Item 4. Information on the Company

A.       History and Development of the Company

Basic Information

TIM Participações S.A. is a corporation (sociedade anônima) organized under the laws of the Federative Republic of Brazil. The Company was incorporated in the Federative Republic of Brazil for an indefinite period on May 22, 1998 under the name Tele Celular Sul Participações S.A., which was later changed to TIM Participações S.A. on August 30, 2004.

Our headquarters are located at João Cabral de Melo Neto Avenue, 850 – North Tower – 12th floor, 22775-055 Rio de Janeiro, Brazil and our telephone number is +55 (21) 4109-3742 and our fax number is +55 (21) 4109-3314.

Our agent for service of process in the United States is Puglisi & Associates located at 850 Library Avenue, Suite 204, Newark, Delaware 19711.

Historical Background

In July 1998, as part of the privatization of Telebrás, the Brazilian state-owned telecommunications monopoly, the Federal Government sold substantially all its shares of the 12 holding companies into which Telebrás had initially been broken up, including its shares of Tele Sudeste Celular Participações S.A., or TSU, and Tele Nordeste Celular Participações S.A., or TND. Following a series of acquisitions, corporate reorganizations and corporate name changes, TSU and TND merged to form TIM Participações in 2004.

We continued to expand and restructure our operations through a series of corporate reorganizations, mergers, acquisitions and name changes, and we are currently held, directly and indirectly, by Telecom Italia (which began operating in Brazil in 1998 as Telecom Italia Mobile) through its wholly owned subsidiary, TIM Brasil, formed in 2002 as the holding company of Telecom Italia’s operating companies in Brazil. In turn, the single largest shareholder of Telecom Italia is Vivendi, which is able to exercise significant influence over Telecom Italia. See “Item 4. Information on the Company—C. Organizational Structure” for a description of our current corporate structure and Exhibit 8.1 attached hereto for a list of our significant subsidiaries as of the date of this annual report.

In 2009, the acquisition of Holdco Participações LTDA, holder at the time of 100% of Intelig's capital, was approved and Intelig became a wholly-owned subsidiary of TIM after this transaction. Our acquisition of Intelig brought material advantages through significant synergies with its network, such as its metropolitan optimal fiber network and its large backbone that allowed us to accelerate the development of our 3G network and generate significant operational cost savings

In 2011, our wholly owned subsidiary TIM Celular entered into an agreement with Companhia Brasiliana de Energia and AES Elpa (the AES Group in Brazil) for the purchase of all of AES Elpa’s equity interests in Eletropaulo Telecomunicações and 98.3% of the interest of AES RJ, or the AES Atimus Acquisition. In connection with the acquisition, Eletropaulo Telecomunicações changed its corporate name to TIM Fiber SP Ltda., or TIM Fiber SP, and AES RJ changed its corporate name to TIM Fiber RJ S.A., or TIM Fiber RJ, and we call this business, collectively, TIM Fiber.

In accordance with the reorganization of TIM Fiber, TIM Fiber RJ and TIM Fiber SP were merged into TIM Celular in 2012, which owns and operates an extensive fiber optic network in metropolitan São Paulo and Rio de Janeiro. The purpose of this reorganization was to simplify our organizational structure and improve the administrative, operational and financial efficiency of the companies controlled by us.

Our shareholders approved our adherence to the Novo Mercado rules and the transfer of trading of the shares issued by us to the Novo Mercado segment of the BM&FBOVESPA in 2011. In order to join the Novo Mercado, we are required to adhere to heightened requirements relating to corporate governance and the disclosure of information to the market and we are not permitted to issue preferred shares, participation bonuses or any kind of shares with restricted voting rights. From August 3, 2011, our preferred shares ceased to trade and we only had common shares traded on the Novo Mercado listing segment of BM&FBOVESPA, by using the code “TIMP3”, and as from August 5, 2011, our ADSs representing preferred shares ceased to trade on the NYSE and our ADSs representing five

common shares instead of ten preferred shares commenced trading on the NYSE. See “Item 9. The Offer and Listing—A. Offer and Listing Details.”

2016 Important Events

Towers Sale and Leaseback

In November 2014 and January 2015, TIM Celular entered into sale and leaseback transaction, or the ATC Sale-Leaseback Transaction, pursuant to which it executed a Sales Agreement, or the Sales Agreement, and a Master Lease Agreement, or MLA, with American Tower do Brasil Cessão de Infraestruturas Ltda., or ATC. Under the Sales Agreement, TIM Celular can sell up to 6,481 telecommunications towers owned by it for approximately R$3 billion, and under the MLA TIM Celular can then lease back part of the space on these towers for a period of 20 years from the date of transfer of each tower, with monthly rental prices depending on the type of tower (greenfield or rooftop). The ATC Sale-Leaseback Transaction will benefit the Company’s operating and financial capacity and we expect it will allow the Company to expand investments and improve quality of services.

The Sales Agreement provides for the towers to be transferred in tranches to ATC as conditions precedent are met. A total of five tranches of transfers were made, three in 2015, April 29, September 30 and December 16 and two in 2016, June 9 and December 20. As a result of these five tranches of transfers, we transferred a total of 5,819 towers to ATC, and received a total of R$2,632 million in cash.The gain on the portion of the assets effectively sold, amounting to R$44 million (net of transaction costs), was recognized as other operating income for financial year 2016, while the gain on the portion of the towers subject to sale and leaseback, amounting to R$70.9 million (net of transaction costs), was deferred over the lease term (20 year) per the MLA. The discount rate used in the ATC Sale-Leaseback Transaction was determined based on observable market transactions that the lessee would have to pay in a similar lease or borrowing arrangement. The discount rate applied in each tranche is described in Note 15 to our consolidated financial statements.

2016 mobile market developments

According to Anatel, the Brazilian mobile market reached 244 million lines nationwide at the end of 2016, corresponding to a penetration ratio of 118%, compared to 125.7% in 2015, for an annual contraction rate of 5.3%, compared to a 8.2% contraction rate in 2015. Brazil is one of the largest mobile telephony markets in the world. Although the Brazilian telecommunications market’s prepaid customer base has contracted by 10.8% (or 20 million lines) over the course of 2016, to 165 million lines, it still continues to represent the market’s largest component, constituting 67.5% of total subscriber base as of December 31, 2016, as compared to 71.6% as of December 31, 2015. The significant reduction in the overall number of prepaid users is mainly due to macroeconomic pressures, acceleration in users consolidating multiple SIM cards to a single one, high penetration of mobile service and the rapid substitution of voice for data usage, resulting in a decrease in the so-called “community effect”, where consumers value a telecommunications system more as more users adopt it. The postpaid business, however, reached 79 million lines in 2016, a 8.3% increase over 2015.

Capital Expenditures

The majority of our capital expenditures in 2014 related to our investment of approximately R$2.9 billion in the acquisition of a license to operate in the 700 MHz spectrum for 4G mobile technology and R$3.7 billion related to improvements in network infrastructure. Our principal capital expenditures in 2015 totaled R$4.7 billion, of which 92.4% was dedicated to network infrastructure. In 2016, our capital expenditures totaled R$4.5 billion, a decrease of 5.5% when compared to 2015 which can be explained by the negotiations made with vendors to reduce supply costs as well as project optimization efforts. For a detailed breakdown of our capital expenditures in 2014, 2015 and 2016, as well as the total amount of the same each year, see “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Uses of Funds—Material Capital Expenditures.”

During 2017, 2018 and 2019, we expect to consolidate our position as the leading mobile telecommunications operator in infrastructure investments, based on public capital expenditure data reported by other operators. See “—B. Business Overview—Competitive Strengths—High-quality services” and “—B. Business Overview—Our Strategy—Construction of a unique infrastructure network in the Brazilian market and improving our network” for further information on the types and geographical distribution of these ongoing infrastructure investments.

B.       Business Overview

Market Characteristics

The Brazilian mobile telecommunications market has in recent years been characterized by the expansion of the number of subscribers, investment in network infrastructure and subsidies to attract and retain customers. These expenditures have resulted in a significant increase in mobile penetration, revenue generation and competition for customers. In 2016, a tougher macroeconomic environment affected the telecommunications industry as a whole, and contributed to the first year of overall customer base reduction. As of December 31, 2016, there were approximately 244.0 million mobile lines, representing approximately118% of the population, compared to approximately 257.8 and 280.7 million mobile lines representing approximately 125.7% and 138.0% of the population in 2015 and 2014. As is the case throughout most of Latin America, the Brazilian mobile telecommunications market is characterized by a large number of prepaid customers, but as previously mentioned, this trend is changing as a result of macroeconomic pressures, an acceleration in users consolidating multiple SIM cards to a single one, a high penetration of mobile service, and the rapid substitution of voice for data usage, resulting in an overall reduction in the total number of prepaid base users and a decrease in the so-called “community effect” where consumers value a telecommunications system more as more users adopt it. According to Anatel, at the end of 2014, 2015 and 2016, approximately 75.8%, 71.6% and 67.5%, respectively, of mobile lines were prepaid and 24.2%, 28.4% and 32.5%, respectively, were postpaid. The postpaid business reached 79 million lines in 2016, a 8.3% increase over 2015.

Our Business

We are the second largest provider of mobile telecommunication services in Brazil based on the number of phone lines, with 63 million lines and a market share of 26.0% in 2016, as compared to 66 million lines and market share of 25.7% in 2015, based on data from Anatel. In the year ended December 31, 2016, we lost 2.82 million net lines, compared to a net loss of 9.49 million lines in the year ended December 31, 2015. Through our subsidiaries in various telecommunications markets throughout Brazil, we operate mobile, fixed and long distance telephony, data transmission and ultra-broadband (speeds of more than 34 MB per second, or Mbps) services. For the year ended December 31, 2016, our gross service revenue was R$21.4 billion, a 7.6% decrease from the year ended December 31, 2015, in comparison to a 5.7% decrease in gross service revenue from 2014 to 2015.

Through our GSM network, we serve approximately 95% of the urban population of Brazil, representing the largest GSM network coverage of any mobile telecommunications services provider in Brazil (based on publicly available data of other mobile telecommunications providers), with a presence in approximately 3.4 thousand municipalities. We offer extensive data coverage throughout Brazil with our GPRS technology, covering 100% of our coverage area and our EDGE technology reached almost 95% of our coverage area, in addition to our sophisticated 3G and 4G network covering approximately 89% and 74%, respectively, of the urban population of Brazil. Our international roaming agreements include more than 450 networks available in more than 205 destinations on six continents (including Antarctica). Our fiber network extends from northern to southern Brazil, with an extensive wide area network, or backbone, of approximately 76,000 kilometers, and metropolitan area networks, or backhaul. Our fiber optic network has a unique capacity to offer high-quality mobile ultra-broadband service, available through our TIM Live network in the Rio de Janeiro and São Paulo metropolitan regions. In 2016, we continued to connect our antennas with our fiber optic network, representing an increase of 9% compared to the end of 2015, enabling an increase in data transmission capacity. This is a key project for the Company which enables us to deliver a high-performance data experience to our users. In 2013, we completed the LT Amazonas project, our long distance fiber optic network connecting major cities in the north of Brazil, one of Brazil’s regions with the greatest lack of infrastructure. Fiber optics are particularly important in rural areas such as these because the signals that are transmitted through fiber experience less attenuation (loss of signal strength) and, therefore, can travel longer distances. In connection with the LT Amazonas project, we have entered into financial lease agreements for the right to use infrastructure with companies that operate transmission lines in Northern Brazil.

Our growth in the mobile telecommunications market does not result in revenue cannibalization (substitution of fixed-line services for mobile services), as we are essentially a pure mobile operator with no landline legacy, unlike many of our competitors that offer both fixed-line and mobile telephony services. Also, we have a selective subsidy policy for handset and accessories sales, which helps avoid pressure on margins and costs as we grow.

We believe our net investment of approximately R$4.5 billion in 2016, a 5.5% decrease over 2015 and of which approximately 85% went towards infrastructure, is indicative of our commitment to enhancing our ability to provide services of the highest quality and meet the demand for voice traffic in Brazil. According to our strategic plan we disclosed to the market on February 2, 2017, or the 2017-2019 Industrial Plan, we plan on investing almost R$12 billion in Brazil between 2017 and 2019, with the majority of this amount directed to network development.

As of December 31, 2016, we had more than 10.8 thousand points of sale through premium shops and dealers (exclusive or multi-brand) and consolidated partnerships with large retail chains. This figure includes 175 of our own stores. In addition to these retail stores, our customers have access to prepaid phone services through supermarkets, newsstands, and other small retailers as alternative channels to access our products and services, totaling more than 332 thousand points of sale throughout Brazil.

For the corporate market, we have more than 550 third-party business partners focused on serving small and medium companies and a direct sales force team of 94 employees focused on large companies.

In order to serve our customer base of over 63 million customers, we maintain twelve customer care centers, two of our own and ten outsourced, comprising around fourteen thousand customer service representatives. Moreover, we have continuously invested in alternative customer service channels, developing solutions based on interactive voice response, or IVR, and self-service and mobile applications for iOS and Android.

Competitive Strengths

We believe that our robust network infrastructure, together with our brand recognition and our widespread sales network, position us well to capitalize on opportunities in the telecommunications industry in Brazil and meet the growing demand in the mobile telecommunications market. We believe that our main strengths include:

High quality services. Since national coverage and quality had improved quite substantially over the last few years, Anatel has shifted its focus in 2016. The prior focus was service quality from a broader state-oriented perspective and now, Anatel is taking a local perspective, concentrating its efforts on smaller geographic areas and specially those where service is still considered poor.

In accordance with Anatel’s directions to monitor and evaluate quality on more specific geographic areas, we will disclose our quality indicators based on the number of cities – rather than states – within Antel’s targets. Such indicators are expected to be more assertive and better reflect customer experience.

TIM posted solid improvements in Anatel’s voice quality metrics. Importantly, the Company has been able to sustain its positive results in data indicators (3G/4G) despite the rapid expansion of our coverage in 2016, especially in 4G where we are the leaders in the number of cities covered.

Regarding Anatel’s metrics for instant speed, or SMP10, and average speed, or SMP11, we highlight that both indicators remain stable and above Anatel’s target, guaranteeing a positive customer experience when using data. In a scenario of strong data traffic increase (+56% Year over Year, or YoY, in 2016), such results also indicate strong resilience of our network

TIM has historically recorded the fewest number of customer complaints registered with the Brazilian Consumer Protection and Defense Authority, or PROCON, integrated in the National Information Integration System, or SINDEC. The TIM economic group has the fewest registered complaints per one thousands customers until October, the date of the last official report disclosed, having received 59% fewer complaints than the economic group with the largest number of complaints. According to an official report by the National Consumer Bureau ( Secretaria Nacional do Consumidor ), or SENACON, over the course of 2016, the TIM economic group satisfactorily resolved 81% of Preliminary Investigation Letters, or CIPs, and 76% of Justified Complaints, or RFs, submitted by PROCON. These performance rankings are commensurate with our 2015 results.

TIM Live was recognized as the best internet connection in fixed broadband market by a satisfaction survey published in March by Anatel. The survey was conducted in the second half of 2015. Reinforcing our innovative approach and focus on quality, TIM Live was also the Brazilian leader of Netflix’s ISP Speed Index in October, the date of the last official report, which measures the performance of internet service providers in different countries. In the mobile market, TIM has the highest penetration of coverage by 4G technology, having reached more than 1,200 cities and around 74% of the urban population in Brazil by the end of 2016.

We also continue to provide high quality services by means of our continued investment in infrastructure. Such investments have been achieved organically, including through building long distance networks and establishing our metropolitan fiber optic network, with more than 5,000 sites connected to fiber in December 2016, and by means of acquisition of additional bandwidths including the 700 MHz bandwidth nationally. In December 2015, when Anatel auctioned left over radiofrequencies in the 1,800 MHz, 1,900 MHz and 2,500 MHz bands, TIM was only allowed to participate in batches of the 2,500 MHz band which had originally been auctioned in 2012, and for which we bidded for some lots. We were classified as first-ranked bidder for the acquisition of the lots for Recife and its metropolitan region, in the state of Pernambuco, and for Curitiba and metropolitan region, in the state of Paraná, based on our bids which totaled R$57.5 million

The result was approved by Anatel’s directing council on June 1, 2016 and the authorization terms were signed on July 26, 2016. As of December 31, 2016 as compared to December 31, 2015, we achieved a 51% increase in volume of e-NodeB and 17% increase in volume of NodeB, the equipment responsible for adding, respectively, 4G and 3G data traffic capacity to an antenna, and installed and had 441 new sites connected to fiber optics, an increase of 9%. During the period from December 31, 2015 to December 31, 2016, our 4G network coverage grew by more than three times in terms of the number of cities covered, while our 3G network coverage grew by more than 54% over the same period, resulting in our total coverage reaching almost 95% of Brazil’s urban population.

