"The chamber concluded that it has not been sufficiently demonstrated that (Libya's) domestic investigation (covers) the same case that is before the court," the Hague-based ICC said in a statement on the long-awaited decision.
The ICC, which was mandated by the UN Security Council to investigate the Libyan conflict, issued an arrest warrant for Seif, 40, his strongman father Moamer Kadhafi, now deceased, and his spy chief Abdullah Senussi in June 2011.
Libya challenged the ICC's bid in May last year, saying the North African country had the means at its disposal to put him in the dock in a local court.
The ICC then also postponed its request for Libya to surrender Seif until judges ruled on the challenge.
But after looking at Libya's case, judges concluded that "taken as a whole... Evidence did not allow the chamber to discern the actual contours of the national case against Mr Kadhafi such that Libya could said to have substantiated.