During the financial crisis in 2008 RBS benefitted from state aid measures that resulted in the UK government holding the majority of its shares. A restructuring of the bank was approved by the Commission in 2009 and amended in 2014.
As part of this restructuring, the UK committed to a significant balance sheet and risk reduction in RBS. The bank has delivered on those commitments and on all its other divestment commitments, the Commission said.
"The divestment of Williams & Glyn, to be completed by end-2017 is the last outstanding commitment, with the objective to mitigate the distortion of competition in the UK SME banking market," it said.
However, the Commission has now approved an alternative package proposed by the UK authorities.
The UK proposal involves the transfer of a 3% market share in the UK SME banking market from RBS to challenger banks.
A £425 million Capability and Innovation Fund will be distributed to eligible challengers to develop their capability to compete with RBS in the provision of banking services to SMEs and develop and improve their financial products and services available to SMEs, while a £350 million Incentivised Switching Scheme will provide funding to eligible challengers to enable them to offer incentives to encourage Williams & Glyn's customers to switch their business current accounts, deposit accounts and loans.
If there is not enough uptake from the switching scheme, RBS may be required to make a further contribution of up to £50m.
The Commission approved the UK's package under EU state aid rules, it said.
"The Commission can only accept modifications to existing commitments by member states and aided banks that were given to obtain approval for restructuring aid if the new commitments can be considered equivalent to those originally provided," it said.
Ross McEwan, RBS chief executive said: "We are pleased that we now have final approval from the European Commission for the alternative remedies package. This allows us to resolve our final state aid divestment obligation and brings welcome clarity for our customers and staff."
"It also builds on the progress we have made already this year in resolving our major legacy issues through reaching a settlement with the Federal Housing Finance Agency, and resolving the 2008 Rights Issue litigation. We remain committed to resolving our last remaining major legacy issue, the investigation into our historic US RMBS activities," McEwan said.