If there is one thing the German state takes very seriously, it is safeguarding and compliance with tax law—a cliché whose truth was shaken in light of the many Cum-Ex scandals, but which is once again confirmed in the following case.
Most recently, the Münster Fiscal Court had to address, first, the question—already decided by the highest court—of whether the income of a person in preventive detention may be taxed at all. Second, it was discussed whether this income is to be classified as employment income or as other income within the meaning of the Income Tax Act (EStG).
The question arose in the specific case because the detainee filed an action against an income tax assessment notice in which his wage payments were classified as other income.
The inmate sought to have a standard allowance for work-related expenses in the amount of EUR 1,000 applied and argued that his work in the correctional facility constituted employment within the meaning of Section 19(1) EStG .
Furthermore, he argued that, as a general matter, his activity could not be subject to tax liability because, in the employment of prisoners and detainees, resocialisation—not the generation of income—was the primary focus, and their work was therefore not comparable to a “normal” employment relationship.
In the view 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 detainee’s work did not arise from an employment relationship and, accordingly, there was no entitlement to continued payment of wages in the event of illness or to paid leave. The tax office stated that it is generally recognised that work in the prison system is public-law in nature and that prisoners therefore cannot be employees. In addition, they are covered only by accident and unemployment insurance, but not by health and pension insurance. The tax treatment must follow these principles.
The Münster Fiscal Court takes a different view, at least in part. In its judgment of 20 September 2023 (14 K 1227/21), the court affirmed that an employment relationship exists between persons in preventive detention and the correctional facility, citing the different status of prisoners serving sentences and persons in preventive detention as its reasoning.
Unlike “regular” prisoners serving sentences, persons in preventive detention are not obliged to work. This difference results from the different protective purpose of the two measures. As its name suggests, a custodial sentence serves to punish the offender and is therefore primarily a repressive measure.
Preventive detention is a custodial measure that may be ordered in addition to a prison sentence. In such a case, the offender remains in state custody for preventive reasons even though they have already served their sentence—effectively making a kind of “special sacrifice” for the public. For this reason, people in preventive detention enjoy certain privileges compared to prisoners serving sentences.
Since people in preventive detention therefore work voluntarily, they exercise—according to the Fiscal Court—“free commercial will” in the course of their work, which is a decisive criterion for affirming employee status and an employment relationship. As a result, the income of the person in preventive detention was classified as employment income pursuant to Section 19(1) EStG.
This reasoning of the Fiscal Court automatically leads to the conclusion that the detainee’s income is subject to tax liability.
In 2021, the Federal Court of Justice held that inmates are not exempt from tax liability. Filing a tax return is regularly possible and reasonable (BGH, judgment of 13 January 2021 – 1 StR 120/20).
In the reasoning for its judgment, the Fiscal Court relied on decisions of the Federal Fiscal Court, which clarified that a special motive of the employer (such as safeguarding resocialisation) does not eliminate the taxability of the income. The activity is therefore at least also aimed at increasing income through an exchange of services ( BFH, judgment 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 detainee even used part of the income from his work to provide maintenance payments to his son—i.e., precisely not only to ensure his resocialisation after release.