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TIM Participações S.A. and

TIM Participações S.A. and

subsidiaries

Financial Statements as at

December 31, 2015

and Independent Auditors’ Report

TIM PARTICIPAÇÕES S.A.

FINANCIAL STATEMENTS

December 31, 2015 and 2014

Contents

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(Free translation of the original report in Portuguese, issued on financial statements prepared in accordance with Brazilian and international financial reporting standards)

Independent auditor's report

To the Board of Directors and Shareholders

TIM Participações S.A.

We have audited the accompanying individual and consolidated financial statements of TIM Participações S.A. ("Parent Company") and of TIM Participações S.A. and its subsidiaries ("Consolidated"), which comprise the balance sheet as at 31^st. December 2015 and the statements of income, of comprehensive income, of changes in equity and of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information,.

Management's responsibility for the financial statements

Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting practices adopted in Brazil and with the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB), and for such internal controls as management determines as necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditor's responsibility

Our responsibility is to express an opinion on these financial statements based on our audit.   We conducted our audit in accordance with Brazilian and International Standards on Auditing.   Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements.   The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error.

In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control.   An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

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(Free translation of the original report in Portuguese, issued on financial statements prepared in accordance with Brazilian and international financial reporting standards)

Independent auditor's report (continued)

To the Board of Directors and Shareholders

TIM Participações S.A.

Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of TIM Participações S.A. and TIM Participações S.A. and its subsidiaries as at 31^st. December 2015, and their financial performance and their cash flows for the year then ended, in accordance with accounting practices adopted in Brazil and International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB).

Other matters

Supplementary information - statements of value added

We also have audited the parent company and consolidated statements of value added for the year ended 31^st. December 2015, which are the responsibility of the Company's management. The presentation of these statements is required by the Brazilian corporate legislation for listed companies, but they are considered supplementary information for IFRS.   These statements were subject to the same audit procedures described above and, in our opinion, are fairly presented, in all material respects, in relation to the financial statements taken as a whole.

Prior year balances

The individual and consolidated financial statements of TIM Participações S.A. for the year ended 31^st. December 2014 were examined by other independent auditors, who issued an unqualified opinion dated 12^th. February 2015.

Rio de Janeiro, 4th. February 2016.

Ricardo Julio Rodil

Accountant – CRC-1SP111444/O-1

Baker Tilly Brasil Auditores Independentes S/S

CRC-2SP016754/O-1

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TIM PARTICIPAÇÕES S.A. and

TIM PARTICIPAÇÕES S.A. AND SUBSIDIARIES

BALANCE SHEET

 (in thousands of Reais)

The accompanying notes are an integral part of these financial statements.

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TIM PARTICIPAÇÕES S.A. and

TIM PARTICIPAÇÕES S.A. AND SUBSIDIARIES

BALANCE SHEET

(in thousands of Reais)

The accompanying notes are an integral part of these financial statements.

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TIM PARTICIPAÇÕES S.A. and

TIM PARTICIPAÇÕES S.A. AND SUBSIDIARIES

STATEMENT OF INCOME

Years ended December 31

(in thousands of Reais, unless otherwise indicated)

The accompanying notes are an integral part of these financial statements.

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TIM PARTICIPAÇÕES S.A. and

TIM PARTICIPAÇÕES S.A. AND SUBSIDIARIES

STATEMENT OF COMPREHENSIVE INCOME

Years ended December 31

(in thousands of Reais)

The accompanying notes are an integral part of these financial statements.

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TIM PARTICIPAÇÕES S.A. and

TIM PARTICIPAÇÕES S.A. AND SUBSIDIARIES

STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

 (in thousands of Reais)

The accompanying notes are an integral part of these financial statements.

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TIM PARTICIPAÇÕES S.A. and

TIM PARTICIPAÇÕES S.A. AND SUBSIDIARIES

STATEMENT OF CASH FLOWS

Years ended December 31

(in thousands of Reais)

Disclosures on supplementary information on non-monetary and other transactions are shown on note 43.