We have also added to our network infrastructure by means of inorganic growth historically, for example, through the acquisition of assets such as Intelig and AES Atimus (later known as TIM Fiber and now TIM Celular). The acquisition of Intelig expanded our network infrastructure by adding a 100% digital fiber optic network installed from northern to southern Brazil, totaling more than 500,000 kilometers of fiber optic, with an extensive wide area network (backbone) of approximately 15,000 kilometers and metropolitan area networks (backhaul) in Brazil’s principal cities. In addition, we added to our network telephone exchanges and satellite stations, connecting to major networks and with capability in major international submarine cable systems. The AES Atimus acquisition positioned us well, compared to our competitors, to capture broadband Internet market share. Investing in fiber optics in this way allows us to provide high quality services to our customers. These acquisitions also enabled a reduction of infrastructure rental costs, while helping us to obtain significant synergies related to our existing fiber optic network.

Throughout 2016, we also expanded the installation of “Biosites” across Brazil, a cellular antenna shaped like a lamp post and designed to accommodate 3G and/or 4G transmission equipment, illustrating our focus on seeking innovative infrastructure alternatives to improve the quality of and our customers’ satisfaction with our services. Each Biosite is a multifunctional device, allowing not only for the installation of new 3G and/or 4G stations, but also modernizing streetlights in cities and reducing visual clutter, since the cellular antennas and their necessary equipment are self-contained within the post itself, without the need for external or auxiliary engineering structure.

We are also better able to provide high quality services due to our strong relationship with our suppliers. We operate a system for information technology vendor management in order to improve the commitment of our suppliers. As a result of this approach, we benefit from enhancements like (i) better accountability of end-to-end vendors on our business processes; (ii) better contractual conditions and savings due to the increase of volumes per vendor; (iii) vendor consolidation and specialization in specific platforms/processes, creating the opportunity for long-term investments in such areas; and (iv) active contribution to transformation and simplification.

These processes were organized and improved through detailed rules such as the Projects Review Board and Investments, and the Function Points Productivity Contractual Auditing. This allowed us to achieve an excellent level of information technology governance, exemplified by better business contribution of each investment due to shared objectives and goals. As a result, we improved our efficacy and efficiency.

Strong brand associated with innovation. We believe that we have a strong brand and a reputation for innovation, having pioneered several product launches in Brazil, such as the introduction of pay-per-call (rather than per minute) offers in the Brazilian market (Infinity Pré), followed by a prepaid daily Internet package delivering a limited traffic allowance (Infinity Web) and a combined daily package of Internet and text messages (Infinity Web + Torpedo). We also introduced the concept of and equalization of prices for local calls and long distance within our network and, in the postpaid business, we launched the concept of unlimited calls within the TIM network (TIM Liberty). TIM launched the first daily prepaid service option (a promotion for customers that have the Infinity plan), data package sharing among multiple devices. TIM also launched plans that allowed voice minutes to be used for

calls to any operator, anywhere in Brazil. We believe the subsequent development of other plans based on these concepts strengthen our leadership position compared to our competitors in terms of innovation.

Our mobile phone plans have transformed the mobile telecommunications market in Brazil, increasing voice traffic and long distance calls in Brazil and accelerating the growing trend in the substitution of fixed-line telephone services for mobile telephone services. The current path of innovation is to completely eliminate the difference between on-network and off-network calls, and also the market shift from a voice plan approach to a data-centric plan approach.

On April 2016, TIM adopted a new institutional campaign launched by the Telecom Italia group, featuring the launch of a new logo and a new slogan “Evoluir é fazer diferente” (to evolve is to do things differently). The new slogan represents a new market positioning and points to different form in facing the Company’s relationship with customers. This transformation is part of a path that the Company has taken, which focus on quality and better user experience. TIM’s new positioning seeks to fulfill consumers’ needs by understanding what they value and earn their trust based in three pillars: (i) innovation, which is already in the company's DNA and will continue as a priority, with new plans, offers, partnerships and technologies; (ii) quality, as TIM has worked to become a leader in 4G coverage and maintain strong investments in infrastructure to deliver the best to its customers and be prepared for the future; (iii) user experience, which, in addition to the two other pillars, is important to establish a new relationship with customers and act to give every client the best caring experience, great services and a transparent relationship with the company.

The only Brazilian telecommunications company listed on the Novo Mercado . Since our listing on the Novo Mercado in July 2011, we are the only company in the Brazilian telecommunications sector listed on this segment of the BM&FBOVESPA. As part of our listing on the Novo Mercado , we are required to adhere to heightened requirements relating to corporate governance and the disclosure of information to the market. As part of our strong commitment to these principles, we made our 2016 financial year financial results meetings available by teleconference, smartphone and tablet in addition to computer. We believe that the listing on the Novo Mercado provides greater liquidity and value for our shares and allows us greater access to international markets, promotes the strengthening of our corporate image and increases confidence in us, in addition to reaffirming the long-term commitment of the Telecom Italia Group in Brazil. We believe listing on the Novo Mercado also aligns the interests among our controlling and minority shareholders with respect to voting rights, tag along rights and dividend policy.

In addition, we belong to a select group of companies comprising the portfolio of the Corporate Governance Index and the BM&FBOVESPA Tag Along Stock Index, comprised of companies that have committed to adopt better co-sale protection to minority shareholders, have actively traded in 30% of the trading sessions and do not constitute a penny stock. In 2016, we were listed for the ninth consecutive year as part of the portfolio of the Corporate Sustainability Index of the BM&FBOVESPA, an index comprised of companies that have a strong commitment to sustainability and social responsibility. In August 2013, we received for the second consecutive time the gold seal of Greenhouse Gas Protocol, the program of the Center for Sustainability Studies of the FGV, which aims to foster corporate responsibility with respect to greenhouse gas emissions.

We furthered our commitment to transparency when, in the third quarter of 2014, we began making our financial results meetings open to investors and journalists, as well as by teleconference, computer, smartphone and tablet.

Highly qualified and experienced executives and controlling shareholder support. We have a team of highly qualified executives, widely recognized in the industry and possessing extensive experience in telecommunications markets in Europe and emerging countries. Our executive compensation policy seeks to align the interests of our executives with those of our shareholders, through variable compensation plans and stock options that reward good performance and the accomplishment of certain goals, as well as provide for improved executive retention.

Our controlling shareholder’s support in our operations is further demonstrated through the sharing of know-how and best practices and development of new solutions for networking, marketing and finance, which are rapidly rolled out under a “plug & play” strategy, under which network innovations may be developed by our parent company first in other regions and then implemented with us.

Our Strategy

Our strategy includes:

Our strategic goals can be divided into 4 pillars: infrastructure, offer/commercial approach, customer experience and efficiency. TIM’s infrastructure strategy is to be the leader in 4G technology in order to guarantee our service quality, particularly in mobile broadband. Likewise, we want to eliminate completely our coverage gap in 3G and selectively make use of 4G technology, or to address the residential broadband market with our wireless 4G broadband network. With respect to our offer and commercial approach, TIM aims to remain the market leader in prepaid subscribers while improving our postpaid position with a higher market share in this market. Customer experience is also an important feature of TIM’s strategic path, through the use of new “full digital” platforms and architechture to implement the best client end-to-end multichannel experience. Efficiency for TIM means a “lean company” approach, to capture a results-oriented culture for the company.

Protecting the value of our prepaid customer base and aiming at the growing postpaid segment, shifting focus from absolute market share to share of total revenue, and strengthening our existing customer base. As mentioned above, the Brazilian mobile telecommunications market is facing an overall reduction in the number of prepaid customers, as users which previously held multiple SIM cards are consolidating to one single SIM card due to macroeconomic pressures. In connection with this trend, our strategy is to be chosen as the single SIM provider for the prepaid market by providing offers that are attractive and valuable to customers (such as offering plans with more voice minutes and internet usage) and maintaining our reputation for quality. To support this strategy, we will also implement a new handset strategy and new initiatives in our sales channel model, including a more efficient regional approach.

Our growth strategy is mainly focused on addressing the potential for mobile Internet in the Brazilian market, particularly increasing mobile Internet penetration and data traffic. We believe mobile operators are in a strong position to address the demand for broadband in Brazil, with the ability to provide flexible price plans (including the prepaid market) affordable to the majority of the Brazilian population. The lack of fixed infrastructure is still an issue for accessibility to fixed broadband, especially in suburban areas, making mobile coverage more suitable for such customers without broadband access. In addition to providing affordability and coverage advantages, mobile operators appeal to the new cultural demand for Internet connectivity at all times and in all places. The machine-to-machine market, or M2M, is also an area of opportunity for growth with future applications to be developed.

In addition, our strategy also involves positioning TIM as a partner of our existing customer base, by increasing their loyalty by offering exclusive products to existing customers, focusing on value-added services in our offers, and by differentiation in our products and services. Value-added services represent an important part of the TIM strategy, as it is already a relevant market and has high growth rates with the potential to increase revenue streams. Recent value-added services that we have launched include TIM Music, TIM Protect (backup, antivirus, devices insurance) and plans that include unlimited usage of the WhatsApp messaging application. Such services are generally launched through a partnership with an established over the top player. We believe the foregoing strategies will allow us to strengthen customer loyalty without requiring us to incur higher costs, as increased traffic within our own network does not significantly increase our operational costs. We are also investing in new channels, to bring new customers to the company and to enhance each customer’s experience. We are constantly seeking new customers through new marketing efforts and promotional initiatives.

Capitalizing on fixed-mobile substitution in voice and traditional services. We seek to capitalize on the existing opportunity of fixed-mobile substitution in voice and data traffic and encourage the use of mobile devices, rather than fixed lines, for long distance communication and Internet. We believe that the main advantage of our product offerings is that our users are able to use our growing mobile network.

In the voice market, this strategy has been successful in part due to the limited service offerings of other long distance carriers in Brazil and the acceleration of fixed-mobile substitution. We have become the market leader in the long distance telecommunications market based on our market share. Fixed-mobile substitution is still evident in Brazilian market, as fixed telephony operators have experienced a decline in revenues. Since we are primarily a mobile operator with robust network infrastructure, the impact of any reduction in the fixed telephony market does not impact our performance and we therefore encourage the acceleration of fixed-mobile substitution, which in turn increases demand for our services.

As already mentioned, TIM is also targeting the residential broadband market through its 4G mobile broadband network, using WTTx technology, connecting homes to the Internet by using a router that connects to our 4G mobile network. We believe such product can be suitable specially for areas with poor fixed broadband infrastructure as our 4G coverage is growing rapidly.

Providing Internet access to everyone. We intend to provide universal Internet access to all classes, offering our prepaid and postpaid customers competitive data usage plans through wireless handsets or other data devices (e.g. tablets, wearables, etc.). Our focus on increased data usage among our customers is also influenced by our ability to effectively manage our handset and accessories sales, with a primary focus on smartphone models that provide for quality Internet access at a low cost. This approach has allowed us to offer our services at a highly competitive price, offer convenient payment methods, meet market demand and allow for opportunities for innovation. The result of this strategy can be seen in the increase in our number of data users from 50.7% of our customer base in December 2015 to 51.9% of our customer base in December 2016.

Leading mobile internet growth in our sector is a key pillar of our strategy, since we see this as the most important market in terms of growth and size in the foreseeable future. Our marketing efforts have also been designed to stimulate internet usage and leverage our 3G and 4G networks by providing for suitable and affordable postpaid and prepaid internet plans.

Construction of a unique infrastructure network in the Brazilian market and improving our network. We are committed to developing a robust network infrastructure capable of serving our customer base and anticipating new trends and technologies in the industry. The development of this infrastructure requires both organic (planning and infrastructure development projects for the existing network) and inorganic (acquisitions) investments. As part of our strategy to focus our investments in infrastructure, we acquired Intelig in December 2009 (in page to establish our own fiber optic network and develop automation projects and acquired the company formerly known as AES Atimus (later TIM Fiber and now TIM Celular) in 2011 to strengthen and expand our fiber optic network.

In 2016, we carried out this strategy through ongoing investments in projects that will continue to differentiate and strengthen our network, such as the construction of new fiber optic networks in the north and northeast of Brazil. We have expanded our Mobile BroadBand, or MBB, project, which was launched in 2013, to 20 clusters, totaling 268 cities to be covered during 2016 and 2017, providing improved data transmission for mobile broadband users through an expanded high-speed fiber optic network and new functionalities in the core and access networks. The cluster concept expands the targeted zones to metropolitan areas of cities that were included in the MBB project in 2015, aiming to provide high quality experience in broadband mobility. The cluster perimeter includes the state capitals and their metropolitan areas, conurbation cities, major coastal cities and main primary access roads. Our commitment to providing improved, high-quality services is further reflected by our R$4.5 billion in investments in 2016, roughly 85% of which were in infrastructure.

Besides improving our core infrastructure, TIM has been rolling out an aggressive plan for 4G coverage, which has placed TIM as the undisputed leader in 4G coverage in Brazil, achieving more than 1,255 cities with such technology in 2016, considerably ahead of its competitors. This positions TIM as having the best coverage and the best mobile broadband technology, creating the possibility of an improved market position, particularly for high end customers. Moreover, TIM has also been investing in 3G technology, achieving nearly 2,800 cities covered in 2016.

Expansion into new businesses and continued strength in recently expanded sectors. TIM Live offers high quality ultra-broadband, with high-speed data connection varying from 35 Mbps until 1 gigabit (1,000 Mbps) downstream and 500 Mbps upstream speeds, operating within Rio de Janeiro, Duque de Caxias, Nova Iguaçu, São João do Meriti and São Paulo.

In 2016, we had a base of 305.8 thousand clients, covering 2.9 million addressable households in 176 neighborhoods in the cities mentioned above. We will continue expanding our coverage in Rio de Janeiro and São Paulo states throughout 2017. Our success with TIM Live has resulted from a strategy of transparent communication and a commitment to deliver the services that the consumer actually purchased, which differentiates us from local market practice. As a consequence, TIM Live continues to lead Netflix’s ranking of best broadband services in Brazil (in terms of Netflix performance on particular internet service providers), has the most satisfied users of the market according to research published by CVA Solutions, and has been listed as the best broadband service by Estado de São Paulo, one of Brazil’s leading newspapers.

Regional Overview

We offer GSM telecommunications services with a national reach to 95% of the urban population, which is one of the most extensive GSM coverage areas in Brazil, with a presence in 3,460 municipalities. We have 2G coverage

available to approximately 95% of the urban population, 3G coverage available to almost 89% of the urban population and 4G coverage available to approximately 74% of the urban population of Brazil.

The map below shows our national coverage areas, considering 2G, 3G and 4G coverage:

The following table shows combined information regarding the Brazilian mobile telecommunications market and our customer base, coverage and related matters, at the dates indicated.

Mobile Service Rates and Plans

In Brazil, as in most of Latin America, mobile telecommunications service is offered on a “calling party pays” basis, under which the customer generally pays only for outgoing calls. Additional charges apply when a customer receives or places calls while outside of the customer’s “registration area,” which are the areas into which we divide our coverage areas.

Under our current authorizations, we are allowed to set prices for our service plans, provided that such amounts do not exceed a specified inflation adjusted cap. Anatel must ratify our basic and other service plans, but its focus is on compliance with the relevant regulatory rules rather than the prices charged. See “—Regulation of the Brazilian Telecommunications Industry—Rate Regulation.” We charge different rates for our services, which vary according to the customer’s service plan. Per minute prices decrease as customers commit to purchasing more minutes per month. Prices can also vary depending on the type of call (for example, calls from other operators on fixed lines or calls outside of the network for mobile calls) or the location of the parties on a call.

Anatel regulations require mobile telecommunications providers to offer service to all individuals regardless of income level. We recommend service plans that are suitable to each potential customer’s needs and credit history, such as our prepaid service plans described below. If a customer fails to make timely payment, services can be interrupted. See “—Billing and Collection.”

We offer mobile services under a variety of rate plans to meet the needs of different customer classification, including our corporate customers. The rate plans are either postpaid, where the customer is billed monthly for the previous month, or prepaid, where the customer pays in advance for a specified volume of use over a specified period.

