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Foreign firms will be allowed to buy up Telecom's retail business when the company breaks up this year.

Under its Kiwi Share obligations, no foreign company can own more than 49.9 per cent of Telecom and Government approval is needed for foreign stakes larger than 10 per cent. These restrictions have been in place since Telecom was privatised in 1990.

However, questioned in Parliament yesterday by Labour's Clare Curran, Communications Minister Steven Joyce said the rules would change when Telecom demerged.

The company is due to split this year, following its win of the Government's ultra-fast broadband contracts.

If approved by shareholders, the network branch Chorus will become a separate listed company and roll out and own the fibre internet network.

The copper network will also be owned by Chorus. Telecom will become a standalone retail business, selling mobile, phone, internet and IT services to businesses and consumers.

While the new Chorus business will have to meet the ownership restrictions, Telecom retail does not and will be open to foreign ownership.

"The restrictions will not apply to the retail company in the same way they do not apply to Vodafone or TelstraClear," said Joyce.

A Ministry of Economic Development document explaining the changes said they were necessary because of Australian tax rules which could have influenced shareholders' decision to break up Telecom.

"[When Telecom and Chorus split] Australian-resident Telecom shareholders would face paying tax as a result of the demerging. As they represent a blocking minority of Telecom shareholders, the demerger would most likely fail to win shareholder support."

While the ownership rules would not be entrenched in telecommunications law being debated in Parliament, they would be enforced in a deed between Chorus and the Crown, Joyce said.

The changes were noticed when a supplementary order paper removing all references to Kiwishare was tacked on to the law on Tuesday.

But Joyce said they should not be a surprise and had been posted on the ministry's website when the broadband contracts were announced on May 24.

Telecom's obligations to provide rural phone services would be split between the retail and network businesses.