The accompanying notes are an integral part of these financial statements.

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TIM PARTICIPAÇÕES S.A. and

TIM PARTICIPAÇÕES S.A. AND SUBSIDIARIES

STATEMENT OF VALUE ADDED

Years ended December 31

(in thousands of Reais)

The accompanying notes are an integral part of these financial statements.

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TIM PARTICIPAÇÕES S.A.

Publicly-held Company

Corporate Taxpayer's ID (CNPJ/MF): 02.558.115/0001-21

Corporate Registry (NIRE): 33 300 276 963

MANAGEMENT REPORT

COMMENTS ON THE FINANCIAL STATEMENTS FOR THE YEAR ENDED ON DECEMBER 31, 2015

Dear Shareholders,

The management of TIM Participações S.A. (“TIM Participações”, “The Company” or “TIM”) submits to you the Management Report and the Consolidated Financial Statements of the Company, with the independent auditors’ report for the fiscal year ended on December 31, 2015.

The consolidated financial statements have been prepared in accordance with the International Financial Reporting Standards (IFRS) as defined by the IASB.

The operating and financial information of 2015 below, unless stated otherwise, is presented in Brazilian Reais (R$), based on consolidated figures and pursuant to Brazilian corporate law.

Profile

TIM Participações is a publicly traded company which shares are listed on the São Paulo Stock Exchange (Bovespa) and which ADRs (American Depositary Receipts) are listed on the New York Stock Exchange (NYSE). In late 2015, the Company was informed that it will be part, for the eighth  consecutive year, of the select group of companies that make up the ISE (Corporate Sustainability Index) portfolio. Moreover, it is the only telecommunications company to participate in the Novo Mercado, the highest level of corporate governance of BM&FBOVESPA, in addition of having implemented the Audit Committee under the Company’s Bylaws, achieving further progress in its Corporate Governance.

TIM Participações is controlled by TIM Brasil Serviços e Participações S.A., a subsidiary of the Telecom Italia group. Through the sharing of experiences and the adoption of a best practices policy, the Company shares experiences with its parent and builds synergies benefiting all of its customers. Through our subsidiaries, TIM Celular S.A. and Intelig, we operate in the mobile phone market, in fixed telephony, in long-distance and data transmission markets, throughout the Brazilian territory. TIM is also a reference in the offering of ultra-broadband services through TIM Fiber, and our area of operation for TIM Fiber incompasses the metropolitan areas of Rio de Janeiro and São Paulo states.

TIM PARTICIPAÇÕES S.A. and

TIM PARTICIPAÇÕES S.A. AND SUBSIDIARIES

MANAGEMENT REPORT

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1. Message from Management

The year of 2015 was marked by significant challenges, both for the country, with a progressively deteriorating macroeconomic environment throughout the year and impacts to growth, FX rate and inflation, and for the sector and company, which saw the total mobile user base decline for the first time after years of continued growth, with the acceleration of the substitution of voice by data usage and messaging applications, leading to the beginning of a strong decline in the use of multiple SIM cards and the reduction of the so called “community effect” on prepaid users.

Facing this “perfect storm” scenario, we maintained our focus on the execution of our strategic plan and its mid/long-term goals, in particular with an intense infrastructure investment, but also acted rapidly to reposition our portfolio in face of the sector’s structural changes, and at the same time intensified further our efficiency actions, which helped protect our financial results and expand our operating margin even in a year of reduction in revenues and, slightly less so, in EBITDA.

The Year of Infrastructure

In spite of the short-term challenges, we maintained our vision about the strategic importance of developing a robust infrastructure for data growth, centered in particular on the 4G technology, which allows for better quality of service and more efficient network costs. And with this vision we got to the mark of R$4.7 billion invested during last year, not only achieving, but surpassing our infrastructure growth objectives during 2015, even amidst a scenario of significant FX depreciation of the local currency. These investments allowed us to reach, by year-end, the milestone of 411 cities covered with 4G, or 59% of the country’s urban population, achieving the undisputed leadership in 4G coverage in Brazil, both by number of cities served and % of population covered. In addition to this, we have added yet another 500 cities to our 3G coverage, and reached the mark of over 70.000 km of own optical fiber, which will continue to allow the fast growth of our high capacity data infrastructure – key for a successful competitive positioning now and in the future.