Our postpaid plans include the following charges:

Certain plans include the cost of national roaming and long distance in the price per minute so that all calls within Brazil cost the same amount per minute. Some postpaid plans are designed for high and moderate usage subscribers, who are typically willing to pay higher monthly fees in exchange for minutes included in the monthly service charge while other plans are designed to satisfy the more limited needs of low-usage postpaid subscribers. We also offer customized services to our corporate clients, which may include local call rates between employees wherever located in Brazil.

We offer a single prepaid plan with promotional offerings, which does not include monthly charges. Prepaid customers can purchase a prepaid credits plan that may be used for calls, data and additional services, based on the specific customer’s needs. We have agreements with large national retail stores chains, in addition to partnerships with regional retail stores chains, to offer online recharge. Customers can also recharge straight from their mobile handsets using credit cards such as Visa, MasterCard or Diners Club.

Consumer Plans

In 2015, TIM launched a new portfolio to provide a complete mobile communications solution, which combines voice, data and SMS. We believe the new portfolio will reinforce the strength of our innovative marketing positioning, while maintain our customer base revenues.

Within the consumer business, our main plans include:

Prepaid Plans

balance available. A monthly data package offerings was also launched with OTT services (TIMmusic by Deezer)

As a complementary offering to our prepaid plans, we also established new terms of usage of data package for our daily offers, wherein data is not interrupted but speed is reduced.

Post-Paid Plans

Controle Plans

Once customers of control plans have reached the limit of their data plan, the data transmission is no longer available and the user has two options: (i) to repurchase a data package or (ii) to wait for the next data period to commence, which varies by plan, at which point his data availability and usage limit are renewed in full. Postpaid customers can also purchase a data package to navigate in full speed but the usage is not blocked when he reaches the limit of his data package.

Corporate Plans

In 2016, we continued to improve our positioning towards the large companies as potential clients, offering a variety of corporate solutions for mobile or fixed services (both voice and data), as well as value-added services and mobile-to-mobile services. The approach for these top clients are driven by customized solutions and a premium customer service focus.

In line with the strategy started at the end of 2015, we have kept business deals attractive to our target customers, such as the “Small and Medium Enterprises” ( Pequenas e Médias Empresas ), or PME, customer group. We guaranteed “Minutes and lots of internet, for all providers and anywhere in Brazil.” In line with this strategy, we focused on the main benefits of offers such as: “TIM Empresa Tarifa Flat 1000 minutes + 3GB.” This plan includes 1,000 minute package to call all providers, local and/or national long distance, plus 3GB of internet data, 800 SMS and unlimited local Calls to the enterprise’s TIM numbers for only $ 99.90 monthly. There were also 6GB and 10GB options, respectively at R$ 129.90 and R$ 144.90, monthly. TIM Empresa Tarifa Flat plans represent a major innovation in the Brazilian market because it significantly reduced the bill shock risk to our clients

We have also continued to offer Liberty Empresa, which provides unlimited in-network calls to TIM local and long-distance numbers within Brazil, unlimited talk to any radio user via through the Liberty Empresa Rádios

option, as well as various package options for voice minutes for calls to other operators. This plan has a greater importance in areas where TIM has a high market share due to the “community effect.” Therefore, we continuing promoting offers in connection with the Liberty Empresa plan, such as “ Fale Mais Navegue Mais ”, encouraging our potential customers to customize their mobile plans by offering 12 combinations of local minutes plus data, for competitive prices. Starting at R$69,90 monthly, clients pick Liberty Empresa 200 or 400 local minute package to call other providers (unlimited calls to TIM numbers anywhere in Brazil are included) and choose from 1GB, 3GB, 6GB or 10GB internet. We have also maintained the entry offerings of our portfolio: “ Liberty zero ” without an unlimited voice package and “ Liberty 50 ” to remain competitive.

To meet the market demand, we had major launches in 2016:

A main focus during recent years has been to improve the plans based upon specific needs demonstrated to us. In 2014, for example, we introduced loyalty clauses into new 24-month contracts, with the goal of strengthening customer loyalty. These loyalty-based contracts are available with all renewed corporate customer plans.

The following presents a brief summary of certain key elements of our Internet corporate offerings:

We also provide flexibility for our Senior Account Channel, allowing negotiations with a high level of discounts.

Value-Added Services

We are constantly seeking to increase value to our customers through innovative offers and products, and 2016 was no exception. We offer, directly or through agreements entered into with third parties, value-added services, including short message services or text messaging, multimedia messaging services, push-mail, video call, WAP downloads, web browsing, business data solutions, mobile-learning services with TIM “Educação”, wellness services with TIM “Bem Estar”, songs with TIM Music, ringbacktones with TIM “Som de Chamada”, applications with TIM Apps Club, voicemail, conference calling, chats and other content to our postpaid and prepaid customers. Under various postpaid mobile plans some value-added services are included in the monthly subscription charge at a specified level of usage.

The following is a brief summary of our principal value-added service offerings to consumers and corporate customer groups:

(fitness tips with Solange Frazão), “TIM Receitas” (food recipes tips with Edu Guedes) and “TIM Estilo” (style tips with Gloria Kallil).

We offer data services which support our value-added services across every technology currently available on our network, starting from GPRS/EDGE capability using the GSM network, followed by 3G/ High Speed Packet Access, or HSPA capability, using 3G infrastructure, and, since 2013, also through the 4G layer, which is fully dedicated to data services. Also, in 2013, we launched the MBB program, which combines high capacity backhaul with advanced features of HSPA, such as HSPA+ and Dual Carrier, reaching up to 42Mbps per cell. By December 2016, our 4G data transmission technology, Long Term Evolution, or LTE, at the 2.5GHz and 1800MHz spectrum, was available in 1,255 cities (representing 74% of urban population). LTE allows the user to access the Internet at very high data speeds. The 2.5GHz LTE network layer is built under an innovative RAN sharing deal with another two Brazilian mobile operators, which establishes that each operator is responsible to cover part of the Brazil with LTE network (see “Item 4. Information on the Company—B. Business Overview—Site-Sharing and Other Agreements”). This agreement brings significant savings in LTE construction and operation for both companies while keeping subscribers and services completely separate.

Some changes in our business model for value-added services, such as new pricing and implementation strategies, were instrumental in increasing our profits and those of our partners. Value-added services represented 35.0% of our mobile services gross revenues in 2016, 35.0% of our mobile services gross revenues in 2015, 28.0% of our mobile services gross revenues in 2014, 22.3% of our mobile services gross revenues in 2013. We continued to experience growth in usage of these services in 2016, as illustrated by revenue growth from value-added services of 24.0% compared to 2015.

Financial and Other Services

Financial Services

In May 2013, the Government enacted Provisional Measure No. 615, which was passed as Law No. 12,865 in October 2013, which provides that telecommunications operators may offer mobile payment services.

From 2013, we have strengthened our activities in the financial service field through the development of partnerships and products for mobile banking, insurance, mobile payment, and “mobile money”, all of which strengthen our core business and provide additional sources of revenue generation. We have entered into financial services pilot projects in partnership with various financial institutions, including testing of Near Field Communication, or NFC, technologies in partnership with Mastercard, RedeCard and Gemalto and “mobile money” payments via mobile phones with Caixa Econômica Federal and MasterCard.

Mobile Insurance

At the beginning of 2012, we launched TIM Insurance for Mobile Theft, our insurance product in partnership with Assurant Solutions. At first we launched the theft insurance exclusively through our virtual store, and were the first and still the only operator to offer mobile theft insurance through an online channel. We now also offer mobile theft insurance in our own stores. The product allows our customers to protect themselves against the costs of mobile handset theft and/or accidental damages (physical or water damage) for monthly prices ranging from R$2.99 to R$54.99, depending on the contracted coverage (theft only, damage only, or complete) and price of the device.

Financial Protection Insurance – “Protected Invoice”

Our “Protected Invoice” service is a financial protection insurance for postpaid plans that guarantees payment of up to 3 of the customer’s TIM bills, each up to R$100.00, in the event of involuntary unemployment or full or temporary physical disability. The insurance, which costs R$6.50 per month, is offered to our postpaid customer base through Smart Message channel, which provides a convenient and easy way to subscribe.

New Insurances – Personal and Residential Markets

Our insurance portfolio also includes the personal and residential accidents markets as a means of capitalizing on additional lines of revenue. We offer two types of personal accident insurance plans: Personal Accident Insurance with Help Desk Assistance and Personal Accident Insurance with Concierge Assistance . Both insurance plans guarantee the payment of R$5,000 in compensation to the beneficiaries in a result of accidental death. Additionally, the plans also offer assistance to plan customers when needed, which adds value for the customer because they can make use of the product routinely, as opposed to only in the rare instance of accidental death.

Personal Accident Insurance with Help Desk offers technical support assistance over the phone, Internet, chat and remote access (Virtual Tour) for hardware problems (including PCS, laptops, netbooks, tablets and smartphones). The insurance costs R$8.90 per month and is offered to our postpaid customer base through Smart Message, SMS and IVR channels.

Personal Accident Insurance with Concierge offers travel assistance when traveling, for financial and health purposes, emergencies and daily activities. The insurance costs R$6.90 per month and is offered to our postpaid customer base through Smart Message, SMS and IVR channels.

We also offer two types of residential accident insurance plans: “ Casa Protegida ” and “C asa Protegida Completo. ” The first offers cover fire, explosion, lightning and aircraft. It costs R$9.90 per month and is offered to our prepaid customer base. The second offers the same coverage but also includes residential assistance (such as electrician services, leakage tests, and other residential assistance) that can be used at any time. This insurance is offered to the postpaid customer base and has a cost of R$16.90 per month. Both products are offered to our customer base through Smart Message, SMS and IVR channels.

Micro Rewards Platform - Telecom Bonus

As another source of new revenue, TIM partnered in 2014 with MinuTrade to participate in “Micro Rewards” platform. The Micro Rewards platform integrates TIM’s systems with many different partner companies in order to provide to our common customers certain bonuses or credits towards TIM purchases, or Telecom Bonuses. For example, in the Brazilian bank market is common to charge customers a monthly fee for account maintenance. In exchange for the monthly fee payment, participating banks reward the customers with a Telecom Bonus which can be used for in-network calls, long-distance calls, SMS and daily data packages. Our new revenue comes from selling the wholesale value of the Telecom Bonus to the banks and other partner companies. MinuTrade receives a commission for use of the “Micro Rewards” platform.

TIM Itaucard

The TIM Itaucard is our first payment product, a co-branded credit card in partnership with Itaú, which brings us an unprecedented relationship program based on Itaú’s benefits platform. During 2016, our target was penetrate the use of offer to bring to our clients convenience in payment solution. TIM Itaucard allows the Company to develop a deeper, more loyal client relationship and provides increased revenues.

Liberty Controle Express

In November 2012, with the idea of creating a postpaid plan that could be sold without the need for a credit assessment, a new Controle plan paid exclusively with a credit card was launched. The plan was launched with three distinct values of R$18.00 for Rio Grande do Sul, and R$28.00 and R$48.00 for the rest of the country. The plan also can be acquired by self-service through our website, in addition to our owned stores.

Mobile Money

With a focus on developing a product for non-banking prepaid clients, we entered into a partnership with Caixa Econômica Federal and MasterCard to develop new payments options via mobile, in the “mobile money” format, a virtual version of a prepaid bank card associated with a mobile number. With this “mobile money” service, which is named TIM Multibank CAIXA, users can use their TIM mobile devices to pay their bills and send and receive money. With the growth in popularity of this service, TIM will strongly contribute to the financial enfranchisement of millions of Brazilians, given that 40% of Brazilian population currently have no bank account.

(1)       The adjustments are illustrated in Note 2(e) of our consolidated financial statements and described under “PRESENTATION OF INFORMATION—Presentation of Financial Information”

Revenue from mobile telephone services includes revenue from:

Monthly Subscription Charges

We receive a monthly subscription fee under our postpaid mobile plans, which varies based on the usage limits under the relevant plan.

Network Usage Charges

We divide our coverage areas into certain areas defined as “home registration areas.” Calls within the same home registration area are considered local calls. Each of our customers is registered as a user of one of our home registration areas.

As determined by Anatel, our usage rate categories for local mobile services on a prepaid or postpaid basis are as follows:

Usage charges are for minutes in excess of those included as part of the monthly subscription charge under the relevant postpaid plan.

Roaming Fees

We receive revenue pursuant to roaming agreements we have entered into with other mobile telecommunications service providers. When a call is made from within our coverage area by a client of another mobile service provider, that service provider is charged a roaming fee for the service used, be it voice, text messaging or data, at our applicable rates. Similarly, when one of our clients makes a mobile call when that customer is outside of our coverage area using the network of another service provider, we must pay the charges associated with that call to the mobile service provider in whose coverage area the call originates at the applicable rate of such mobile service provider.

Automatic national roaming permits our customers to use their mobile telephones on the networks of other mobile service providers while traveling or “roaming” in the limited areas of Brazil not covered by our network, complementing our current mobile coverage. Similarly, we provide mobile telecommunications service to customers of other mobile service providers when those customers place or receive calls while in our network. Mobile service providers which are party to roaming agreements must provide service to roaming customers on the same basis that such providers provide service to their own clients. All such providers carry out a monthly reconciliation of roaming charges. Our roaming agreements have a one-year term and automatically renew for additional one-year terms.

In conjunction with the approval of the PGMC, Anatel classified the four main national PCS providers as having significant market power in the national roaming market. As a result of such classification, TIM Celular, Claro, Vivo and Oi are required to submit reference offers at least every six months for Anatel’s approval and must offer roaming services to other mobile providers without significant market power at the approved rates. As mentioned above, PGMC is currently under review by Anatel and as a result of such process the agency may eliminate or create new relevant markets, as well as modify our classification as having significant market in the applicable relevant markets.

Interconnection Charges

Interconnection charges represent a significant part of our revenues. We receive interconnection revenues in connection with any call originating from another service provider’s network, mobile or fixed line, which is received by any mobile customer, of ours or of another provider’s, while using our network. We charge the service provider from whose network the call originates an interconnection fee for every minute our network is used in connection with the call.

We have entered into interconnection agreements with all the telecommunications service providers operating in Brazil, which include provisions specifying the number of interconnection points, the method by which signals must be received and transmitted, and the costs and fees for interconnection services. Nevertheless, even in the absence of approval by Anatel, the parties to these interconnection agreements are obligated to offer interconnection services to each other. See “—Regulation of the Brazilian Telecommunications Industry—Interconnection Regulation.” The interconnection fees we were permitted to charge other mobile telecommunications providers, and which other mobile telecommunications providers charge us, have in the past frequently been adjusted by inflation.

On July 4, 2014, Anatel approved, by means of Resolution No. 639/2014, a rule for the definition of maximum reference rates for entities with significant market power, based on a cost model, for VU-M, TU-RL, and EILD. Pursuant to Anatel’s rule, reference rates will decline based on a glide path until the cost modeling known as BU-LRIC is applied (2019, for VU-M and TU-RL; and 2020, for EILD). On July 7, 2014, Anatel published the corresponding Acts No. 6,210/2014, 6,211/2014 and 6,212/2014, which determined the specific reference rates effective as of February 2016. With the adoption of the cost modeling methods, VU-M declined, and is expected to

keep declining, approximately, as follows: Region I: 40-45% in the first year, 47% in the subsequent years; Region II – 35% in the first year, 48% in the subsequent years; and Region III: 24-30% in the first year, 39% in the subsequent years.

As previously noted, Anatel classified us as belonging to economic groups with significant market power in the mobile network termination market to which these cost models apply, which is the primary impact of our classification as a significant market power. Because the significant majority of our interconnection charges are to the other leading telecommunications operators in Brazil, which are also classified as having significant market power, we are also entitled to remunerate these providers at the reference rates approved by Anatel.

In addition to the VU-M reduction, Anatel established a Bill & Keep, or B&K, rule between significant market power and non-significant market power PCSs. From January 2013 until February 2015, the B&K was 80%/20% as established by Resolution 600. On February 12, 2015, Anatel approved, by means of Resolution No. 649/2015, the following new B&K percentages, amending the percentages established by Resolution 600: 75%/25%, from 2015 until 2016; 65%/35%, from 2016 until 2017; 55%/45%, from 2017 until 2018; and 50%/50%, from 2018 until 2019, which was object of a judicial suit (on going), in order to suspend its effects. After 2019, the VU-M will be charged by the significant market power whenever their network is used to originate or to finish a call. In July 2015, we filed a lawsuit seeking to annul Resolution No. 649/2015 and maintain the percentages originally established by Resolution 600, which currently remains ongoing.

