I don't think the Red Baron went beyond the norms of what is expected in war and what is expected of a fighter pilot, unlike, say, a Nazi soldier rounding up children to be sent to a death camp.
For me, I think discussions like these are fraught with pitfalls, and I think it is important to distinguish between my own personal rules for myself, what I think contests rules should be, and what in an ideal world I think people should adopt. This is also a difficult discussion as we are in a difficult time given real world politics as over the past few years, there has been a lot of high profile neo-nazi activity and terror attacks. It's hard to discuss these sort of issues when politeness demands you don't discuss politics at the dinner table or in the scale model group.
Personally, I don't do Nazi stuff, unless it is portraying a rejection of the regime such as a captured aircraft in Allied or Republican service, or a Nazi flag being run over by an Allied tank. I don't like Nazis and don't want to in any way glorify them. Certain other historical figures are also a no-no, like, say, King Leopold. There is also some anime stuff that I stay away from because some of it can get a little creepy; schoolgirls and the like. Also, I'm not really into really exploitative nude figures, though I do have one topless weird squid mermaid figure in the stash. I also don't like combat scenes that are to "real" in terms of blood, gore, etc, or are really intense combat scenes with people getting shot, preferring the sort of "slice of life" stuff like some soldiers not under fire, pausing to check their maps and maybe grab a quick bite. The exception is in fantasy stuff where it is so over the top that it doesn't have the same effect as real-life gore -- an orc getting cut in half by the chainsaw-bayonet of a dude in powered armour is just so ridiculous that it doesn't have the same impact as a bunch of young guys getting mowed down by a machine gun. Those are my rules about what I want to work on and what I want to stare at in my display case.
As for contests, I think we have to have rules to keep things family-friendly. These are public events where we want people to bring kids to to get them interested, not to mention that you need to respect the venue if they are uncomfortable with certain subjects. No nudes and some basic rules for keeping things in good taste, and of course if you are in a country like Germany where there are legal restrictions, you have to follow all relevant laws. Seems like a no-brainer to me, though there might be some grey areas here and there, but I think it is good to keep things a little vague and trust the judgement of the show organizers and head judge, just because there will always be instances where people think of new ways to push the envelope that the organizers didn't anticipate.
Finally, in general, I think this is a hobby where a little more introspection on controversial subjects might be nice. There is the (silly, IMHO) debate over whether what we do is art, but if we want to claim to be artists, then we need to ask ourselves questions like why are we making a piece of art, what emotions do we want to convey, what story do we want to tell, etc, and those questions have to go a little deeper than "this is like a Bf.109 but smaller." I'm not saying that you shouldn't build German armour, but I feel like sometimes, attitudes towards Nazi stuff borders on an obsession that can be a little creepy. Occasionally, discussions go into some light Nazi apologia -- proclaiming the superiority of Nazi soldiers and equipment, whitewashing the crimes of the Wehrmacht, blaming everything on Versailles, pushing a false equivalence between the Nazis and Allied soldiers, etc. And there have been a couple times where I've seen people online start out saying "just because I build German armour doesn't mean I'm a Nazi" and then trail off into a bunch of racist or homophobic stuff, apparently not realizing that if it walks like a duck and quacks like a duck...
To be honest, as much as people complain about not having historically accurate decals, I think the Germans (outside of a resurgence in far-right ideas in some areas in recent years that needs to be kept in check) have the right idea -- take "Never Again" seriously by restricting the display and glorification of Nazi symbols, while at the same time making Holocaust education mandatory in schools. It's the same reason why I don't do Nazi stuff -- I don't avoid Nazi subjects because I want to forget the Holocaust; I don't build Nazi stuff precisely because I remember.