Agile Repositioning of Portfolio and Offers

With the rapid change in the profile of telecom services consumption by Brazilian users, TIM maintained its tradition as the most innovative operator in the country, and was the first to reposition its complete portfolio for all customer segments – Prepaid, Control and Postpaid, effectively eliminating the different rates for calls to users in our own network and to users of other operators in all of our new plans, increasing the convenience of our voice and data bundles in all segments. We thus established first mover advantage at the beginning of a new industry cycle, represented by the reduction of the multiple SIM cards per user and corresponding concentration of spending in a single preferred SIM card. This bold movement will help us protect and increase the value of our prepaid customer base, where we remain leaders, as well as keep growing our base of postpaid customers, who start to have at TIM more complete voice and data offers for fair prices, providing an incentive to usage growth with its understanding and adoption.

Although still preliminary, the first results of our new offers are very encouraging from the standpoint of attractiveness to new clients and generation of new gross additions, average ARPU increase and consistency with the planned margin profiles, and helped turn the results of Mobile Number Portability balances against all other operators to become positive starting from the launch month of the new portfolio, in all customer segments.

TIM PARTICIPAÇÕES S.A. and

TIM PARTICIPAÇÕES S.A. AND SUBSIDIARIES

MANAGEMENT REPORT

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Intensity of Efficiency Actions Compensating the Short-Term Challenges in Financial Results

Throughout 2015, the short-term pressures coming from the voice, SMS and interconnection revenue reduction made total service revenues to decline 5.8% YoY. Nevertheless, excluding the interconnection revenues (which continued on a regulatory reduction path with a new MTR reduction in 2015), we could maintain the so called customer generated or “outgoing” revenues stable, based on the significant growth of data revenues, which had an YoY growth of around 40%, with positive results both in terms of data ARPU and data user base. It is also worth highlighting the larger reduction in total net revenues was a result of the direct impact of our change in handset strategy, reducing their overall sales volumes (without any significant impact to operating margin) to focus on value customers.

Notwithstanding the reduction on mobile service revenues, the intensification of our efficiency actions announced by the second quarter last year allowed for a limited impact to the EBITDA generated by the company, which declined by 2.6% YoY even with a much larger revenue decline. Based on our efficiency plan, very good results were achieved in the containment of operating expenses in virtually all areas of the company, elevating our operating EBITDA margin to 31.5% in 2015, an all-time high annual result thus far and a sector benchmark in Brazil. It is important to emphasize the continued solidity of our balance sheet, which presents a Net Debt / EBITDA ratio of only 0,3x, one of the lowest in the industry, allowing for significant financial flexibility. Also worth mentioning that the 2015 reported results, when augmented by the proceeds of our tower sale process, present numbers that are significantly more positive than the organic results highlighted above.

Conclusion and Perspectives

In conclusion, despite all of the challenges faced during 2015, the company was able to demonstrate its commitment with a mid/long-term positioning and structural actions, while at the same time reacting very rapidly to the main market transition challenges and subsequent need to protect its financial results in a scenario of short-term pressures to its revenues.

For 2016, we will emphasize the focus on three main pillars, with the maintenance of infrastructure investments and 4G leadership, development and positive results of our new portfolio and offers announced late 2015 and continuation of the intensity of efficiency actions that allow us to keep expanding our operating margin. We expect those three pillars, when combined with the growing usage of data services and the evolution of our positioning in quality/offers/user experience, will allow us to finish 2016 in an upward trajectory of continuous result improvements.

Very shortly, we will announce our 2016-2018 industrial plan details and I am confident that, once again, TIM’s outstanding team of professionals will keep making a difference in face of all of the upcoming challenges.