As mentioned above, PGMC is currently under review by Anatel and as a result of such process, the agency may eliminate or create new relevant markets, as well as modify our classification as having significant market in the applicable relevant markets.

We are currently reevaluating our strategy due to new commercial conditions. In any case, it is likely that we will remain subject to some form of systematic rate regulation as a result of our classification as having significant market power.

Long Distance

Telecommunications customers in Brazil are able to select long distance carriers on a per-call basis under the carrier selection, or the CSP program, introduced in July 2003, by punching in a two digit code prior to dialing long distance. This regulation also increased the size of home registration areas, calls within which are local calls and, as a result, reduced the number of home registration areas.

For mobile customers, we offer long distance services throughout Brazil through our wholly owned subsidiary TIM Celular. This service allows our mobile customers the option of continuing to use our service for long distance calls, which we believe strengthens our respective relationship and loyalty, and enhances the perception of our brand as a comprehensive mobile telecommunications service. Mobile customers of other service providers can also choose to use our long distance service.

Under this structure, a customer is charged the VC1 or VC rates directly by us only for calls made by and completed to a number registered within that customer’s home registration area. Long distance calls, however, are charged to a customer by the chosen long distance carrier. Other long distance carriers, in turn, pay us a VU-M fee for any use of our network for a long distance call.

As determined by Anatel, our long distance usage rate categories are as follows:

In 2012, the unification of the long-distance licenses 23 and 41 was concluded. The 23 customer base migrated to 41, thus making possible a single branded long distance operator for both mobile and fixed. Also in 2012, the Liberty Passport offer for voice and data was launched, which offers customers the innovative concept of unlimited use of Internet and voice services on five continents, paying a fixed value per day of use of each service (voice or data), simplifying the adhesion to our international roaming service, with extremely attractive values.

Sales of Mobile Handsets

We offer a diverse portfolio of 25 to 30 handset models from several manufacturers, including Apple, Samsung, LG, Alcatel, Positivo and Motorola, for sale through our dealer network, which includes our own stores, exclusive franchises and authorized dealers. We are focused on offering an array of handsets, including essential and smartphones such as the iPhone and Samsung Galaxy devices with enhanced functionality for value-added services, mainly 4G equipment that provides Dual SIM, NFC, Wi-Fi, Internet, Bluetooth and camera functionalities, while practicing a policy of increasing 4G smartphone penetration, focusing on high quality 4G smartphones to enhance the customer experience. Our mobile handsets can be used in conjunction with either our prepaid or postpaid service plans. In 2017, TIM increased its focus on the postpaid segment, offering these customers subsidized high-level 4G smartphones. As the average sales price is growing in the Brazilian market, TIM introduced “TIM Next”, a program intended to make the premium devices more affordable to the end user by giving them the option to re-sell their own devices for an amount that can be discounted from the cost of the new device. Currently, we believe that supplies of mobile handsets are sufficient to satisfy demand, but also plan to expand our mobile handset portfolio to new devices focused on the connectivity experience, such as routers and other web devices.

Co-Billing Services

Co-billing occurs when we bill our customers on behalf of another long distance service provider for services rendered to our customer by that carrier. Beginning July 2003, we started providing co-billing services to other telecommunication service providers operating in Brazil. The rates of such services are being negotiated under the supervision of Anatel.

Sales and Marketing

Our recent sales and marketing strategy has been characterized by:

Our Network

Our wireless networks use 2G, 3G and 4G technologies and cover approximately 95% of the urban Brazilian population based on Anatel’s coverage criteria. In order to move toward 4G services, in October 2012, we acquired

additional bandwidth in the 2,530-2,540 MHz and 2,650-2,660 MHz sub-bands, with national coverage, and the 450 MHz band in Espírito Santo, Paraná, Rio de Janeiro and Santa Catarina states.

As part of regulatory commitments, we started covering six cities by April 2013 with 4G/LTE. As of December 2013, we had provided 4G coverage to approximately 27% of the urban population of Brazil, including 19 capital cities. By the end of 2015, we were providing 4G/LTE coverage in 411 cities, making us the national leader in provision of 4G/LTE by number of cities covered, considering implementation in both the 2.5GHz and 1800MHz layers. These cities represent 59% of total Brazilian urban population.

Between 2007 and 2014, we acquired new RF authorizations used for 3G and 4G mobile telephone services at the 2100 MHz, 2500 MHz and 700 MHz bands. In September 2014, we invested approximately R$2.85 billion to acquire bandwidth in the 700 MHz range, aligned with our strategy of expanding our broadband and 4G service across Brazil. We began providing our services in the 700MHz range in 2016 (Rio Verde, in the state of Goiás and Fernando de Noronha, and in the state of Pernambuco), and will expand such services, depending on the progression of spectrum clean-up required of the winning bidders for the spectrum (see “—Regulation of the Brazilian Telecommunications Industry—Frequencies and Spectrum Background”). In December 2015, Anatel auctioned left over radio frequencies in the 1,800 MHz, 1,900 MHz and 2,500 MHz bands. We submitted bids for the left over lots of the 2,500 MHz band, which had originally been auctioned in 2012. This particular band spectrum provides for 4G mobile services. We were classified as the first ranked bidder in the lots for Recife, in the state of Pernambuco (Region AR 81), and Curitiba, in the state of Paraná (Region AR 41), based on our bids which totaled R$57.5 million. The corresponding authorization terms were signed in July, 2016. See “Item 4. Information on the Company—B. Business Overview—Regulation of the Brazilian Telecommunications Industry—Authorizations and Concessions.”

RF authorizations are generally valid for a period of 15 years and renewable for 15 more years (with exceptions such as the LTE “P” band, for which the authorization period is less than 15 years), and our current authorizations will start expiring in April 2023, starting with our 3G RF authorization.

These investments allowed us to reach, by the end of 2016, the milestone of 1,255 cities with 4G coverage, or 74% of the country’s urban population. We are thus the undisputed leader in 4G coverage in Brazil among mobile telecommunications providers, both by number of cities served and percentage of population covered. A major portion of the Company’s capital expenditures between 2017 and 2019 will be dedicated to further investment in 4G networks.

We consider the purchase of any frequency made available by Anatel for the provision of mobile services as a priority, since having available frequency is core to our business. In 2016, we made R$4.5 billion, or 84.5% of our capital expenditures (excluding licenses) in investments to improve our network infrastructure, primarily in 4G and 3G deployment, expansion and capacity enhancement of optical transport networks, quality maintenance and enabling of fiber-to-the-site and MBB programs.

Our wireless network has both centralized and distributed functions, and mainly includes transmission equipment, consisting primarily of 12,902 BTS in our GSM network, 14,459 NodeBs (which provide connection between mobile phones and the network) for the 3G layer and 11,645 eNodeBs for 4G network as of December 2016, hardware equipment and software installation and upgrades. The network is connected primarily by IP radio links and/or optical fiber transmission systems distributed nationwide. Only a few radiobase stations remain connected by leased lines. Nokia Siemens Networks, Ericsson and Huawei are our main suppliers for GSM and 3G equipment.

In 2013, we launched MBB, initially in 39 cities, which has improved data transmission for mobile broadband users through an expanded high-speed fiber optic network and new functionalities in the network core. Our MBB service now reaches 194 cities. By the end of 2015, we delivered important infrastructure projects for the benefit of MBB users, including improvements in data transmission which in turn improve MBB performance, high-speed optical fibers, radio access upgrades and implementation of new functionalities in the network core. We will continue investing in high performance MBB.

Another priority is developing our national network. In December 2016 as compared with the December 2015, we increased by 9.3% the quantity of sites connected by optical fiber, contributing to a 47.1% increase in data carried on our network during 2015. The results are consistent with Anatel’s network quality requirements, and with

TIM retaining its solid performance in 2016. Since national coverage and quality of service has improved substantially over the last few years, Anatel has shifted its focus in 2016. Anatel is now concentrating its efforts on smaller geographic areas, particularly in those areas where service is till considered poor. Anatel’s prior focus was on service quality from a broader state-oriented perspective rather than this local perspective .

In accordance with Anatel’s directions more toward monitoring and evaluation of quality in more specific geographic areas, we will begin to disclose our quality indicators based on the number of cities – rather than states – within Anatel’s targets. Such indicators are expected to be more accurate and better reflect the customer’s experience.

Considering the official data released by Anatel through August 2016 and internal estimates from September and October 2016, TIM demonstrated solid improvements in Anatel’s voice quality metrics. TIM has also been able to sustain its positive results in data indicators (3G/4G), particularly in 4G, demonstrating that we are the national leader in coverage by number of cities.

Our switching exchanges and intelligent network platforms enable us to offer flexible, high quality voice service at extremely competitive prices. Our satellite network covers distant areas of the country and is being expanded and renewed to provide high capacity private service to other carriers and corporate customers. We also acquired capacity from major submarine cable systems such as AmericasII, Globenet and Atlantis2. As mentioned above, we have initiated a multi-year plan to expand the network with a goal of expanding coverage to the most isolated areas of Brazil.

Finally, the AES Atimus Acquisition and consequent creation of TIM Fiber (now TIM Celular) has improved our optical fiber (or fiber optic) network presence in the metropolitan regions of Rio de Janeiro and São Paulo. Our optical fiber network has a unique capacity to offer high quality ultra-broadband service, available through our TIM Live service.

As of December 31, 2016, our optical fiber infrastructure is highlighted by the following characteristics:

Site-Sharing and Other Agreements

With the objective of avoiding unnecessary duplication of networks and infrastructures, Anatel permits telecommunications service providers to use other providers’ networks as secondary support in providing telecommunications services. Therefore, we have allowed other telecommunications service providers to use our infrastructure, and we have used others’ infrastructure, pursuant to site-sharing agreements we have entered into with such providers.

Additionally, other sharing plans are being agreed among mobile operators, such as joint construction of long distance lines, backhaul sharing, and even studies for sharing radio access frequencies have been made, with focus on lowering costs and increasing the penetration of the wireless services in Brazil.

In November 2012, we executed a memorandum of understanding, or MoU, aimed at negotiating the joint use of LTE network (4G technology) under a RAN sharing model pursuant to which Oi will invest in (and provide TIM with access to) infrastructure in certain cities, while TIM Celular will invest in (and provide Oi with access to) infrastructure in other cities. On March 28, 2013, CADE approved the MoU without any restrictions. On April 18, 2013, Anatel also approved the MoU. In late 2013, TIM Celular and Oi negotiated the extension of the MoU to additional cities, including adding training centers, and the revision of certain obligations of each party under the MoU. CADE fully approved the inclusion of new territories and governance structure on November 19, 2013, which completed all regulatory steps necessary for approval.

In April 2014, TIM Celular and Oi filed with CADE and Anatel an MoU aimed at negotiating the joint construction, implementation and reciprocal assignment of elements of their respective network infrastructure for GSM (2G) and UMTS (3G). On April 25, 2014, during a meeting with TIM Celular and Oi, Anatel requested additional information, including the final draft of the agreement to be executed by the parties. On May 6, 2014, CADE requested additional information about the transaction. On December 30, 2014, TIM and Oi provided additional information and clarification before CADE and Anatel, as requested by the respective authorities. On January 29, 2015, CADE approved the transaction without restrictions and on March 16, 2015, Anatel approved the transaction without restrictions.

In June 2015, we executed an MoU aimed at negotiating the joint use of LTE network (4G technology) under a RAN sharing model (MOCN) pursuant to which Vivo, Oi and TIM will invest proportionally (2 Vivo, 1 Oi and 1 TIM) in sites in certain cities based on their coverage obligations. On December 14, 2015, CADE approved the operation without any restrictions. On December 21, 2015, Anatel also approved the operation based upon MOCN spectrum sharing among only the 3 operators. At the beginning of 2016, however, Anatel required that the parties include new clauses in the contract permitting a new additional operator be added. This contract covers 32 cities in 2015, 150 cities in 2016 and will cover 252 cities in 2017.

In October 2015, TIM Celular, Vivo, Claro and Oi filed with CADE a Term of Commitment aimed at negotiating the joint hiring of one or more companies to carry out the construction, installation and assignment of infrastructure in indoor sites in several locations in Brazil. On December 21, 2015, CADE approved the transaction without restrictions.

In November 2015, TIM Celular, Intelig and Vivo filed with CADE and Anatel a Contract aimed at negotiating the joint use of UMTS network (3G technology) under a RAN sharing model (MOCN) in certain cities based on their rural coverage obligations. On December 16, 2015, CADE approved the operation without any restrictions and on August 19, 2016, Anatel approved the transaction without restrictions.

Customer Service

In order to serve our customer base, over 63 million customers, we aligned the insourced/outsourced ratio of our internally managed customer service operations to our outsourced customer service operation to the best practices of Brazilian telecommunications business. We operate through 13 customer care centers, two of our own and eleven outsourced, comprising around 16,300 customer service representatives (of which 2,800 are the purpose of offering dedicated to provide the best options in terms of offers and services to our multi-customer base). Our high value customer service and core processes are maintained within our internal customer care centers.

In 2016, TIM defined its new strategy plans based on four pillars, one of which is “Customer Experience”, with the challenge to offer a better, end-to-end, customer centric model, in an omni channel approach, tuned to global market trends. Since then, we have created initiatives to bring about transformations in culture and processes, because – more than just a concept – Customer Experience is a practice in which the goal is to place the customer at the very heart of organizational efforts.

The first step towards our goal was to assess our customer journeys and customer relationship growth, and create a “Customer Experience” team within the TIM organization to focus on the “Customer Experience”. The team is divided in three fundamental projects: design, execution and monitoring.

The goal of the design team is to develop a customer-centric approach to core processes and competencies, through the creation and revision of policies, normative documents and indicators that allow customer necessities to be in line with the business model evolution.

The execution front is responsible for leading multidisciplinary teams that act in coordination with TIM’s business units to improve customer experience by preventing gaps in launching new products and offers and to solve problems already detected by customer research. The focus is to transform known problems into action plans and to identify new ones through established key performance indicators, or KPIs.

The monitoring team consolidates KPIs that reflect customer problems, necessities, and perceptions. The goal is to direct the analytics efforts towards a more predictive implementation, allowing decision makers to act before problems have an impact in customer satisfaction.

Moreover, we have contributed maximizing customer satisfaction through continuous improvements in our processes and systems. In order to improve our customer experience through digital channels and to provide greater convenience and autonomy, we have developed new self-service applications for iOS and Android, letting our customers track their in real time usage, costs and payment as well as manage their services and accounts. We maintained our efforts in workforce training, updating procedures focused on meeting customer demands, and developing programs to encourage attendance.

We further improved our electronic customer service menu (URA) performance by offering new customer-oriented options and introducing natural language interactive voice response.

Our portal *144# uses Unstructured Supplementary Service Data, or USSD, a technology to allow the activation of services from the mobile device itself.

We completed the migration of pre and postpaid back office services (front end was implemented in 2015) to the Siebel customer relationship management, or CRM, system, and will continue the migration to the systems replacement for corporate customers as well.

We also implemented a new approach to customer service infrastructure monitoring by introducing a new business support system performance indicator and service level by business process in order to monitor and guarantee the designed Customer Experience.

Billing and Collection

Our company-wide, integrated billing and collection systems are provided by a third-party vendor. These systems have four main functions:

These billing systems give us significant flexibility in developing service plans and billing options.

Certain aspects of billing customers in Brazil are regulated by Anatel. For mobile and fixed telephones, currently if a customer’s payment is more than 15 days overdue, we can suspend the customer’s ability to make outgoing calls if preceded by a notification. If the payment is 45 days overdue, we can suspend the customer’s ability to receive incoming calls, also if preceded by a notification. For residential broadband, currently if a customer’s payment is more than 15 days overdue, we can reduce the speed of the customer’s broadband access and if the payment is 45 days overdue, we can suspend the customer’s broadband access. After 90 days from the customer’s payment due date, we generally discontinue service entirely, with a notification to the customer. Discontinuation of service is sometimes delayed, however, between 120 and 180 days after the due date for valued customers. The rules of suspension and discontinuation of fixed and residential broadband service are the same as those applied for the mobile service.

In March 2014, Anatel approved a single regulation for the telecommunications sector, with general rules for customer service, billing, and service offers, which are applicable to fixed, mobile, broadband and cable TV customers.

In order to avoid delinquency and discontinuation of service, however, we have invested in CRM models to identify customers with higher propensity to early delinquency, or when a postpaid customer does not pay the first or second invoice, and also reinforced credit history checks for our customers prior to service activation. As a result, our bad debt remained flat throughout 2016. Our “ Plano Express ” has also proved to be an important tool to prevent early delinquency, since the payments are made by credit card.

