The court upheld a Chilean prison sentence for Hartmut Hopp, a German citizen in his seventies.
Hopp worked with Paul SchÃ¤fer, a former Nazi soldier who founded the commune in southern Chile  1961.
Residents were indoctrinated and kept as virtual slaves for more than 30 years.
Hopp's lawyer says he will appeal against the sentence.
SchÃ¤fer also collaborated with the government of Augusto Pinochet whose secret police used the colony around 350km (215 miles) south of the capital, Santiago, as a place of torture and to "disappear" his opponents.
Germany last year said it would declassify its files on the sect, and the foreign minister at the time, Frank-Walter Steinmeier, admitted that the diplomatic service had failed to stop the abuses.
The scale of the abuses only came to light after SchÃ¤fer faced a series of lawsuits in 1997.
He fled Chile and was arrested in Argentina in 2005. He was convicted in Chile of sexual abuse of children, weapons possession and human rights violations.
He died in a Chilean jail in 2010 at the age of 88.
A German court has sentenced a doctor who fled Chile to five years in prison for involvement in child sex abuse at a commune called Colonia Dignidad.