“The club is excluded from participating in the next UEFA club competition for which it would otherwise qualify in the next two seasons,” European football's governing body said in a statement.
It added that the Swiss club had also been fined €235,000 euros.
The case involves a €950,000 debt FC Sion had failed to pay on time to French club Sochaux in a disputed transfer of Ghanaian player Ishmael Yartey.
The amount, which had been due in March last year, was finally paid three months late, UEFA said.
FC Sion was slapped for the “non-fulfilment of the club licencing criteria defined in the UEFA Club Licensing and Financial Fair Play Regulations.”
FC Sion, which is headed by Christian Constantin, who famously assaulted a television pundit on air last September, was eliminated this season by Lithuania's FK Suduva during the third qualifying round of the Europa League.
The club figures in ninth place — second-to-last — in the Swiss championships just a week before it wraps up, and is unlikely to qualify for the Europa League next season.
UEFA also slapped penalties on three other clubs for breaching licensing rules.
Kazakh club FC Irtysh was hit with a €440,000-fine and three-season ban from European competition, although it said the penalty was suspended.
And UEFA said it had withheld €215,000 in Europa League participation bonuses from Serbian club FC Vojvodina and Albanian club KF Tirana.