Pursuant to Anatel regulations, we and other telephone service providers periodically reconcile the interconnection and roaming charges owed among them and settle on a net basis. See “—Interconnection Charges”

and “—Roaming Fees.” Currently, the roaming reconciliation process is largely managed by industry sponsored groups, including Verisign Clearing House for domestic roaming TDMA and MACH for domestic and international GSM, while the interconnection reconciliation process is primarily managed directly by us.

Fraud Detection and Prevention

“Subscription fraud,” which consists of using identification documents of another individual to obtain mobile services, is the main fraud relating to mobile, fixed and long distance service. We are focused on implementing prevention measures in our points of sales to avoid such subscription fraud. Examples of prevention measures include digital authentication for our sales front end system, a strong training program, maintaining a blacklist of offenders to prevent fraud, analysis of the documentation presented and monitoring and identification of point of sale. We also work to detect and prevent fraud by frequently improving and updating our traffic behavior monitoring and subscriber data.

Seasonality

We have experienced a trend of generating a significantly higher number of new clients and handset sales in the fourth quarter of each year as compared to the other three fiscal quarters. A number of factors contribute to this trend, including the increased use of retail distribution in which sales volume increases significantly during the year-end holiday shopping season, the timing of new product and service announcements and introductions, and aggressive marketing and promotions in the fourth quarter of each year.

Sources and Availability of Raw Materials

Our business and results of operations are not significantly affected by the availability and prices of raw materials.

Competition

Mobile Competitors

TIM is the brand name under which we market our mobile telecommunications services. We offer GSM, 3G, and 4G technologies. Currently, our subsidiaries hold mobile licenses for each of the ten wireless areas of Brazil recognized by Anatel, making us a mobile operator in Brazil offering complete nationwide coverage. In two of our ten areas we are the Telebrás legacy provider. See “Item 4. Information on the Company—A. History and Development of the Company—Historical Background.” Our network covers approximately 95% of the country’s population based on Anatel’s coverage criteria.

In addition to TIM, there are three other major participants in the Brazilian mobile market that offer nationwide coverage in all Anatel wireless areas: Vivo, Claro and Oi.

The Brazilian mobile telecommunications industry is highly competitive. Any adverse effects on our results and market share from competitive pressures will depend on a variety of factors that cannot be assessed with precision and that are beyond our control. Among such factors are our competitors’ size, experience, business strategies and capabilities, the prevailing market conditions and the applicable regulations.

Other Competition

We also compete with fixed line telephone service providers. The fixed line incumbent providers in Brazil (Oi, Telefónica and Embratel Participações S.A. (owned by America Movil), as well as Algar Telecom, which is a regional incumbent) and some relevant players (GVT S.A., acquired by Telefónica, and Net Serviços de Comunicação S.A., owned by America Movil) offer packages of services including voice (both fixed line and mobile), broadband and cable TV services in a bundled offer. Fixed line providers are, however, required to offer their services to unaffiliated mobile providers on the same basis they are offered to affiliated mobile providers. Our acquisition of Intelig and AES Atimus broadened our participation in the fixed telecommunication sector.

We also compete in the corporate telephony business with Nextel, which acts both as a digital trunking (based on push-to-talk technology), or SME, provider as well as a regular mobile, or SMP, provider, using 3G and 4G technology in some regions. SME providers operate under rules similar to the rules applicable to mobile

telecommunications service providers, though trunking operators are not permitted to offer their services to individuals. Nextel has provided trunking services in Brazil since 2001 and, since 2013, after winning a bid for UMTS frequencies mobile telecommunications services held by Anatel. Nextel became the fifth mobile telecommunications competitor, but its network deployment was focused mainly in the states of São Paulo and Rio de Janeiro. Later, in 2014, Nextel also entered into a national roaming agreement with Telefónica, whereby Nextel personal mobile service, or SMP, customers can use Telefónica mobile 2G and 3G network in regions where Nextel does not have coverage. In June 2016, CADE approved the RAN sharing agreement between Nextel and Vivo, which only includes 1.9 and 2.1 MHz frequencies (3G). This deal is complementary to the roaming agreement that Nextel had previously arranged with Vivo. Nextel is in a continuous migration process of its customer base from SME to SMP techonology. More than 74% Nextel’s customer base is already in SMP.

On February 9, 2015, Anatel approved, by means of Resolution No. 647/2015, the adjustment of SME licenses into PCS licenses, although charges may apply to operators in connection with such adjustment. In December 2015, Nextel won the auction for the 30 Mhz band in the 1,800 Mhz spectrum in São Paulo with an offer of R$455 million. Nextel will use this spectrum to offer SMP services in a movement of transition from an SME operator to an SMP operator. Nextel has opted to have Anatel adjust its SME licenses into PCS licenses and the process is ongoing.

Our Operational Contractual Obligations

For more information on our material contractual obligations, see “Item 10. Additional Information—C. Material Contracts.”

Interconnection and Other Agreements

We have entered into interconnection agreements with most of the telecommunications service providers operating in Brazil. The terms of our interconnection agreements include provisions specifying the number of interconnection points, the method by which signals must be received and transmitted, and the costs and fees for interconnection services. Due to our migration to PCS, we have adapted our interconnection to conform to the PCS rules and submitted these revised contracts to Anatel. Nevertheless, even in the absence of approval by Anatel, the parties to these interconnection agreements are obligated to offer interconnection services to each other. See “—Interconnection Regulation.” Anatel is currently reviewing the interconnection regulation and as a result of such process we may have to changes our current practices regarding interconnection agreements.

As a means to improve efficiency and reduce costs, we also enter into agreements with the other major Brazilian telecommunications operators related to (i) the cancellation of idle circuits and (ii) interconnection using Session Initiation Protocol (SIP) technology.

Roaming Agreements

We have entered into roaming agreements for automatic roaming services with other mobile operators outside our regions. Automatic roaming allows our customers to use their mobile telephones on the networks of other mobile operators while traveling abroad or out of TIM coverage areas in Brazil. Similarly, we provide mobile services for customers of other mobile operators when those customers place or receive calls while visiting Brazilians cities with TIM coverage. We provide services for the clients visiting our network on the same infra-structure basis provided to our own clients. All of the mobile operators party to these agreements must carry out a monthly reconciliation of roaming charges with its roaming partners.

Through TIM Brasil, we are a member of the Brazilian Association of Telecommunications Resources ( Associação Brasileira de Recursos em Telecomunicações ), or ABRT, a group comprised of all mobile and fixed telecommunications service providers operating in Brazil. This association is in charge of managing telecommunications projects in compliance with Anatel in order to support common interests of its members. Our GSM national and international roaming services are supported by individual agreements with our partners.

National Roaming Agreements

In accordance with Anatel requirements, we have entered into national roaming agreements with other Brazilian operators to guarantee a mobile service (voice and SMS) on Anatel’s list of cities with less 30,000 habitants.

International Roaming Agreements

We have international roaming agreements available in approximately 205 different countries on approximately 450 networks. These agreements include at a minimum voice service, and may be enhanced based on the technology available on the visiting network and can include SMS, multimedia messaging service, or MMS, GPRS, EDGE, 3G and 4G. Our international roaming agreements have steadily expanded in recent years. By the end of 2016, we expanded our data coverage to 153 additional countries, and among them 30 have 4G service.

We were also the first Brazilian mobile operator to launch a user-friendly international roaming plan, charging per day of usage. In 2013, we expanded our coverage to prepaid customers and developed a different option for the Liberty Express plan. In October 2015, the Liberty Passport offering was redesigned to offer increased data to customers in key destinations, with the goal of creating a better overall user experience for our customers in general. Moreover, focusing on a key portion of TIM customers, the offering was made available in the United States at a rate of R$9.90 per day of use. As of December 2016, international roaming is available to customers on our Prepaid, Controle and Liberty plans.

Site-Sharing Agreement

With the objective of avoiding unnecessary duplication of networks and infrastructure, Anatel permits telecommunications service providers to use other providers’ networks as secondary support in providing telecommunications services. Therefore, we have allowed other telecommunications service providers in our region to use our infrastructure, and we have used other providers’ infrastructure, pursuant to site-sharing agreements with such operators.

Co-billing services

Co-billing occurs when we bill one of our customers on behalf of a long distance service provider for services rendered to our customers by that carrier. Beginning in July 2003, we started providing co-billing services to other telecommunication service providers operating in Brazil. The rates of such services are being negotiated under Anatel oversight.

Disclosure Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act

Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 added Section 13(r) to the Exchange Act. Section 13(r) requires an issuer to disclose in its annual or quarterly reports filed with the SEC whether the issuer or any of its affiliates has knowingly engaged in certain activities, transactions or dealings with the Government of Iran, relating to Iran or with designated natural persons or entities involved in terrorism or the proliferation of weapons of mass destruction during the period covered by the annual or quarterly report. Disclosure is required even when the activities were conducted outside the United States by non-U.S. entities and even when such activities were conducted in compliance with applicable law.

In accordance with our Code of Ethics, we seek to comply with all applicable laws. The Code of Ethics is available on our website: www.tim.com.br/ir.

Activities relating to Iran

We are not to our knowledge engaged in any activities, transactions or dealings with the Government of Iran or that relate in any way to Iran.

We are also required to disclose our affiliates’ activities relating to Iran. We have been informed that other members of the Telecom Italia Group have entered into Roaming Agreements and certain agreements (of a de minimis value) for the provision of telecommunication services with Iranian telecommunications operators. The information in this section is based solely on information provided to us by our parent Telecom Italia for purposes of complying with our obligations under Section 13(r) of the Exchange Act.

Telecom Italia informs us that the activities, transactions or dealings each company had in the year ended December 31, 2016 that, to its knowledge, relate in any way to Iran are (1) Roaming Agreements, which allow its mobile customers to use their mobile devices on a network outside of their home network, or Roaming Agreements, (2) international telecommunications services agreements with international carriers, which cover delivery of traffic

to Iran through non-Iranian carriers, or International Carrier Agreements, and (3) other commercial communications agreements of a de minimis value.

Telecom Italia

Telecom Italia informs us that the only activities that Telecom Italia had in the year ended December 31, 2016 that, to its knowledge, relate in any way to Iran are:

Roaming Agreements

The Telecom Italia Group operates one of the largest mobile networks in Italy. Through its foreign subsidiaries, Telecom Italia also has large mobile operations in Brazil (TIM Participações, by means of its subsidiary TIM Celular).

It is pursuant to Roaming Agreements that a mobile customer is able to use his or her mobile phone on a network different from such mobile subscriber’s home network. The following is the definition of roaming that we provide in the glossary of this annual report:

Roaming is a function that enables customers to use their mobile telephone on networks of service providers other than the one with which they signed their initial contract. The roaming service is active when wireless is used in a foreign country (included on a GSM network).

Like all major mobile networks, in response to the competition and customers’ demands, Telecom Italia, TIM Participações and their subsidiaries have entered into Roaming Agreements with many foreign mobile networks, so as to allow their customers to make and receive calls abroad.

Roaming Agreements, including those relating to Iran, are on standard terms and conditions. Entering into Roaming Agreements is an activity carried out in the ordinary course of business by a mobile network operator.

Roaming Agreements are, generally, reciprocal. Pursuant to a Roaming Agreement, our mobile customers may, when in a foreign country covered by the network, or the Foreign Network, of an operator with which we have a Roaming Agreement, make and receive calls on their mobile phone using such operator’s network. Likewise, the Foreign Network’s customers may make and receive calls using our networks when these customers are in Brazil.

The Foreign Network bills us for calls made and received by our roaming customer on their network at the roaming rate agreed upon in the applicable Roaming Agreement. Then, we will bill our end customers according to the specific tariff plan of the subscription agreement they have signed with us. Likewise, we bill the Foreign Network at the roaming rate agreed upon in the applicable Roaming Agreement. The Foreign Network will bill its clients for the calls made and received using our networks according to their specific customer agreements. Roaming Agreements do not, generally, contemplate other fees or disbursements.

Telecom Italia informs us that in 2016, the impact on Telecom Italia Group net profit (loss) arising from such roaming contracts is as follows:

According to information provided to us by Telecom Italia, these revenues and charges are immaterial to their consolidated revenues and operating expenses.

The purpose of such Roaming Agreements is to provide Telecom Italia’s customers with coverage in areas where they do not own networks. In order to remain competitive and maintain such coverage, the Telecom Italia Group intends to continue maintaining these agreements.

International Carrier Agreements

As a rule in the modern telecommunication business, when voice and data traffic from a specific network is placed to or transported through another carrier’s network, or the Host Network, the Host Network receives a fee from the incoming network. Likewise, when voice and data traffic coming from one of our networks is placed with, or transported through, a Host Network, we owe a fee to such Host Network.

Telecom Italia informs us that in 2016, the impact on its net profit (loss) arising from the above-mentioned International Carrier Agreements is as follows:

The purpose of this agreement is to allow exchange of international traffic. Consequently, Telecom Italia intends to continue maintaining this agreement.

All such revenues and charges are de minimis with respect to Telecom Italia’s consolidated revenues, operating expenses trade receivables and trade payables, respectively.

Other De Minimis Commercial Communications Agreements

Telecom Italia had no revenues in 2016 from its other commercial communications agreements within Iran as described above, and its total receivables from such commercial communications agreements in 2016 amounted to 3,666 thousand euros.

Taxes on Telecommunications Goods and Services

The costs of telecommunications goods and services to clients are subject to a variety of federal, state and local taxes (in addition to taxes on income), the most significant of which are ICMS, COFINS, PIS, FUST, FUNTTEL, FISTEL, CONDECINE and corporate income tax and social contribution on net income, which are described below.

rates between 25% and 35%. The ICMS tax rate levied on the sale of mobile handsets and other products such as modem and SIM cards averages 17% or 20% throughout the Cellular Regions, with the exception of certain handsets whose manufacturers are granted certain local tax benefits, thereby reducing the rate to as low as 7%. In 2005, certain of the Brazilian states started to charge ICMS on the sale of mobile handsets under a “tax replacement” system, under which the taxpayer that manufactures the goods is required to anticipate and pay ICMS amounts that would otherwise only become due in later steps of the distribution chain.

Since December 2016, the ICMS rates over telecommunication and goods were increased in some Brazilian states, such as Maranhão, where rates have increased from 25% to 27% and Rio de Janeiro, where rates have increased from 30% to 32%. With respect to the rates over goods, Piauí has increased from 17% to 18%.

On December 15, 2005, Anatel enacted Ordinance No. 7/05 requiring that FUST should be paid on revenues arising from interconnection charges since its effectiveness. A notice was issued deciding that we must adjust values on the FUST calculation basis in order to include interconnection revenues received from other telecommunications companies. A writ of mandamus was filed against Anatel to avoid the terms of Ordinance No. 7/05. The first level decision was issued in our favor. Such decision was challenged by Anatel and the Appeal will still be judged by second level.

applicable to all telecommunications services. FUNTTEL is a fund managed by BNDES and FINEP, government research and development agencies. The purpose of FUNTTEL is to promote the development of telecommunications technology in Brazil and to improve competition in the industry by financing research and development in the area of telecommunications technology. FUNTTEL Tax is imposed at a rate of 0.5% on gross operating revenues, net of discount, ICMS, PIS and COFINS, and its cost may not be passed on to clients.

On March 21, 2013, Anatel enacted Resolution No. 95, which regulates FUNTTEL collection. As in the case of FUST, it requires that FUNTTEL be calculated based upon revenues arising from interconnection charges since its effectiveness. Sinditelebrasil, the Brazilian syndicate of telecom companies, filed a Writ of Mandamus against Anatel in order to compel Anatel not to apply Resolution No. 95. An injunction was issued in our favor but the final decision has not been rendered yet.

In 2013, the Brazilian government enacted Provisional Measure No. 627/2013, in order to end the Transitional Tax Regime, or RTT. RTT was implemented in 2008 as a way to neutralize the tax impact caused by the adoption of IFRS accounting rules in lieu of Brazilian GAAP. Provisional Measure No. 627/2013 allows taxpayers to choose either to maintain RTT in 2014 or to be subject to the provisions contained in the Provisional Measure No. 627/2013. Although taxpayers were permitted elect to maintain RTT treatment in 2014, for financial year 2016 they were obligated to adopt the new IFRS accounting rules.

