The European Commission has decided to refer Malta to the Court of Justice of the European Union for selling passports to wealthy investors.
It is the latest step in the EU's long-running battle against the investor citizenship scheme, also known as 'golden passports'.
Malta is the only state to have such a scheme after both Bulgaria and Cyprus scrapped their programmes. The government said it believes it has the right to run the scheme but will let the court decide.
In a statement, the commission said it considers that granting EU citizenship in return for pre-determined payments or investments without any genuine link to the member state concerned is incompatible with the principle of sincere cooperation enshrined in the Treaty on European Union, and with the concept of Union citizenship.
Malta disputes that view, insisting again on Thursday that it is correct in its interpretation of EU treaties.
On October 20, 2020, the Commission sent a letter of formal notice to Malta, urging it to end its investor citizenship scheme. It sent an additional letter of formal notice to Malta on June 9, 2021, following the introduction of a new scheme.
Following Russia's war against Ukraine, Malta suspended the sale of passports for Russian and Belarusian nationals.
"While this was a positive step, Malta continues to operate the scheme for all other nationalities and has not expressed any intention to end it," the commission observed in its statement.
It recalled that last April it sent a reasoned opinion to Malta.
At the time Malta reacted by saying that while it would maintain a dialogue with the commission, "the grant of citizenship falls within the national competence of a member state and it should remain as such".
On Thursday, the commission said "Malta's reply did not satisfactorily address the concerns raised by the Commission. Malta is the only remaining Member State that operates such a scheme."
Cyprus discontinued its scheme in 2020, while Bulgaria abolished its scheme in April.
"Consequently, the Commission decided today to refer Malta to the Court of Justice of the EU under Article 258(2) of the Treaty on the Functioning of the European Union," the commission said.
Malta hits back
The Ministry of Home Affairs said it had noted the commission's decision "regarding the diverging interpretation of the treaties on competencies relating to citizenship".
It said that "constructively and in good faith" it had been exchanging views with the Commission on the acquisition of citizenship by investment.
Malta has insisted that this is a matter of national competence, and that it is not in breach of the principle of sincere cooperation that is part of the Treaty of the European Union.
"The government, following consultations with experts in this field, strongly rejects the interpretation given by the Commission regarding such articles," the statement said.
It said it had "robust due diligence processes" that address risks related to money laundering and the financing of terrorism and "ensure that only worthy individuals would acquire Maltese citizenship and consequently European citizenship".
It said Malta had passed evaluations by Moneyval and the Financial Action Task Force on risks of money laundering and the financing of terrorism.
Last year Malta was voted off the Financial Action Task Force grey list on Wednesday, one year after first being labelled an untrustworthy financial jurisdiction by the global watchdog.
The ministry said it would now let the court settle the matter by ruling on the interpretation of the treaties.
In a statement, the Nationalist Party expressed concern about the development and asked what the government would be doing to safeguard Malta's international reputation.
In a tweet, Nationalist MEP David Casa also commented on the development saying that after years of ignoring calls for reform, the government will now be answering to the EU Court of Justice.
"The chickens are finally coming home to roost," he wrote.