This runs contrary to what Baghdad had sought from state control of fixed infrastructure within its jurisdiction, and the situation has spooked private investors and neutered Internet development outside Kurdistan, which sets its own rules, Reuters reported.
Iraq bars private companies from owning fixed networks transiting domestic data and anything they build is usually seized by the government.
Just 9.2 percent of Iraqis are online, according to the International Telecommunication Union (ITU), placing OPEC's second-largest crude exporter below the likes of Haiti and Nepal despite an average income six times greater.
In Iraq proper, a one megabyte per second (mbps) broadband connection costs $399 per month, Arab Advisors Group estimates.
This compares with $3.51 in the European Union and $7 in Iran, according to Ookla consultancy, while Kurdistan's pro-business approach has made the region's Internet faster, cheaper, more reliable and widespread.
Dyn Research estimates Kurdish Internet service providers (ISPs) transit three-quarters of Iraq's networks and about 90 percent of individual IP addresses on those networks.
"If Kurdistan and Iraq became adversarial, then it could definitely become an issue," said Doug Madory, Dyn Research director of internet analysis. "I can't think of another example where a larger country was so reliant on a smaller country or territory for access to the Internet."
That could allow the Kurdistan Regional Government (KRG) to intercept Baghdad Internet traffic, but the region likely lacks the resources to intercept south-bound communications to an extent that would trouble Baghdad, Madory said.
"More importantly, it gives the KRG a chip to play in discussions with the government of Iraq," he said. "What can Iraq hold over the KRG in an attempt to enforce their policies when they are so dependent on the KRG for outside access?"
In April, Mohammed Noori, a senior official at the Ministry of Communications (MoC), acknowledged that greater private sector involvement in the sector could be beneficial, but highlighted security dangers.
"Maybe it will help in spreading and developing broadband services faster in Iraq but it will make another security issue for us," he said. "Our situation is so critical maybe now we cannot allow this, but maybe in the future."
Noori and the Ministry did not respond to repeated requests by Reuters for further comment, but state control appears at least as much a priority as security.
Arbil-based Newroz Telecom has the largest international Internet gateway in Iraq yet faces long-standing hostility from Baghdad, which often blocks the company transiting data into Iraq from Kurdistan, Ali Imad, Newroz technical director, said. Iraq allows it to carry traffic in the other direction.
Newroz had built 80 percent of a fibre cable from Turkey to the Gulf via Kurdistan and Iraq, investing $137 million, before Baghdad halted work in 2012 citing security fears, said Imad.