Rodrigo Abreu

CEO

 TIM PARTICIPAÇÕES S.A. and

TIM PARTICIPAÇÕES S.A. AND SUBSIDIARIES

MANAGEMENT REPORT

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2. Economic and Industry Overview

2.1. Economic Environment

The macroeconomic scenario was quite difficult in 2015, in which political instability, GDP contraction, inflation pick-up, the lowering of credit notes and the cooling of the world economy worsened the situation in Brazil. The increasing interest rate policy in the United States, the slowdown of the Chinese and European economies and the decreasing prices of oil and other commodities have led the country to an estimate Gross Domestic Product (GDP) contraction of –3.7%, according to the latest 2015 Central Bank Consensus Report, and an increase in the unemployment rate to 9.0% in the year, according to the last research PNAD Contínua, released by Brazilian Institute of Geography and Estatistics (IBGE) in october.

The official inflation ended the year at 10.67%, out of the ceiling limit of the target, 6.5%, although Brazilian Central Bank (BACEN) implemented successive increases in the basic interest rate (SELIC) that, in 2015, went from 11.75% to 14.25% at the end of the year. The expectation for the end of 2016, according to the latest 2015 Central Bank Consensus Report is that the SELIC may reach up to 15.25%.

Regarding the exchange rate issue, Brazil continues to try to curb the appreciation of the US dollar, which rose 47% against Brazilian Real in 2015, even with the BACEN keeping the sale of currency in the market with swap contracts. On the other hand, despite the decrease of 14% in exports, the slowdown of the Brazilian economy contributed to a further decrese in imports, resulting on a trade balance with an accumulated surplus of US$19.7 billion.

2.2. Particularities of the sector

Mobile telephony in Brazil is characterized by being a private sector where prices and tariffs are regulated by the market. ANATEL acts as the agency that regulates all sectors of telecommunications in Brazil, with the mission to “promote the development of the country's telecommunications to give it a modern and efficient telecommunications infrastructure, able to offer society appropriate services, diversified and at fair prices, throughout the national territory.”

In the competitive environment, the Brazilian mobile telephony sector presents as one of the most competitive in the world, being one of the few to have four major competitors with a national presence and a market share from 18% to 29%. The strong competitive movement in the market implies greater pressure on margins due to commercial expenses related to advertising, commissions and benefits.

The need for intensive capital is also a major feature of the telecommunications industry. To support the increase in network traffic over the years and the advent of new technologies, high levels of investment are necessary to ensure the scale and quality of services provided.

TIM PARTICIPAÇÕES S.A. and

TIM PARTICIPAÇÕES S.A. AND SUBSIDIARIES

MANAGEMENT REPORT

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3. TIM Services

3.1. Our Business

A strong brand associated with innovation. TIM has a strong brand and a reputation for innovation, having pioneered several product launches in Brazil, our innovative plans and offerings have helped to position the company as a service provider able to set a new standard in the market. Among these plans, we introduced the concept of charging per call (rather than per minute), equalizing the tariffs for local and long distance calls within our network.  

In 2015, with the pressure of the macroeconomic scenario, the achievement of a near saturation level for voice lines in the country and the accelerated substitution of voice by messaging and data, we confirm our prediction of the beginning of a significant consolidation in the number of multiple prepaid SIM cards, resulting in an important reduction in the so called “community effect” (club effect, with on-net calls costing a fraction of off-net calls and retaining users based on the total size of the customer base, or “community”), and a corresponding overall reduction in the number of total users due to the reduction of the prepaid base, as a result, overall market reduced to 257.8 million lines versus 280.7 million lines in 2014.

3.2. Our Strategy

With our stated strategy of focus on data, the growth of our gross data revenues continued unabated even by the macro crisis and achieved again a double digit growth, 17% year over year.

