"The acquisition of Union citizenship cannot result from a commercial transaction," the EU's Court of Justice said, ruling that Malta had infringed EU law.
Brussels had taken Malta to the top court in 2022 over the programme, which allows non-Europeans to effectively buy Maltese -- and therefore EU -- citizenship through defined payments or investments.
Tuesday's decision is binding and Malta must comply or risk hefty fines.
"A member state cannot grant its nationality –- and indeed European citizenship -– in exchange for predetermined payments or investments, as this essentially amounts to rendering the acquisition of nationality a mere commercial transaction," the court said.
Although the court stressed that each member state has the right alone to decide on nationality, this was a freedom that must "be exercised in compliance with EU law".
The Maltese scheme "infringes the principle of sincere cooperation and jeopardises the mutual trust between member states concerning the grant of their nationality", the court said.
Rich Russians and Chinese had used the scheme to obtain EU citizenship from Malta.
There had been similar schemes in Cyprus and Bulgaria but these countries later dropped them.
Malta excluded Russian and Belarusian applications for "golden passports" following Russia's invasion of Ukraine in 2022, when Europe cracked down on Kremlin-linked individuals.
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