Kajetan Mühlmann studied from 1913 to 1917 at the k. k. Staatslehrerbildungsanstalt in Salzburg-Stadt together with lifelong friends and future National Socialists Karl Heinrich Waggerl and Karl Springenschmid. Because of a lung condition acquired during the First World War, he was forced to give up his position as teaching assistant in Fusch on the Glocknerstraße. Like his half-brother Josef, he therefore started studying art history in 1921 at the University of Vienna, financing his studies by operating a tobacconist shop. After obtaining his doctorate at the University of Innsbruck on the subject of Baroque fountains and water art in Salzburg – he also wrote numerous art history articles in that connection – Mühlmann became propaganda director of the Salzburg Festival in 1926. Dismissed in connection with accusations of corruption, he began to sympathize with the NSDAP. After the Party was banned, he was briefly arrested for illegal activities in 1935. In the confused rivalry among the "illegals", he looked for the support of his close friend, the lawyer Arthur Seyß-Inquart, who ultimately led the victorious wing. Mühlmann also had contacts with the Austrofascist camp led by Federal Chancellor Kurt Schuschnigg, and with State Secretary and short-term Foreign Minister Guido Schmidt. Mühlmann's insider knowledge was in such demand that he reported directly to Adolf Hitler on the situation in Austria before Hitler's meeting with Schuschnigg at the Obersalzberg in February 1938.

After the annexation of Austria to Nazi Germany, Mühlmann officially joined the NSDAP (membership number 6,106.587) and the SS (membership number 309.791). Reichsstatthalter Seyß‑Inquart made him a state secretary, first for a month in the Federal Chancellery (in March 1938), and then, after the rebuilding of the government, in the Ministry of Internal and Cultural Affairs. Mühlmann was responsible, among other things, for drafting guidelines for the confiscation of artworks from collections belonging to Jews. The uncontrolled Aryanization was to be replaced by systematic expropriations. Mühlmann himself was active as an Aryanizer. In 1941 he expropriated for his wife Leopoldine Poldi, née Wojtek, whom he had married in 1932, the studio of the artist Helene Taussig in Salzburg-Anif. Like Seyß-Inquart, Mühlmann believed that the most significant art treasures in Austria and above all those in Vienna should remain there as part of the city's cultural heritage. Mühlmann repeatedly attempted to persuade Hitler, who in August 1938 had promulgated the "Führervorbehalt" (Führer reserve), giving him the pre-emptive right to decide on the fate of artworks, to follow his line. When Reichsstatthalter Josef Bürckel removed him from office in June 1939 for pro-Austrian tendencies, Mühlmann turned to Reichsmarschall Hermann Göring, whose two sisters he had known since the 1920s. On 6 October 1939, Göring appointed Mühlmann as special representative of the Reichsmarschall for securing art and cultural objects in the former Polish territories. A few days later he received written authorization giving him wide-ranging powers to secure all artworks owned by Jews, the former Polish state and other enemies of National Socialism. An agreement was made with Kommando Paulsen and the SS‑Ahnenerbe as to which objects should be confiscated by each of these Nazi offices. Looting orders were subsequently issued by Reinhard Heydrich and Generalgouverneur Hans Frank. Mühlmann was soon in overall charge of the looting in Poland, forming raiding parties to locate, transport and catalogue the artworks. Göring, who had appointed him, demanded Mühlmann's loyalty and Mühlmann sent him outstanding artworks as special gifts. Hans Frank and Heinrich Himmler also requested privileged treatment. Mühlmann cultivated his relationship with Adolf Hitler as well, sending him five photo albums with 521 first-choice objects for his "Führermuseum" in Linz and announcing that all of Poland's art treasures would be seized within six months. In autumn 1943 he nevertheless fell out with Hans Frank, who accused Mühlmann of chaotic management but probably also of having not given him enough art objects. At the time of his recall from Poland, Mühlmann had long shifted his field of operation, however. Shortly after the invasion of the Netherlands in 1940, his old companion and the newly appointed Reichskommissar Arthur Seyß-Inquart