Another substantial change brought about by Provisional Measure No. 627/2013 is the treatment of dividends. Generally, dividends paid up to the limit of the Company’s accounting profits are exempt from corporate income tax. However, during 2013, Brazilian tax authorities published guidance indicating that such exemption should only apply to dividends paid based on the profits calculated according to the rules prior to IFRS (referred to as “fiscal profits”). If any dividends exceed this limit, then they must be taxed. This generated much debate among taxpayers and, as a response, dividends paid in the last five years over the limit of “fiscal profits” will be exempted as long as taxpayers adopt the new rules in 2014.

In May 2014, Provisional Measure No. 627 was converted into Law No. 12,973, the main objective of which was to implement the new tax regime, adapted to the new accounting guidance provided by IFRS, ending the RTT. Given that the implementation requires specific adjustments to promote the elimination of the effects of registration of the new accounting methods and criteria to the statutory books, some assets and liabilities now have different methods and accounting criteria from those previously adopted by the former accounting rule. Law No. 12,973 establishes as a condition for the accurate tax treatment of these differences to impact only at the time of the realization of these assets or liabilities the creation of subaccounts for individualized control. The treatment is the same in regards to present value adjustments and fair value adjustments.

The rules for deductibility of goodwill were maintained for the transactions which occurred or will occur prior to the end of 2017. The tax treatment by TIM Celular of the goodwill arising from the purchase of the companies AES Atimus SP and RJ will not be impacted by the new rules.

Regarding dividends, Law No. 12,973 ensures the full and unconditional exemption on payment or credit of profits or dividends earned between January 1, 2008 and December 31, 2013, previously paid or not. Uncertainty remains, however, about the exemption on profits and dividends generated in the calendar year 2014, if higher than the taxable income in the same period in the case of companies that do not opt for early adoption of the new post-RTT tax regime that year.

Dividends are not subject to withholding income tax when paid. However, as the payment of dividends is not tax deductible for the company that is distributing them, there is an alternative regime for stockholder compensation called “interest on equity,” which allows companies to deduct any interest paid to stockholders from net profits for tax purposes.

These distributions may be paid in cash. The interest is calculated in accordance with daily pro rata variation of the Brazilian government’s long term interest rate, or TJLP, as determined by the Central Bank from time to time, and cannot exceed the greater of: (1) 50% of the net income (before taxes and already considering the deduction of the own interest amount attributable to stockholders) related to the period in respect of which the payment is made; or (2) 50% of the sum retained profits and profits reserves as of the date of the beginning of the period in respect of which the payment is made.

Any payment of interest to stockholders is subject to withholding income tax at the rate of 15%, or 25% in the case of a stockholder who is domiciled in a tax haven. These payments may be qualified, at their net value, as part of any mandatory dividend.

Losses carried forward are available for offset during any year up to 30.0% of annual taxable income. No time limit is currently imposed on the application of net operating losses on a given tax year to offset future taxable income within the same tax year, nevertheless there is no monetary restatement.

Companies are taxed based on their worldwide income rather than on income produced solely in Brazil. As a result, profits, capital gains and other income obtained abroad by Brazilian entities are added to their net profits for tax purposes. In addition, profits, capital gains and other income obtained by foreign branches or income obtained from subsidiaries or foreign corporations controlled by a Brazilian entity are computed in the calculation of an entity’s profits, in proportion to its participation in such foreign companies’ capital. Previously, Brazilian entities were allowed to deduct income tax paid abroad, up to the amount of Brazilian income taxes imposed on such income (reciprocity of treatment between Brazil and the country from which the income or gain comes from is required in order for this rule to apply). Effective January 1, 2002, however, profits (including retained profits from previous years) realized by a Brazilian entity from controlled or affiliated companies are taxed as of the date of the Brazilian entity’s year-end balance sheet, unless the Brazilian entity is liquidated before the date of its year-end balance sheet, in which case the profits are taxed at the time of its liquidation.

Prior to January 1, 2002, profits realized by an entity in Brazil from a branch or agency were taxed as of the date of the Brazilian entity’s year-end balance sheet, and profits from a controlled or affiliated company were taxed as of the date such amounts were paid or made available to the Brazilian company as dividends or otherwise.

Regulation of the Brazilian Telecommunications Industry

General

The telecommunications sector is regulated by Anatel, which was established by law and is administratively independent and financially autonomous from the Ministry of the Communications. Anatel is responsible for promulgating standards related to telecommunications services and regulating the relationship between different operators, as set forth in the General Law of Telecommunications ( Lei Geral de Telecomunicações ), Law No. 9,472, dated July 16, 1997 and the Regulamento da Agência Nacional de Telecomunicações , or the Anatel Decree.

Despite liberalization, which occurred in 1997, the Brazilian telecommunications market still faces persistent dominant positions held by fixed incumbent operators. In particular, broadband access is currently offered by

operators over their own infrastructure and the respective regulatory framework is not always based on effective implementation of the wholesale access obligations.

Regarding the operating activities of TIM Celular and Intelig (in August 2012, TIM Fiber was merged into TIM Celular, which assumed TIM Fiber’s existing service obligations), Anatel has developed a strict regulation of mobile communications services known as Personal Communication Service ( Serviço Móvel Pessoal ), or PCS, landline services known as Commuted Fixed Telephonic Service ( Serviço Telefônico Fixo Comutado ), or STFC and data communication known as Multimedia Service of Communication ( Serviço de Comunicação Multimedia ), or SCM.

Anatel may regularly alter these standards based on changes in technology, in particular regarding PCS technology, which are common to the telecommunications sector. In order to allow operators to plan for the implementation of these policies, Anatel approved a General Plan of Update of Telecommunications Regulation in Brazil ( Plano Geral para Atualização da Regulamentação das Telecomunicações no Brasil ), or PGR, pursuant to which it established short-, medium-, and long-term policies for two, five, and ten-year terms, respectively. Anatel has authority to propose and to issue regulations that are legally binding on telecommunications service providers. Any proposed regulation or action by Anatel is subject to a period of public comment, which may include public hearings, and may be challenged in Brazilian courts. This regulation process takes into consideration Anatel’s specialized analysis of different areas of the telecommunication sector and matters resulting from public hearings, by means of which the regulation proposals are considered by Anatel, state authorities and the general public. We follow these public hearings closely.

A presidential decree issued on June 30, 2011, established a bidding process for fourth generation RFs, an important landmark for the telecommunications sector. The bid occurred in 2012 and, in order to guarantee full rural service by 2018, Anatel linked the 4G blocks in the 2,500 MHz band to the 450MHz band in specific geographic regions of Brazil. As a result, the four winning operators of the 4G blocks in the 2,500 MHz band linked to the 450MHz band are subject to coverage commitments in rural areas. Such presidential decree also resulted in two new regulations to measure mobile and fixed broadband quality standards. The presidential decree also approved the PGMU, creating fixed line universal service obligations binding on the STFC concessionaires.

With respect to the new regulations on quality standards currently being implemented by Anatel and a group of interested companies, the PCS quality regulation went into force in 2012 (partially in March and fully in October), and the SCM measurement regulation went into effect in November 2012. Full adoption of these standards will require new investments.

In 2016, Anatel issued certain regulations which are particularly relevant to our operations, including: Resolution No. 663/2016, which modified rules of the MVNO Regulation; Resolution No. 667/2016, which approved the General Regulation of Accessibility in Telecommunications Services of collective interest; Resolution No. 668/2016, which modified the STFC Regulation; and Resolution No. 671/2016, which approved the Regulation on the Use of the Radiofrequency Spectrum and modified the Regulation on the Collection of Public Price for the Right of Use of Radiofrequencies and the Regulation on the Imposition of Administrative Sanctions.

Throughout 2016, Anatel issued other important regulations and public consultations that will have great impact on TIM and Intelig’s activities, particularly those summarized below:

Review of the current regulatory model for the provision of telecom services

It is a goal of the Brazilian government to review the 1997 General Telecommunication Law and to transform the old fixed telephony concessions into authorizations, modifying the relevant and related obligations.

On April 11, 2016, the Ministry of Communications issued guidelines to be followed by Anatel when implementing this transformation, moving to a more market-oriented licensing approach. These guidelines were issued following a public consultation which ended on January 15, 2016.

In general terms, the Ministry’s guidelines establish that public authorities should promote access to broadband service at affordable costs and levels, putting broadband at the center of public policies.

In this sense, Anatel is expected to:

As a result of the ongoing debate regarding the licensing regime, ANATEL was tasked with reviewing concession contracts by December 2016. However, after the publication of Resolution 673, approved on December 30, 2016, the deadline for reviewing these contracts was postponed to June 30, 2017.

Meanwhile, a bill that proposes changes to Law 9.472/1997 (General Telecommunication Law) and allows Anatel to change the licensing mode of telecommunications service is under review in the Brazilian Senate. According to the proposal, upon request of the STFC concessionaires, Anatel may authorize the migration of the concession agreements to authorizations, subject to the observance of certain requirements. Anatel will be responsible for determining the economic value associated with the migration, which shall be applied in investment commitments, prioritizing the implementation of network infrastructure for high capacity data communication in locations without appropriated competition.

The bill also proposes changes in the radiofrequency rules, allowing subsequent and unlimited renewals, up to 20 years each, generating an environment possibly more conducive to long-term investments. In addition, the bill favors the creation of a spectrum secondary market, allowing transfers of radiofrequency authorizations between players, upon Anatel’s approval. The economic and operational conditions will be defined by Anatel.

If the Senate approves the bill without changes in relation to the proposal approved by the House of Representatives, but it still has to be submitted for Presidential approval.

Authorizations and Concessions

With the privatization of the Telebrás system and pursuant to the Lei Mínima, or the Minimum Law, Band A and Band B service providers were granted concessions under SMC or Serviço Móvel Celular , or Cellular Mobile Service, regulations. Each concession was a specific grant of authority to supply mobile telecommunications

services in a defined geographical area, subject to certain requirements contained in the applicable list of obligations attached to each concession.

Under its PCS regime, Anatel began encouraging mobile telecommunications service providers operating under SMC regulations to convert their concessions into authorizations under PCS regulations. According to the rules issued by Anatel, SMC providers would not be able to renew their concessions to provide SMC services, and were compelled to convert to the PCS regime in order to continue their operations. The permission from Anatel to transfer the control of these companies was also conditioned on rules that compelled SMC providers to migrate its SMC concessions to PCS authorizations, and to operate under the PCS regulations.

Our predecessors were granted SMC concessions and in December 2002, such SMC concessions were converted into PCS authorizations, with an option to renew the authorizations for an additional 15 years. TIM Celular acquired PCS authorizations in conjunction with auctions of bandwidth by Anatel in 2001, and subsequently acquired additional authorizations and operations under the PCS regulations as well.

On May 30, 2011, we entered into two new RF terms, formalizing the acquisition of excess RF in the states of Minas Gerais, Paraná, Santa Catarina, Amapá, Roraima, Pará, Amazonas and Maranhão and those new terms expire in April 2023.

In October 2012, we acquired the 2,530-2,540 MHz and 2,650-2,660 MHz sub-bands, with national coverage, and the 450 MHz band in Espírito Santo, Paraná, Rio de Janeiro and Santa Catarina states (the 450 MHz band was jointly acquired with Intelig), which terms expire in October 2027.

In December 2014, we acquired the 718-728 MHz and 773-783 MHz sub-bands, with national coverage; these authorizations are valid until 2029. These sub-bands are partially available for mobile operation since broadcasters are still using them, or Anatel’s approval required for their usage is still pending. The mobile operations on those sub-bands may only begin after the reallocation of broadcasting channels and following approval by Anatel and interference mitigation. TIM Celular currently provides services with the use of the 700 MHz band in Rio Verde, in the state of Goiás, and Fernando de Noronha, in the state of Pernambuco.

On March 4, 2015, by Decision No. 66/2015-CD, Anatel approved our renewal application related to the 4G Block (2500 MHz P Band) in Minas Gerais, and also approved our renewal application concerning the authorization terms of the D and E Bands (900 MHz and 1800 MHz). On July 22, 2015, Authorization Act No. 4710/2015-CD was issued (and subsequently published in the Official Gazette of July 28, 2015), extending the use of the aforementioned authorizations terms, until 2030 and 2028, respectively.

In December 2015, Anatel auctioned left over radiofrequencies in the 1,800 MHz, 1,900 MHz and 2,500 MHz bands. We submitted bids for the left over lots of the 2,500 MHz 4G band, which had originally been auctioned in 2012. We were classified as the first-ranked bidder in the lots for Recife, in the state of Pernambuco, and Curitiba, in the state of Paraná, based on our bids which totaled R$57.5 million. The corresponding authorization terms were excluded by Anatel in July 2016.

The STFC and SCM authorization terms do not have an expiration date.

The following table shows each of our authorizations in effect on December 31, 2016:

* Terms already renewed for 15 years and therefore not entitled to another renewal period.

** Only covers complementary areas in the specified states.

According to the General Telecommunications Law and regulations issued by Anatel thereunder, licenses to provide telecommunications services are granted either under the public regime, by means of a concession or a permission, or under the private regime, by means of an authorization. Only STFC incumbents are currently operating under the public regime. All the other telecommunications services providers in Brazil are currently operating under the private regime, including all the PCS services providers.

Telecommunications services providers under the private regime are classified as either providing a service of collective interest or restricted interest. Collective interest private regime services are subject to requirements imposed by Anatel under their authorizations and the General Telecommunications Law. Restricted interest private regime services are subject to fewer requirements than public regime or collective interest private regime services. According to the General Telecommunications Law and the regulation thereunder, all the PCS services providers in Brazil operate under the collective interest private regime.

In August 2009, Anatel gave its approval for the acquisition of the fixed line operator Intelig. From July 2012, Intelig currently provides local fixed telephone service while TIM Celular provides the national and international long distance telephone service, under the selection code 41.

In July 2011, TIM Celular acquired from the Companhia Brasiliana de Energia and AES Elpa, its interest in Eletropaulo Telecomunicações (100%) and AES RJ (98.3%) (together, “AES Atimus,” later named TIM Fiber and now TIM Celular). With these new acquisitions, TIM Celular not only significantly expanded its operations in the

data communications business, or SCM, in the urban areas of the states of Rio de Janeiro and São Paulo, but also obtained important synergies related to the acquired fiber optic network. In August 2012, TIM Fiber was merged into TIM Celular. In connection with such merger, TIM Celular assumed TIM Fiber’s service obligations, thereby ensuring continuity of services.

Obligations of Telecommunications Companies

In November 1999, Anatel and the Brazilian mobile service providers jointly adopted a Protocol for Mobile Cellular Service Providers, or the Protocol. The Protocol established additional quality of service targets and rates, which SMC operators were required to achieve by June 2001. Although the General Telecommunications Law does not specify any penalties for failing to meet the targets required by the Protocol, Anatel was required to examine the performance of the Brazilian telecommunications companies under the Protocol’s standards. Despite migration to PCS in December 2002, from January to June 2003, we reported to Anatel regarding, and had complied with, all quality of service indicators applicable to SMC operators. The Protocol ceased to be applicable to TIM Sul, TIM Nordeste and TIM Maxitel after July 2003.

Beginning in September 2003, we became subject to the PCS quality of service indicators. Our quality of service obligations under our PCS authorizations differ substantially from those under the previous SMC concessions. See “—PCS Regulation.” Since December 2003, we have achieved the majority of the service of quality requirements applicable to the PCS service operators. Some of our PCS quality of service indicators are currently difficult to achieve due to, for example, our dependence on the performance of third parties and the continuing clarification of some of the quality of service measurements under the PCS rules. As a result, since 2004 Anatel has been filing administrative proceedings against TIM Celular and TIM Nordeste for non-compliance with certain of our quality of service obligations. In some of these proceedings, Anatel applied a fee that did not cause a material adverse effect on our business, financial condition and results of operations. We will continue to strive to meet all of our quality of service obligations under the PCS authorizations.

In 2011, Anatel published Resolution No. 575/11 to Review of the Regulation on the Management of Quality of Service – PCS. The new regulation established new quality goals, evaluation criteria, data collection and quality monitoring of Service Providers – PCS. The Anatel regulation aims to create a comprehensive model of quality management of the PCS providers providing preventive and proactive on the part of the Agency, through the incorporation of indicators and benchmarks that allow the systematic evaluation of the quality of service in all its dimensions. Anatel also published Resolution No. 574/11 in 2011, which set broadband quality measurement standards.

This new list of proposals for quality indicators is divided into two major groups: Operational Indicators and Indicators Research for measuring the quality of service perceived by the user. Anatel is likely to launch a new public consultation in 2017, in order to review the quality framework.

