Police said the 21-year-old man had visited the Netto branch in Arnsdorf to complain about a top-up card he bought for his mobile phone.
A video of the incident posted online showed the man holding a bottle of wine behind his back as the dispute continued with staff.
As he stood talking with cashiers, four men appeared and surrounded him, pushing him towards the doors.
As the asylum seeker tried to escape, they pinned him to a table and started punching and beating him, before dragging him out the door.
As the video ends, a woman behind the camera can be heard calmly saying: “Isn’t it a shame that we need a citizen’s defence group.”
Police in Saxony said the men then dragged the man outside and tied him to a tree in the supermarket car park.
Officers called to the dispute found the gang awaiting their arrival and demanding to have the asylum seeker arrested after claiming they had “prevented him from escaping”.
Police told the men to leave as paramedics helped the refugee – without questioning them further or asking for identification - and found no evidence of theft or vandalism.
The Iraqi man is a patient in Arnsdorf’s psychiatric hospital and had already visited the supermarket to complain about the phone card twice earlier in the day, being returned to the hospital by police after staff called the emergency services.
Employees said they had been threatened by the man after the store manager found the balance on the phone card had already been used up.
The suspected vigilantes, including three men wearing black shirts, were not identified until footage of the incident started to spread on social media.
Three of the suspects were identified on Monday as men aged 29, 49 and 54 from the Arnsdorf area but have not yet been caught, while officers are investigating “numerous clues” on other suspects.
The 49-year-old suspect called the emergency services around an hour after the attack claiming the asylum seeker had stolen from the supermarket but police said “no shoplifting had occurred”.
“We are investigating the events, as well as the actions of patrol officers at the scene,” police commissioner Conny Stiehl said.
In a statement posted on Facebook, Netto said it was taking the incident “very seriously”, adding that employees’ actions violated company guidelines but that staff did not call the vigilantes.
Police are investigating the men on allegations of false imprisonment and the Iraqi man for alleged threats made to staff.
Since the attacks on hundreds of women on New Year’s Eve in Cologne, numerous vigilante groups known as the “Bürgerwehr” have sprung up across Germany, gathering widespread local support, The Local reported.
The groups have been vocally supported by anti-immigration and neo-Nazi groups and Germany’s interior ministry has reportedly identified at least seven Bürgerwehrs with “evidence of an extremist right-wing orientation”.
More than a million asylum seekers arrived in the country last year, sparking criticism of Angela Merkel’s decision to open its borders to Syrian refugees arriving on Europe’s shores.
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