This performance was certainly helped by the maintenance of our long term focus on investing in infrastructure, which again delivered substantial results in 2015 as detailed further below and also by the strategy of moving up the value of our customer base, which presented an improvement in mix between postpaid and prepaid customers, with the former growing at double digits and reaching a mix of 21% at the end of the year compared to 17% a year prior.

We keep focusing on the strategic importance of developing a robust data infrastructure for data growth, focusing particularly on 4G technology, which provides better quality of service and increased efficiency in network costs. Our volume of investments allowed us to achieve at the end of the year, the milestone of 411 cities covered or 59% of the urban population of the country, thus reaching the absolute leadership position in 4G coverage in Brazil, either in number of cities, whether in percentage of the population covered. In addition, we have added yet nearly 300 new cities with 3G coverage, and reach the more than 70,000 kilometers of its own fiber brand, which will follow allowing the accelerated growth of our high-capacity data infrastructure - essential to the competitive position now and in the future.

TIM PARTICIPAÇÕES S.A. and

TIM PARTICIPAÇÕES S.A. AND SUBSIDIARIES

MANAGEMENT REPORT

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4. Human Resources

TIM has as one of its strategic pillars “People and Organization,” so that the focus on people, the development of their capabilities and skills initiatives are vectors of encouragement and renewal of the sense of pride and belonging of employees. Our goal is to stimulate creativity and encourage people to break the barriers of everyday life and go beyond their limits. All this with a focus on the client, to bring unlimited communication, access to technology and full mobility throughout the TIM customers.

The company manages its human resources by aligning the expectations of the people, the needs of the business and the market conditions. In a motivating and challenging work environment, TIM offers space and opportunities for its team to expand its horizons, develop and enhance the achievements of the company.

4.1. People

The TIM Group closed the year 2015 with  13,062 employees throughout Brazil. These workforce, with their stories and their knowledge, represent the intellectual capital of the company and act as a key element to the development of the business.

Approximately 48% of people have a college education or are attending college and  7% of the workforce has a post-graduate degree. The numbers and achievements show that employees make up a diverse and highly qualified staff to meet the challenges of the company. TIM's workforce is complemented by  278 trainees and  402 apprentices.

4.2. Development and Training

Employees have access to innovative tools and well-structured ways to evolve within the company and build a successful career. In line with the organizational values of the company, they trace the career from their own professional experiences and knowledge acquired with the company's investment. On this regard, TIM invested more than R$13 million in training and development of its employees during 2015.

To guide the careers of its employees, TIM maps and monitor individual performance to guide the activities with more assertiveness. In addition to encouraging and providing real opportunities for growth, the company recognizes the dedication and the high performance of its professionals, with reference to the Performance Management.

Throughout 2015, 1,211 employees were awarded merit actions and internal opportunities, reaching  21% of the eligible population, with an average salary increase of  20.8%

The attraction and the development of high potential professionals are priorities for TIM. Through the Programa Talentos Sem Fronteiras, TIM seeks to identify and attract the best young professionals in the job market, preparing them to put into practice new ideas and take strategic positions in the company in a short time.  

In order to attract the best students of the market and train our future professionals, the Programa Estágio Sem Fronteiras brings to TIM youths with energy, determination, initiative, team sense and, especially, interest in challenges. In  2015, over  59,930 students from across the country enrolled in the program.

On the internal communication channel, the corporate identity campaign sought to align the same goal to all employees, highlighting the importance of the work of each one to the achievements of the company, focusing on the company's purpose/mission “Connect and take care of every customer, so everyone can do more” and the values of Commitment, Agility, Client Care, Innovation and Transparency.  

4.3. Long Term Incentive Plan

The Long Term Incentive Plan aims at granting stock options or subscription of shares issued by TIM Participações to officers and employees of the Company and its subsidiaries, thus seeking to promote the expansion, the achievement and the success of the Company’s social objectives as well as align the interests of shareholders, directors and employees of the Company.

The plan consist on granting the right to buy company stock for a predetermined price during an specified period. The options are subject to vesting (a period of time where the options cannot be exercised) and performance conditions (that can adjust positively or negatively the option price). As long as the employees are able to add value to the stock price, they can profit with the exercise of their options.