PCS Regulation

In September 2000, Anatel promulgated regulations regarding PCS wireless telecommunications services that are significantly different from the ones applicable to mobile companies operating under Band A and Band B. The rules allowed companies to provide wireless telecommunications services under PCS authorizations. The PCS authorizations allowed new entrants in the Brazilian telecommunications market to compete with existing telecommunications service providers.

According to rules issued by Anatel, renewal of a concession to provide mobile telecommunications services, as well as permission from Anatel to transfer control of cellular companies, are conditioned on agreement by such cellular service provider to operate under the PCS rules. TIM Sul, TIM Nordeste and TIM Maxitel converted their cellular concessions into PCS authorizations in December 2002, and later transferred them to TIM Sul, TIM Nordeste and TIM Maxitel, which are now TIM Celular subject to obligations under the PCS regulations. See “—Authorizations and Concessions.”

Anatel has initiated administrative proceedings against TIM Celular for noncompliance with certain quality standards and noncompliance with its rules and authorization terms. We have been fined by Anatel in some proceedings and are still discussing the penalty imposed in appeals before the Agency. As a result of these proceedings, Anatel applied some fines that did not cause a material adverse effect on our business. In the year

ended December 31, 2016, the total amount of these fines was R$98.9 million. However, only R$29.3 million was classified as “probable loss” by our legal advisors.

We continue to do our best to fully comply with our obligations under the PCS regime or with future changes in the regulations to which we are subject. See “—Obligations of Telecommunications Companies,” “Item 3. Key Information—D. Risk Factors—Risks Relating to our Business” and “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings.”

According to the PCS regulations, we were required to adjust our operating processes and agreements to such rules, including our interconnection agreements, as well as agreements with our customers. By April 2005, substantially all of our interconnection arrangements were covered by agreements that had been amended to reflect the PCS regulations.

In October 2012, Anatel enacted the Regulation on Universal Obligations related to the fixed line universal service obligations ( Plano Geral de Metas de Universalização ), or PGMU, regulating backhauling, public pay phones and telephone services for families with low incomes, among others. In November 2012, Anatel enacted the General Plan for Competition Goals ( Plano Geral de Metas de Competição ), whose goal is to encourage competition by creating interconnection obligations and the sharing of infrastructure already installed by other operators.

In March 2014, by means of Resolution No. 632/2014, Anatel approved the adoption of a single regulation for the telecommunications sector ( Regulamento Geral de Direitos do Consumidor de Serviços de Telecomunicações ), or RGC, with general rules for customer service, billing, and service offers, which are applicable to fixed, mobile, broadband and cable TV customers.

Significant Market Power

In November 2012, Anatel published a new competition framework known as the PGMC. Also in November 2012, Anatel published a series of regulations identifying groups with significant market power in the following relevant markets as defined by the PGMC: (i) copper pair or coaxial cable data transmission access landline network infrastructure offer at transmission rates up to 10 Mbps (Act No. 6.617, of November 8, 2012); (ii) wholesale local transport and long distance inland network infrastructure offer for data transmission rates of 34 Mbps or less (Act No. 6.619, of November 8, 2012); (iii) passive infrastructure for transport and access networks (Act No. 6.620, of November 8, 2012); (iv) mobile network inbound calls (Act No. 6.621, of November 8, 2012); and (v) national roaming (Act No. 6.622, of November 8, 2012).

The TIM Group, comprised of TIM Celular and Intelig, is currently considered to have a significant market power in the following markets: (i) passive infrastructure in transport and access networks (provision of towers); (ii) mobile network inbound calls (otherwise referred to as the mobile network termination market); and (iii) national roaming.

Due to such classification we are now subject to increased regulation under the PGMC, which could have an adverse effect on our business financial condition and results of operations. Specifically, because we have been classified as having significant market power in the mobile network termination market, the rates charged by mobile service providers to other mobile service providers to terminate calls on their mobile networks, or VU-M, are regulated. On July 4, 2014, Anatel approved, by means of Resolution No. 639/2014, a rule for the definition of maximum reference rates for entities with significant market power, based on a cost model, for VU-M, TU-RL, and EILD. Pursuant to Anatel’s rule, reference rates will decline based on a glide path until the cost modeling known as BU-LRIC is applied (2019, for VU-M and TU-RL; and 2020, for EILD). On July 7, 2014, Anatel published the corresponding Acts No. 6,210/2014, 6,211/2014 and 6,212/2014, which determined the specific reference rates effective as of February 2016. Because of our classification as having significant market power in the national roaming market, we must also offer roaming services to other mobile providers without significant market power at the rates approved by Anatel. We are also required to provide other providers without significant market power access to our towers and masts due to our classification as having significant market power in that portion of the passive infrastructure market.

On December 5, 2016, Anatel published public consultations on (i) the revision of PGMC’s relevant markets and remedies, and (ii) the proposal of a specific Regulation for the Approval of Reference Offers, for public

comment until March 22, 2017. Anatel will analyze all the contributions to the consultations and the final approval will likely occur by the end of 2017.

According to the PGMC proposal, cities in Brazil will be classified by levels of competition (1 – competitive, 2 – moderately competitive, 3 – less competitive, 4 – non-competitive), and asymmetric measures will be applied according to the market competition. In addition, also based on the proposal submitted to public consultation, wholesale relevant markets will be defined as follows:

Drafts of the acts whereby Anatel will designate the groups that have significant market power in each relevant market, also submitted to public consultation, indicate that we could be identified as having significant market power in the wholesale relevant markets of mobile interconnection and national roaming.

For additional detail, see – “Network Usage Charges” – “Roaming Fees” – “Interconnection Charges” and “Long Distance” above.

Interconnection Regulation

Telecommunication operators must publish a public interconnection offer on both economic and technical conditions and are subject to the “General Interconnection Regulatory Framework” promulgated by Anatel in 2005.

In 2005, Anatel issued a ruling for “Accounting Separation and Cost Accounting,” introducing the obligation of presenting the Accounting Separation and Allocation Document ( Documento de Separação e Alocação de Contas ), or DSAC, by the license holders and groups holding Significant Market Power in the offering of fixed and/or mobile network interconnection and wholesale leased lines ( Exploração Industrial De Linha Dedicada ), or EILD. Starting from 2006 (for fixed operators) and 2008 (for mobile operators related to the results of 2006 and 2007), operators (TIM included) are delivering the requested information to Anatel.

In 2013, Anatel reviewed almost the entirety of DSAC. Pursuant to Resolutions No. 608 and 619, the level of information to be delivered to Anatel and the number of products analyzed were extended. Rules on costs allocation were also standardized in order to allow comparison of the results among operators.

With respect to mobile interconnection, in October 2011, Anatel established a mechanism for reducing fixed-to-mobile call rates, applying a reduction of 18% in 2012 and 12% in 2013. In November 2012, through Resolution 600, Anatel decided that the VU-M reference rates in 2014 would be 75% of the valid VU-M in 2013, and in 2015 by 50% of the valid VU-M in 2013. Based on that, in December 2013, VU-M prices for 2014 and 2015 were published in accordance with Resolution No. 600.

In addition to the VU-M reduction, Anatel established a B&K rule between significant market power and non-significant market power PCSs. From January 2013 until February 2015, the B&K was 80%/20%. On February 12, 2015, Anatel approved, by means of Resolution No. 649/2015, the following new B&K percentages, amending the

percentages established by Resolution 600: 75%/25%, from 2015 until 2016; 65%/35%, from 2016 until 2017; 55%/45%, from 2017 until 2018; and 50%/50%, from 2018 until 2019, which was the object of a judicial suit (on going), in order to suspend its effects. After 2019, the VU-M will be charged by the significant market power whenever their network is used to originate or to finish a call. In July 2015, we filed a lawsuit seeking to annul Resolution No. 649/2015 and maintain the percentages originally established by Resolution 600, which currently remains pending a final decision.

With respect to fixed interconnection, Anatel revised the criteria for pricing the use of fixed networks in May 2012. According to such regulation, after January 1, 2014, a full B&K regime (in which no payments are due for the traffic termination) was implemented for local STFC operators dealing with other local STFC operators. Currently, therefore, no payments are due for the use of a local STFC operator’s network by other local STFC operator. With respect to interconnection of STFC operators with long distance and mobile operators, we understand that, in 2012, when Anatel issued PGMC, the assymmetrical measure that permitted STFC operators without significant market power to charge a TU-RL 20% higher than the TU-RL charged by STFC operator, with significant market power was revoked. In September 2016, we filed a lawsuit on this subject, which is still pending a final decision.

On July 4, 2014, Anatel approved, by means of Resolution No. 639/2014, a rule for the definition of maximum reference rates for entities with significant market power, based on a cost model, for VU-M, TU-RL, and EILD. Pursuant to Anatel’s rule, reference rates will decline based on a glide path until the cost modeling known as BU-LRIC is applied (2019, for VU-M and TU-RL; and 2020, for EILD). On July 7, 2014, Anatel published the corresponding Acts No. 6,210/2014, 6,211/2014 and 6,212/2014, which determined the specific reference rates effective as of February 2016.

Rate Regulation

Under our PCS authorizations, we are allowed to set prices for our service plans, subject to approval by Anatel, provided that such amounts do not exceed a specified inflation adjusted cap. Anatel currently uses the IST ( Índice de Serviços de Telecomunicações ), a specific price inflation index developed by the Agency, in evaluating prices and determining the relevant cap for prices charged in the telecommunications industry. As mentioned above, on July 4, 2014, Anatel approved the calculation of VU-M, TU-RL and EILD reference rates based on a cost model. We expect that the adjustment of our prices will follow the market trend, and that the adjustment will be below the annual inflation rate based on the IST. If this new inflation adjustment mechanism, or any other mechanism chosen by the Brazilian government in the future, does not adequately reflect the true effect of inflation on our prices, our results of operations could be adversely affected.

Number Portability

In March 2007, Anatel issued a new regulation regarding number portability in Brazil for fixed telephony and PCS providers. Portability is limited to migration between providers of the same telecommunications services. For PCS providers, portability can take place when customer changes services provider within the same Registration Area as well as when customer changes the service plan of the same area. Anatel finished the nationwide NP implementation schedule in March 2009.

Value-Added Services and Internet Regulation

Value-added services are not considered under Brazilian telecommunications regulations to be telecommunications services, but rather an activity that adds features to a telecommunications service. Regulations require all telecommunications service providers to grant network access to any party interested in providing value-added services, on a non-discriminatory basis, unless technically impossible. Telecommunications service providers also are allowed to render value-added services through their own networks. Internet connection, when offered to users on a single basis, by parties other than telecommunications service providers, is considered by Brazilian legislation to be a value-added service, and its providers are not considered to be telecommunications companies. Current regulations allow us or any other interested party to offer Internet connection through our network. In such case, Internet connection would be deemed as a portion of the telecommunications service that enables users to navigate the Internet.

In April 2014, the Brazilian President passed Law No. 12,965 of 2014, known as the Legal Framework for the Use of the Internet ( Marco Civil da Internet ), or the Internet Framework, which establishes the principles, guarantees, rights and duties for the use of the Internet in Brazil.

Key topics covered in the Internet Framework are: net neutrality; collection, use and storage of personal data; confidentiality of communications; freedom of expression and the treatment of illegal, immoral or offensive contents.

The Presidential Decree No. 8,711/2016 was enacted by the Brazilian President on May 11, 2016. Recently provided additional detail on the Internet Framework in three main aspects:

The decree entered into force on June 10, 2016.

Frequencies and Spectrum Background

We have a license to operate PCS services in the 450 MHz, 700 MHz, 800 MHz, 900 MHz, 1.8 GHz, 1.9/2.1 GHz and 2.5 GHz frequency ranges, which allows us to provide mobile communications services with 2G, 3G and 4G technologies throughout Brazil.

In connection with the PCS authorization auctions in 2001 and 2002, Anatel divided the Brazilian territory into three separate regions, each of which is equal to the regions applicable to the public regime fixed-line telephone service providers. PCS services could only be provided under Bands C, D and E at that time with initially 1800 MHz band and afterwards also the 900 MHz band. We acquired the D band in regions II and III and the E band in region I, completing our national coverage when considering TIM Sul, TIM Nordeste and Maxitel coverage.

We requested a renewal of our authorizations for the D and E bands (1800 and 900 MHz frequencies) in September 2013, given that the initial term for which the authorization was expiring. The process was reviewed by Anatel, which handed down a decision based on formal legal opinion by the Federal Attorney General on the matter. According to such decision, TIM was entitled under the current rules to a renewal of our authorizations for the D and E bands, starting from March 2016.

On March 4, 2015, by Decision No. 66/2015-CD, Anatel approved our renewal application concerning the authorization terms for the D and E Bands based on the Federal Attorney General’s decision. As a result, our authorization term for the usage of these radiofrequencies was extended for 15 years, starting from March 2016. On July 22, 2015, this decision was formalized through the issuance of Authorization Act No. 4710/2015-CD, later published in the Official Gazette of July 28, 2015.

In December 2007, we acquired new authorizations for the 1800 MHz frequency in the São Paulo and Rio de Janeiro in order to improve our RF capacity in these regions. Within the same auction, Claro and Vivo acquired authorizations to provide PCS services in regions where we had historically provided services but where Claro and Vivo previously did not, using 1800 MHz and 1900 MHz bands. This resulted in increased competition in these regions. In the same auction, Oi received authorization to provide PCS services in the state of São Paulo using 1800 MHz (band M in the whole state and band E in the state’s countryside).

In December 2010, Anatel auctioned an empty 3G band of radio spectrum consisting of (10+10) MHz in 2.1 GHz in the whole country (the “H Band” Auction), and other left over frequencies in the 900 MHz and 1800 MHz bands that had not been assigned in previous auctions.

In December 2011, Anatel started auction No. 001/2011-PVCP/SPV, pursuant to which 16 blocks in the 1,800 MHz band were sold to Claro, Oi, CTBC and TIM. As a result of our participation in the auction, we will expand our 2G coverage and increase our presence in the northern and midwestern regions of Brazil, including the states of Paraná, Espirito Santo, Rio Grande do Sul, Santa Catarina and Minas Gerais. Our corresponding RF authorization periods were formalized with Anatel in May 2013, after Anatel ruled on an appeal challenging the bidding process outcome.

In 2012, Anatel established a bidding process in order to comply with Presidential Decree No. 7.512 of June 2011, which set April 2012 as the deadline to auction the 2.5GHz band, in order to introduce 4G technology in Brazil. Anatel modeled the auction with 2 national blocks of (20+20)MHz (W and Z) and 2 national blocks of (10+10)MHz (V1 and V2). In order to guarantee full rural service by 2018, Anatel linked the 4G blocks to the 450MHz band in specific geographic regions of Brazil. By April 30, 2013, FIFA Confederations Cup host cities (Belo Horizonte, Fortaleza, Rio de Janeiro, Recife, Salvador and Brasília), in preparation for hosting the FIFA 2014 World Cup and the 2016 Olympic Games, were to have been served by 4G. Following the results of the auction in October 2012, TIM acquired for R$340 million the 2,530-2,540 MHz and 2650-2660 MHz sub-bands, with national coverage, and the 450 MHz band in Espírito Santo, Paraná, Rio de Janeiro and Santa Catarina states (the 450 MHz band was jointly acquired with Intelig). Certain 4G coverage commitments were effective as early as April 2013, while the first coverage commitments for the 450 MHz band were effective in June 2014. In December 2013, we launched 4G in Natal, ahead of Anatel’s required schedule. As of December 2014, we have been providing 4G coverage in compliance with the schedule required by Anatel. Satisfaction of the these coverage commitments demands heavy capital investments and a commitment to acquire products with national technology, with R$1.5 billion to be invested in 4G alone over the next three years.

We participated in the auction as a group bidding in the name of TIM and Intelig. We did not bid for the W block (Amazonas as a rural area), which we viewed as having a high premium if compared to the X block (67%), whereas we successfully acquired the V1 block, which in our view held the best CAPEX/OPEX profile associated with rural services in its selected regions (RJ, ES, SC and PR). The joint bid allowed us to take advantage of the flexibility of the auction rules. These bands brought heavy coverage obligations as its short range characteristics demands large investments.

The year 2013 began with indications from the government and Anatel that they hoped to speed up the move to digitalization of TV in Brazil. In November 2013, Anatel approved the dedication of a single band, of the 700MHz spectrum, exclusively to mobile services.

