Luxemburg-based life offices claim that Chancellor Gordon Brown is asking them to break the law in his clampdown on offshore tax loopholes.
The Government wants Luxemburg offices to detail chargeable events made by UK residents. But this would breach Luxemburg laws of confidentiality which state that financial details should not be released to a third party by any offshore company.
Life offices are lobbying the Inland Revenue through the Association of International Life Offices to change the rules. Both Scottish Equitable International and Axa Sun Life's PanEuroLife are based in Luxemburg.
Scottish Equitable personal investment development manager Richard Lee son says: "This is a conflict that needs to be resolved. The Chancellor is asking us to be the policeman but, by Luxemburg law, you can be fined or imprisoned for releasing client details and, ultimately, your licence to trade in the country can be withdrawn."
PanEuroLife managing director Jacques Drossaert says: "We feel the position of the British Chancellor is unsustainable. The confidentiality rules are written in law. It is not a question of one country going against the laws of another but whether they are willing to accept European rules."
Luxemburg law says offices need only divulge financial information to a third party if it is believed the client may be involved in a criminal event.