The granting of stock options or subscription of shares has been held annually for 3 years, and the exercise of the purchase option or subscription of shares will be carried out gradually, up to 33% in the first year, up to 66% in the second year and 100% in the third year, counted from each of the three grants. The term of the options is 6 years.

As approved by the Company's General Meeting, the administration of the Plan rests with the Board of Directors, subject to the Company's Bylaws. Currently, there are two prevailing Long Term Incentive Plans in the company, referring to the 2011-2013 and 2014-2016 cycles.

The exercise of 2011-2013 Plan options is conditioned upon the achievement of specific performance targets, while the exercise of options of the 2014-2016 Plan does not have this condition. The Strike Price is calculated by applying an adjust, increasing or decreasing, over the Share Base Price as a result of share performance, considering the criteria defined in each Plan.

TIM PARTICIPAÇÕES S.A. and

TIM PARTICIPAÇÕES S.A. AND SUBSIDIARIES

MANAGEMENT REPORT

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4.3.1. 2011-2013 Cycle

For this Plan, the results of 3 vestings of the 2011 and 2012 grants 2011 and the 1st and 2nd vestings of the 2013  have already been determined:

4.3.2. 2014-2016 Cycle

 TIM PARTICIPAÇÕES S.A. and

TIM PARTICIPAÇÕES S.A. AND SUBSIDIARIES

MANAGEMENT REPORT

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5. Network

The investments of the Company prioritized projects for (i) the expansion of its fiber optic network (ii) the optimization of the use of the network, with adjustments to improve the signal quality in the current coverage areas and (iii) the mapping of the main causes of interruptions and failures of the network, as well as the necessary measures to prevent these events, ensuring call and data connection quality, for greater user access capability.

As a provider of an essential service to the socioeconomic development of the country, we strongly believe that this is contributing to the country's infrastructure development, promoting universal access to telecommunications services. The Company reaffirms its investment commitment for the year 2016 and with the incessant search for more and better services, striving to meet all the needs of all its clients.

5.1. National Coverage

TIM Brasil today has a broad national reach, covering approximately 95% of the Brazilian urban population, with a presence in over 3,400 cities. TIM also has extensive data coverage throughout the country, using the most advanced 3G and 4G technologies available, respectively, for 82% and 54% of the urban population.

Of the total investments in 2015, R$2.7 billion was invested only in network and information technology, in order to expand coverage and capacity, with the growth of voice and data traffic.

TIM will continue investing to provide a high performance mobile broadband, primarily through the Mobile BroadBand program (MBB). This program enables the network to transmit data services with high quality through the capacitation of 3G with HSPA+, enabling the achievement of up to 21Mbps per carrier, in addition to enabling the Dual Carrier (DC) feature, totaling up to 42Mbps per antenna. The MBB also includes activation sites with LTE (4G), enhanced backhaul antennas through the expansion of Fiber to The Site (FTTS) network, microwave radios and use of new content management model (Cache infrastructure), reducing latency services and improving the customer experience.

The year of 2015 ends with the delivery of major infrastructure projects for the benefit of the users. Improvements in data transmission allow a differentiated navigation performance for mobile broadband users through websites linked to optical fiber and high-capacity microwaves, the upgrade of the radio access and implementation of new features in the network core.

In 2015, TIM increased by 108% the volume of eNodeB equipment installation and also increased by 32% the amount of sites connected by optical fiber and microwave, enabling an increase in data transmission capacity.

It’s important to highlight that, in the beginning of 2016, TIM achieved the leadership on 4G coverage, with 411 cities and more than 100 million inhabitants that now can count on 4^th generation mobile internet. In 2016, TIM will accelerate this expansion rhythm.

TIM PARTICIPAÇÕES S.A. and

TIM PARTICIPAÇÕES S.A. AND SUBSIDIARIES

MANAGEMENT REPORT