In September 2014, Anatel concluded the 700 MHz spectrum auction that granted to TIM, Vivo, Claro and Algar the operation of the 700 MHz frequency for the 4G mobile technology, to be added to the current LTE service in the 2.5 GHz RF. We bid on Block 2 of that auction, for national coverage of the 700 MHz band, and won the same with a bid of R$1.947 billion (a 1% premium over the minimum price of R$1.927 billion). The 700MHz spectrum, with its long range and good penetration characteristics, is very important to the expansion of the mobile data network in the country, offering even better 4G navigation quality to customers and allowing service to reach a greater number of users, supporting both rural obligations and city coverage. Another benefit of our acquisition of Block 2 of the 700MHz spectrum is the potential for economies of scale with respect to equipment and synergy with the Asia-Pacific Telecommunity, or APT, band plan and the European digital dividend for the spectrum.

The auction also required the winning bidders to proportionally reimburse the broadcasters for the clean-up of the spectrum previously held and used by them. We have spent R$1.199 billion in order to create in March 2015 an entity called the Entity for Administration of TV and RTV Channel Relocation and Digitalization Process, or EAD, with the other winning bidders, to ensure the spectrum clean-up. The price allocated to clean-up of the spectrum related to unsold blocks was shared proportionately among the winning bidders who bought the other blocks. To

offset such additional cost to the winning bidders, the price of the 700 MHz spectrum was discounted using Anatel’s WACC methodology. In December 2014, we paid R$1.678 billion and recorded R$61 million as a debt in our financial statements as of December 31, 2014 (see Note 14(f) to our consolidated financial statements).

The Authorization Terms for usage of the 700 MHz spectrum were signed in December 2014 and the Articles of Association and By-laws of EAD were filed on March 2, 2015.

In December 2015, Anatel auctioned left over radiofrequencies in the 1,800 MHz, 1,900 MHz and 2,500 MHz bands. We submitted bids for the left over lots of the 2,500 MHz band which had originally been auctioned in 2012. This particular band spectrum provides for 4G mobile services. We were classified as the first ranked bidder in the lots for Recife, in the state of Pernambuco, and Curitiba, in the state of Paraná, based on our bids which totaled R$57.5 million. The corresponding authorization terms were executed by Anatel in July, 2016.

VU-M and Wholesale Market

The interconnection of telecommunication operators is mandatory, allowing the users of different services to make calls from one network to another. In the case of PCS, Anatel has established that, whenever its network is used to originate or to receive calls, the operators will receive the Value of Use of Mobile Network ( Valor de Uso de Rede Móvel ), or VU-M, also known as an interconnection rate or mobile termination rate, set by free agreement. Anatel urged us to adopt a single VU-M per region, as such region is set out in the PCS General License Plan ( Plano Geral de Autorizações ), or PGA, which began on November 1, 2010. We declined to do so and instead chose to commercially negotiate VU-Ms with different providers. Under applicable regulations, VU-M rates could be negotiated among operators with reference rates only applied by Anatel in case of dispute.

In October 2011, Anatel decided to reduce fixed to mobile rates, based on a reduction in the respective wholesale interconnection levels on call termination. Anatel proposed a reduction of the fixed to mobile rates of 18% in 2012 and 12% in 2013, based on nominal declines. We believe the rate reductions put in place by Anatel fail to consider the need to preserve PCS market competition, and we filed an administrative appeal with Anatel, which was denied in December 2012.

In November 2012, as part of the cost model transition, Anatel set the 2014 mobile termination reference rate VU-M for operators with significant market power in the mobile network inbound calls market at 75% of the valid VU-M in 2013, and the 2015 reference rate VU-M at 50% of the valid VU-M in 2013. Based on that, in December 2013, VU-M prices were published in accordance with Resolution No. 600 for 2014 and 2015.

We believe, however, that when Anatel adopted such decisions, it failed to observe the proper administrative process required to issue new regulations. We filed an annulment application with Anatel in connection with the November 2012 resolution, which was denied by Anatel in November 2014.

On July 4, 2014, Anatel approved, by means of Resolution No. 639/2014, a rule for the definition of maximum reference rates for entities with significant market power, based on a cost model, for VU-M, TU-RL, and EILD. Pursuant to Anatel’s rule, reference rates will decline based on a glide path until the cost modeling known as BU-LRIC is applied (2019, for VU-M and TU-RL; and 2020, for EILD). On July 7, 2014, Anatel published the corresponding Acts No. 6,210/2014, 6,211/2014 and 6,212/2014, which determined the specific reference rates effective as of February 2016.

It is our position that Anatel’s decision to establish VU-M rates – a price related to the provision of telecommunications services in the private regime – based on a cost model does not comply with Brazilian law. Accordingly, we filed an annulment application with Anatel in connection with the July 2014 resolution, which was rejected by Anatel. As the result of the revaluation of our strategy due to new commercial conditions, we decided not to pursue judicial discussion of that matter.

Industrial Exploration of Dedicated Lines

In December 2010, Anatel approved a public hearing that considered alterations of the Industrial Exploration of Dedicated Lines ( Exploração Industrial de Linha Dedicada ) or EILD, which established mechanisms for the operation of transmissions circuits to increase transparency between operators and concessionaires. In May 2012, Anatel approved the new EILD regulations ( Regulação de Exploração Industrial de Linha Dedicada ) or REILD, or REILD, detailing mechanisms to optimize the operating structure for transmission loop contracts in order to increase

contract price transparency and affording equal treatment to independent service providers from concessionaire groups. The REILD specifically sets out more effective rules on project definition including Standard EILD or Special EILD, in addition to contract and delivery terms, and specifies EILD delivery dispute resolution procedures. Concurrently, in May 2012, Anatel approved new EILD reference prices, substantially lower than those previously in place, and a step towards value fixation in disputes between service providers.

Considering that EILD is also a market subject to the asymmetric regulation defined by Anatel in the PGMC, operators classified by Anatel as pertaining to group with significant market power in the EILD market, such as Oi, were required to submit reference prices and offers for Anatel’s approval, as well as to only offer EILD through a specific system designed for the PGMC. In September 2013, Anatel approved, for the first time, reference prices and offers of the operators with significant market power in the EILD market. At least every six months new reference prices and offers must be submitted for Anatel’s approval. We are not currently classified as having significant market power in the EILD market.

On July 4, 2014, Anatel approved, by means of Resolution No. 639/2014, a rule for the definition of maximum reference rates for entities with significant market power, based on a cost model, for VU-M, TU-RL, and EILD. Pursuant to Anatel’s rule, reference rates will decline based on a glide path until the cost modeling known as BU-LRIC is applied (2019, for VU-M and TU-RL; and 2020, for EILD). On July 7, 2014, Anatel published the corresponding Acts No. 6,210/2014, 6,211/2014 and 6,212/2014, which determined the specific reference rates effective as of February 2016.

We have started discussions to apply the EILD reference rates based on cost model to the existing agreements we have with operators with significant market power in the EILD market. Administrative and judicial disputes were initiated and are still ongoing.

Costs Modeling

The implementation of a costs model by Anatel has been in development since March 2005, when the Separation and Allocation of Accounts Document ( Documento de Separação e Alocação de Contas ), or DSAC was approved, for pricing of STFC and PCS interconnection, as well as wholesale market inputs, in particular with regards to industrial exploitation of the dedicated lines, or EILD and unbundling.

In July 2014, Anatel published the final decision regarding the cost modeling to set the wholesale reference values for the fixed and mobile access and interconnection services, as well as the maximum reference values for leased lines.

Anatel established that fixed termination rates, or TU-RL and VU-M are cost oriented starting from February 2016 and reaching the efficient cost level based on BU-LRIC model in 2019. For EILD, the efficient cost level will only be reached in 2020. See “Risks Relating to the Brazilian Telecommunications Industry—Anatel classified us as an economic group with significant market power in some markets and now subject to increased regulation.”

Anatel signalled that all products (not only call termination rates and leased lines) will be cost oriented from the revision of the PGMC. In October 2016, all operators had to answer a data request from Anatel which intended to gather the necessary data to update the cost model for all the products in the PGMC, such as national roaming and passive infrastructure. See “—Interconnection Regulation.”

Migration of the Mobile Networks with Analog Technology

In February 2011, Anatel approved Resolution No. 562/11, which modified a provision of the regulation on conditions of use of RF, determining that, after a period of 360 days from the publication, the use of analog technology in RF sub bands of 800 MHz would no longer be allowed.

In relation to the use of such RF, we no longer have any subscriber of analog technology (AMPS). However, our analog networks are still used by STFC concessionaires to provide services to subscribers in rural areas of the country, a service called RuralCel.

The implementation of the RuralCel service was carried out by the companies in the Telebrás system, prior to the privatization process in 1998. Once the privatization of these companies was completed, SMC operators are required to keep sharing such infrastructure (mobile networks with analog technology) with STFC concessionaires

with rural subscribers. There is a dispute with STFC concessionaires as to the compensation payable for the availability of the RuralCel support network.

Anatel decided to temporarily postpone shutting down this service, but only until the first half of 2016. We continue to interact with the regulating agency regarding the shutdown of our analog mobile networks and with STFC concessionaires in respect of the migration of their subscribers from our analog networks in connection with our deactivation thereof. After prioritizing the activities of the STFC concessionaires (directly involving Oi), it was possible to move forward at an accelerated pace with the scheduled disconnection of these subscribers. Oi has requested the maintenance of 24 public phones, in the states of Santa Catarina (15) and Pernambuco (9) by January 2017.

In December 2016, Anatel approved Resolution No. 672/16, which prohibited the use of analog technology in the radiofrequency sub bands of 800 MHz, 900 MHz, 1.800 MHz, 1.900 MHz and 2.100 MHz. Regulation of Quality

In October 2011, Anatel published PCS and SCM quality management regulations to establish quality parameters which were to have been met by the mobile telephone and Internet connection operators in up to 12 months. Most quality parameters established became effective in October and November 2012.

Among such quality parameters, most notable are the ones relating to the quality of the networks, both mobile and fixed, creating obligations of minimum and average speeds in numbers, higher than those currently used by operators, which required investments so that such obligations could be met.

As a response to the need to better quantify the financial impacts, Oi has presented a cancellation request along with a revision request to Anatel for the presentation of technical surveys of the economic impacts of the new regulations.

The aforementioned request was submitted for a public hearing by Anatel, which resulted in a series of differing opinions regarding quality measures by the different operations that are currently being considered by Anatel.

With regard to STFC, Anatel approved in December 2012 the Quality Management Regulation for STFC service providers, the purpose of which is the creation of a new quality management model available, such as Quality Management Regulation for PCS and SCM.

In February 2013, Anatel published STFC quality management regulations to establish quality parameters which should be met by fixed telephone operators in 120 days. All parameters established became effective in June 2013.

Anatel is likely to launch a new public consultation in 2017, in order to review the quality framework.

Consolidation of TIM and Intelig STFC Licenses

With the acquisition of Intelig by TIM Participações, we were required to eliminate the existing overlapping licenses in order to abide by regulations. We were given 18 months to implement these changes, beginning on the date of closing of the transaction. This term was later extended for an additional 12 months, expiring on June 30, 2012.

On December 30, 2011 we filed petitions with Anatel to authorize the consolidation of our STFC license terms in the local mode under Intelig and STFC LDN and LDI under TIM. On June 30, 2012 we returned CSP 23 to Anatel, keeping the operation of STFC LDN and LDI bound to CSP 41 TIM Celular S.A. license, whereas Intelig keep the STFC local license.

The amendments to the STFC Instrument of Authorization executed between TIM/Intelig and Anatel providing on the foregoing statutes were published on October 26, 2012.

On August 29, 2012, the companies TIM Fiber SP and TIM Fiber RJ formalized before Anatel their waiver of SCM exploration authorizations. Promptly thereafter, both companies were merged into TIM Celular S.A., which is already authorized to provide such services. Anatel terminated the SCM authorizations held by TIM Fiber SP and

TIM Fiber RJ. Upon absorption of TIM Fiber SP and TIM Fiber RJ, TIM Celular S.A, as successor in interest, became the provider of the services previously provided by these companies.

Inclusion of ninth digit in several areas

In December 2010, Anatel published Resolution No. 553/2010, determining the inclusion of one more digit for mobile numbers in the 011 area code region, which includes the city of São Paulo and neighboring cities. The change requires users to add the digit 9 to the beginning of existing mobile numbers. Anatel’s decision to add one more digit to mobile phone numbers in the 011 area code was intended to increase the availability of numbers in the metropolitan area of São Paulo from 37 million to 90 million, as it is expected that availability of mobile numbers would end by 2013 at the current rate of subscription growth. The ninth digit was successfully implemented on July 29, 2012.

This measure requires residents of the 011 area code region to carry out possible adjustments to private equipment and systems such as, for example, PABX equipment and phone lists, in addition to technical adjustments carried out by telecommunication companies. Technical, Communications and Regulatory work groups have been created by representatives of all PCS and STFC operators, in order to prepare for the implementation of the ninth digit in a synchronized way for all the operators, with standardized communication to avoid adjustment difficulties for users.

After July 29, 2012, calls to mobile numbers using the 8 digits were still completed for a 90-day period, to allow networks and users to adapt. During these 90 days, operators implemented gradual interceptions and users received messages with guidance on how to dial. After this transition period, calls to mobile numbers dialed with 8 digits were no longer completed.

The ninth digit was implemented in all the remaining areas of the state of São Paulo on August 25, 2013, and in the states of Rio de Janeiro and Espirito Santo on October 27, 2013. Beginning on November 2, 2014, referred to as “D Day”, the ninth digit was implemented in the states of Amapá, Amazonas, Maranhão, Pará and Roraima. On May 31, 2015, cellular numbers in the states of Pernambuco, Alagoas, Paraíba, Rio Grande do Norte, Ceará and Piauí acquired the ninth digit, and on October 11, 2015, the same was implemented in the states of Minas Gerais, Bahia and Sergipe. In 2016, the program was concluded and the ninth digit was successfully implemented in all remaining states.

Anatel Administrative Proceedings

Under the terms of its PCS authorization, TIM Celular implemented mobile personal telecommunications coverage for the assigned area. Under such term of authorization, TIM Celular is required to operate in accordance with the quality standards established by Anatel. If it fails to meet the minimum quality standards required, TIM Celular is subject to Obligation Non-Compliance Determination Procedures, or PADO, and applicable penalties. Anatel has brought administrative proceedings against the TIM Group for (1) noncompliance with certain quality service indicators (PGMQ); and (2) default of certain other obligations assumed under the Terms of Authorization and pertinent regulations. In its defense before Anatel, the TIM Group attributed the lack of compliance to items beyond its control and not related to its activities and actions. We cannot predict the outcome of these proceedings at this time, but have accrued the amount in our balance sheet as a provision for all those cases in which we estimate our loss to be probable.

C.       Organizational Structure

We are part of the Telecom Italia Group, which is engaged principally in the communications sector and, particularly, the fixed and mobile national and international telecommunications sector, the television sector and the office products sector. The operating segments of the Telecom Italia Group are organized according to the relative geographical localization for the telecommunications business (Domestic—Italy, Brazil and, until March 8, 2016, Argentina). We are currently held, directly and indirectly, by Telecom Italia through its wholly owned subsidiary, TIM Brasil. In turn, the single largest shareholder of Telecom Italia is Vivendi, which is able to exercise significant influence over Telecom Italia.

Substantially all assets held by TIM Participações consist of the shares of its wholly owned subsidiaries TIM Celular (incorporated in the Federative Republic of Brazil and headquarters located in the State of São Paulo), and Intelig (incorporated in the Federative Republic of Brazil and headquarters located in the State of Rio de Janeiro).

The following chart illustrates our current ownership structure:

D.       Property, Plants and Equipment

Our principal properties consist of transmission equipment, switching exchanges and gateway equipment, which connect calls to and from customers and enables data traffic connections, and radio base stations, which comprise certain signal transmission and reception equipment covering a defined area. At our radio base stations we have also installed antennas and certain equipment to connect these antennas with our switching equipment. As of December 31, 2016, we had 14,459 NodeB and 11,645 (including all partners’ equipment) eNodeB, 12,902 BTS and more than 75 thousand kilometers in fiber optic networks. We generally lease or buy the sites where our mobile telecommunications network equipment is installed. Over the course of financial year 2016, we had leased approximately 106,000 square meters of real property, all of which was available for office space. We also lease approximately 2,000 square meters of commercial office space, and 25,000 square meters of stores operated by us. There are no material encumbrances that may affect our utilization of our property or equipment. All of our property and equipment is owned or leased domestically; we do not own or lease any property or equipment outside of Brazil.