The council lifted the threat of action linked to the search for Kuwaitis and property missing since the invasion ordered by the former dictator.
Iraq's Foreign Minister Hoshyar Zebari called the unanimous council vote a "landmark" in Iraq's efforts to restore its international image.
An international coalition ended the occupation of Kuwait in 1991 and a U.S.-led invasion toppled Saddam in 2003. Iraq was ordered, however, to pay compensation and to help find more than 600 Kuwaitis missing since the invasion.
Kuwait backed resolution 2107 under which the missing people and property will now be handled under Chapter VI of the U.N. Charter, which calls for a peaceful resolution of disputes.
They had previously been dealt with under Chapter VII of the charter, which allows for sanctions and military intervention to enforce council demands.
The sanctions threat remains for Iraq's payment of war compensation. The U.N. also still has an arms embargo against Iraq under Chapter VII.
Iraq was ordered to pay just over $52 billion to its neighbor. Iraq says it still owes about $11 billion and that the debt will be fully paid in 2015.
The resolution acknowledged "the importance of Iraq achieving international standing equal to that" before the 1990 invasion and also welcomed Iraq's "demonstration of its commitment to the full implementation of its outstanding obligations."
U.N. leader
the ephemeral Ban Ki-moon... of whom it can be said to his credit that he is not Kofi Annan...
called for the sanctions to be eased in a recent report. He said both governments have shown "statesmanship and respect" in their efforts to heal the war wounds.
Zebari paid tribute to the Kuwaiti government for its "support and assistance" to get the sanctions regime changed and vowed to increase cooperation with Kuwait.