronic communications compromised the fundamental right to respect for private life.
The judgement follows a legal challenge by an Austrian privacy activist concerned that Facebook might be sharing European personal data with US cyberspies.
The social network has defended itself from the claims and said that it relied on a number of legal methods to transfer data from Europe to the US unconnected to the Safe Harbour treaty.
A spokesman said: "This case is not about Facebook. The advocate general [who advised the European Court of Justice] himself said that Facebook has done nothing wrong.
"What is at issue is one of the mechanisms that European law provides to enable essential transatlantic data flows.
"It is imperative that EU and US governments ensure that they continue to provide reliable methods for lawful data transfers and resolve any issues relating to national security."
It is understood that Facebook will continue operating as normal and it has stressed that it does not offer US security agencies access to its data.
However, while the social network may be largely unaffected by the ruling, it does bring complications to thousands of other, smaller companies that may not have the capability to quickly implement an alternative system.
A UK Government spokesperson said it was a disappointing judgment.
"We will urgently review the judgment's findings and will discuss its implications with industry, while continuing to press the Commission to ensure data can still be transferred."
The European ruling comes as National Security Agency whistle-blower Edward Snowden claims that UK spying agencies are able to eavesdrop on people by controlling the microphones of their phones and remotely switch handsets on and off.