summoned him to The Hague. Because the brutality in the West had to be more efficiently covered up, Mühlmann sought to give his activities a veneer of legality. He established an art dealership of a sort, the "Dienststelle Mühlmann", for the disposal of expropriated works, which were no longer brought to him by his own looting parties but by the Security Service (SD), the Reichskommissariat für feindliches Vermögen (Reich Commissariat for Enemy Assets) or collaborating art dealers, from whom Mühlmann made purchases at reduced prices. Alongside the head office in The Hague, he soon opened subsidiaries in Amsterdam, Brussels, Paris, Vienna and Berlin. The dealership took 15 per cent commission on all sales, except those to Hitler and his intermediaries, and was thus soon able to finance itself. Its clients included the entire Nazi elite. The office fulfilled two purposes: the liquidation of confiscated assets belonging to some of the largest Dutch collections, such as those of the Mannheimer and Hamburger families and of Frits Lugt; and the profitable sale of cheaply acquired artworks. Mühlmann also used the operation to acquire artworks for himself. As in Poland, he gave the Dienststelle Mühlmann and its small staff, which included the two art historians Bernhard Degenhart and Franz Kieslinger and Mühlmann's half-brother Josef, a veneer of seriousness in its identification and cataloguing the various collections. A number of works also went to auction houses such as the Dorotheum in Vienna, Adolf Weinmüller in Munich, in whose Vienna subsidiary Mühlmann also had a direct share, and Hans Lange in Berlin. The Dienststelle Mühlmann continued to exist until summer 1944. Mühlmann then moved with his staff to Vienna, before seeking refuge at the end of the war in the Salzkammergut.

On 13 June 1945 Mühlmann was arrested by the US authorities in Seewalchen on the Attersee and taken to Glasenbach (Marcus W. Orr) camp near Salzburg. He was transferred in July to Peuerbach camp in Upper Austria, where he was interrogated by a unit of the Counter Intelligence Corps (CIC) responsible for art and culture. In August and September 1945 he was questioned again in the Special Interrogation Centre in Altaussee. Mühlmann's testimony on the crimes committed by Hermann Göring, Arthur Seyß-Inquart, Hans Frank and Ernst Kaltenbrunner before the International Military Tribunal in Nuremberg helped in their conviction and sentence to death. Through his willingness to cooperate and assist in locating looted art, he won over the US authorities, on whom his own life depended. Poland, where he was likely to be sentenced to death, demanded his extradition. In October 1946 the CIC handed Mühlmann over to the Austrian authorities with the written assurance that he would be released only with the explicit approval of the US authorities. He was taken from custody to give testimony in 1947 in the trial for high treason of Guido Schmidt and once again used this public forum to profile himself as an insignificant bureaucrat and to deny all Nazi activities before the annexation of Austria. He also trivialized his looting in Austria, Poland and the Netherlands as attempts to rescue artworks at risk. With the start of the Cold War, the US authorities and then the Austrians were less energetic in their prosecution of second-level Nazi criminals. In autumn 1947, Mühlmann was summoned to Munich by members of the former Office of Strategic Services to assist in the restitution of artworks. He became ill in February 1948 and was moved to hospital, from where he managed to escape on 16 February 1948. Although Mühlmann was put on the wanted list by the Austrians, he remained in Bavaria and was ultimately able to find shelter with a lover in Munich. In 1951 he was put on trial by the Volksgericht in Vienna for his activity as an "illegal" but not for his role in Nazi asset expropriation. He did not appear for the hearings and was found guilty in absentia and his known assets seized by the authorities. The Austrian Ministry of the Interior rejected a last request by Poland for extradition in 1955, just before the signing of the State Treaty. No serious attempts were made to capture him, although his place of abode in Munich must have been known, since his family from Upper Austria regularly visited him – he had four children with his second wife Hilde Ziegler – until his death on 2 August 1958.