Tax liability in preventive detention?

If there is one thing the German state takes very seriously, it is the obser­vance of and compli­ance with tax law — a cliché whose truthful­ness has been shaken by the nume­rous cum-ex scan­dals, but which is once again confirmed in the follo­wing case.

The Münster Fiscal Court recently had to deal with the ques­tion, which has already been decided by the highest court, of whether the income of a person in preven­tive detention may be taxed at all. On the other hand, it discussed whether this income should be cate­go­rised as non-self-employed or other income within the meaning of the Income Tax Act (EStG).

The ques­tion arose in this specific case because the inmate filed an appeal against an income tax assess­ment in which his wage payments were cate­go­rised as other income.

The inmate wanted to ensure that a lump sum for income-related expenses in the amount of EUR 1,000 was reco­g­nised and argued that his work in the prison was a non-self-employed acti­vity in accordance with Section 19 (1) EStG.

Further­more, he argued that his work could gene­rally not be taxed, as the employ­ment of prisoners and inmates is focused on reso­cia­li­sa­tion and not on gene­ra­ting income and their work is ther­e­fore not compa­rable to a “normal” employ­ment rela­ti­onship.

In the opinion of the tax office, the income of a person in preven­tive detention consti­tutes other income within the meaning of Section 22 No. 3 EStG.

The acti­vi­ties of the person in detention would not stem from an employ­ment rela­ti­onship and, accor­dingly, there would be no entit­le­ment to continued payment of wages in the event of illness or to paid holiday. The tax office stated that it was gene­rally reco­g­nised that work in the prison system was of a public law nature and that prisoners could ther­e­fore not be employees. Further­more, they were only included in acci­dent and unem­ploy­ment insu­rance, but not in health and pension insu­rance. The tax treat­ment had to follow these prin­ci­ples.

The Münster Fiscal Court disagrees, at least in part. In its judge­ment of 20 September 2023 (14 K 1227/21), the court affirmed an exis­ting employ­ment rela­ti­onship between persons in preven­tive detention and the prison, citing the diffe­rent status of prisoners and persons in preven­tive detention as justi­fi­ca­tion.

In contrast to “regular” prisoners, persons in preven­tive detention are not obliged to work. This diffe­rence resulted from the diffe­rent protec­tive purpose of the two measures. As the name suggests, a custo­dial sentence serves to punish the offender and is ther­e­fore prima­rily a repres­sive measure.

Preven­tive detention is a custo­dial measure that can be ordered along­side a custo­dial sentence. In this case, the offender remains in state custody for preven­ta­tive reasons, even though he has already served his sentence — he is making a kind of “special sacri­fice” for the general public. For this reason, people in preven­tive detention enjoy certain privi­leges compared to prisoners.

As people in preven­tive detention were ther­e­fore working volun­t­a­rily, they were — in the opinion of the tax court — exer­cising a “free busi­ness will” in the course of their work, which is a decisive criterion for the affir­ma­tion of employee status and an employ­ment rela­ti­onship. As a result, the income of the person in preven­tive detention was clas­si­fied as a non-self-employed acti­vity in accordance with Section 19 (1) EStG.

It follows auto­ma­ti­cally from this reaso­ning of the tax court that the income of the detainee is taxable.

In 2021, the Federal Court of Justice ruled that prisoners are not exempt from tax liabi­lity. The submis­sion of a tax return is regu­larly possible and reasonable (BGH, judge­ment of 13.01.2021 — 1 StR 120/20).

In its reaso­ning, the tax court referred to decis­ions of the Federal Fiscal Court, which clari­fied that a special motive on the part of the employer (such as secu­ring reso­cia­li­sa­tion) does not render the income taxable. The acti­vity is ther­e­fore at least also aimed at incre­asing income through the exch­ange of services (BFH, judge­ment of 14 September 1999, IX R 88/95, BFHE 189, 424, BStBl II 1999, 776).

In the case to be decided by the Münster Fiscal Court, the prisoner even used some of the income from his work to pay main­ten­ance to his son — i.e. not just to ensure his reso­cia­li­sa­tion after his release.