The commission established by the Israeli Defence Ministry under retired Judge Eliahu Vinograd, submitted its report to the head of the Israeli armed forces last month, reported local media.
The commission decided it was impossible to establish Arad was dead and so he should be considered alive, it said.
Israel kidnapped two leading Hizb Allah figures, Shaikh Abd al-Karim Ubeid and Mustafa Dirani in 1989 and 1994 respectively from Lebanon, and holds them as bargaining chips in exchange for Arad.
Israel believes he is in Iran, a charge categorically denied by Tehran.
In July 2001, a freed human rights activist told the French weekly Le Point he had seen Arad in a Syrian jail, seven years after his plane was shot down.
“I saw Ron Arad when I was in prison,” Nizar Nayyouf, a journalist and campaigner who was freed after nine years inside a Syrian prison.
“My information proves that he was alive at least until 7 August 1993… On that day his jailers took him to his bath and he was in good physical shape,” Nayyouf was quoted as saying.
Last month Israel repatriated the bodies of two Hizb Allah fighters to south Lebanon through the International Committee for the Red Cross (ICRC) as part of ongoing negotiations for a prisoner swap.