TIMB TIM SA

Free Translation into English of Quarterly Information (ITR)Originally Issued in Portuguese Company Information

Company name:	TIM PARTICIPAÇÕES SA
Last change in the Company Name:	08/30/2004	Prior Company Name:	Tele Celular Sul Participações S.A.
Record date:	05/22/1998	C.N.P.J.:	02.558.115/0001-21
CVM Code:	01763-9	CVM incorporation date:	08/19/1998
Situação do Registro na CVM:	Active	Inicial date of record date at CVM:	09/10/1998
Country of origin:	Brazil	Contry of securities registration:	Brazil
Issuer's page in Internet:	www.tim.com.br/ri
Type of participant:	Listed Company
Record category at CVM:	Categoria A	Current category registration date:	01/01/2010
Issuer's situation:	Operational	Inicial date:	10/09/1998
Type of Control:	Private	Last change in control:
Last change in accounting period		Accounting period:	Day: 30  Month: 06
Activity:	Telecommunication
Country	Incorporation date
United States of America	12/16/1998

Free Translation into English of Quarterly Information (ITR)Originally Issued in Portuguese Parent Company Information - Capital

Number of Shares	Current Quarter
(units)	06/30/2016
Paid up Capital
Common	2,421,032,479
Preferred	-
Total	2,421,032,479
Treasury Stock
Common	795,888
Preferred	-
Total	795,888

Free Translation into English of Quarterly Information (ITR)Originally Issued in Portuguese Parent Company Information – Approval of Dividends

Event	Approval	Proceeds	First Payment	Especie	Class	Dividends per Stock (Reais / Stock)
Annual and Extraordinary General Meeting ("AGOE")	04/12/2016	Dividends	06/10/2016	Ordinary		0,19362

Free Translation into English of Quarterly Information (ITR)Originally Issued in Portuguese Parent Company Statements of Changes in Shareholders´ Equity from 01/01/2016 to 06/30/2016 (in thousands of Reais)

Account Code	Account Description	Capital	Capital Reserves	Revenues Reserves	Retained Earnings	Other Comprehensive Income	TOTAL SHAREHOLDERS' EQUITY
5.01	Beginning balance	9.866.298	1.438.728	5.626.131	-	1.887	16.933.044
5.02	Prior year adjustments	-	-	(355.722)	-	-	(355.722)
5.03	Adjusted Beginning balance	9.866.298	1.438.728	5.270.409	-	1.887	16.577.322
5.04	Shareholder´s Transactions	-	1.055	-	-	-	1.055
5.04.03	Stock option	-	1.055	-	-	-	1.055
5.05	Total Comprehensive Income	-	-	-	202.357	(6.243)	196.114
5.05.01	Profit  for the Period	-	-	-	202.357	-	202.357
5.05.02	Other comprehensive income	-	-	-	-	(6.243)	(6.243)
5.05.02.06	Cash flow hedges	-	-	-	-	(6.243)	(6.243)
5.07	Ending balance	9.866.298	1.439.783	5.270.409	202.357	(4.356)	16.774.491

Free Translation into English of Quarterly Information (ITR)Originally Issued in Portuguese Consolidated Company Balance Sheet - Assets (in thousands of Reais)

Account Code	Account Description	06/30/2016	12/31/2015
1	Total assets	32.409.446	35.556.388
1.01	Current Assets	8.969.565	12.040.246
1.01.01	Cash and Cash Equivalents	3.318.412	6.100.403
1.01.02	Financial assets	491.318	599.414
1.01.03	Accounts Receivable	2.743.937	2.858.089
1.01.03.01	Clients	2.743.937	2.858.089
1.01.04	Inventories	172.803	141.720
1.01.06	Taxes and Contributions Recoverable	1.176.551	1.254.346
1.01.06.01	Current Taxes and Contributions Recoverable	1.176.551	1.254.346
1.01.06.01.01	Indirect Taxes and Contributions Recoverable	846.429	924.624
1.01.06.01.02	Direct Taxes and Contributions Recoverable	330.122	329.722
1.01.07	Prepaid Expenses	643.265	210.056
1.01.08	Other Current Assets	423.279	876.218
1.01.08.03	Others	423.279	876.218
1.01.08.03.01	Operations with derivatives	63.046	608.915
1.01.08.03.02	Other assets	358.002	265.334
1.01.08.03.03	Financial leasing	2.231	1.969
1.02	Non-Current Assets	23.439.881	23.516.142
1.02.01	Long-Term Assets	2.778.886	2.889.601
1.02.01.03	Accounts Receivable	28.453	24.861
1.02.01.03.01	Clients	28.453	24.861
1.02.01.06	Deferred Taxes	132.026	14.526
1.02.01.06.01	Deferred Income Tax and Social Contribution	132.026	14.526
1.02.01.07	Prepaid Expenses	63.068	55.234
1.02.01.09	Other Non-Current Assets	2.555.339	2.794.980
1.02.01.09.03	Operations with derivatives	155.947	490.659
1.02.01.09.04	Other Non-Current Assets	12.298	12.117
1.02.01.09.05	Judicial Deposits	1.213.328	1.106.041
1.02.01.09.06	Indirect Taxes and Contributions Recoverable	790.591	817.676
1.02.01.09.07	Direct Taxes and Contributions Recoverable	183.112	170.521
1.02.01.09.08	Financial leasing	200.063	197.966
1.02.03	Property, Plant and Equipment	10.362.494	10.667.348
1.02.03.01	Property, Plant and Equipment in Operation	9.793.201	10.065.714
1.02.03.03	Construction work in progress	569.293	601.634
1.02.04	Intangible	10.298.501	9.959.193
1.02.04.01	Intangibles	8.771.282	8.431.974
1.02.04.01.02	Software rights	3.519.764	3.496.754
1.02.04.01.03	Authorizations	1.161.000	1.226.273
1.02.04.01.04	Other Intangibles	4.090.518	3.708.947
1.02.04.02	Goodwill	1.527.219	1.527.219

Free Translation into English of Quarterly Information (ITR)Originally Issued in Portuguese Consolidated Company Balance Sheet - Liabilities (in thousands of Reais)

Account Code	Account Description	06/30/2016	12/31/2015
2	Total liabilities	32.409.446	35.556.388
2.01	Current Liabilities	5.903.855	9.166.864
2.01.01	Social and Labor Obligations	210.299	199.373
2.01.01.02	Labor Obligations	210.299	199.373
2.01.02	Suppliers - Trade Payable	2.498.537	3.734.556
2.01.02.01	Domestic Suppliers	2.370.552	3.623.775
2.01.02.02	Foreign suppliers	127.985	110.781
2.01.03	Taxes, rates and contributions	751.569	715.648
2.01.03.01	Federal Obligations	288.324	252.992
2.01.03.01.01	Income Tax and Social Contribution Payable	196.021	128.666
2.01.03.01.02	Other Taxes	92.303	124.326
2.01.03.02	State Obligations	422.112	419.547
2.01.03.02.01	ICMS	422.112	419.547
2.01.03.03	Municipal Obligations	41.133	43.109
2.01.03.03.01	ISS	41.133	43.109
2.01.04	Loans and Financing	893.533	2.326.186
2.01.04.01	Loans and Financing	893.533	2.326.186
2.01.04.01.01	Domestic Currency	625.946	606.574
2.01.04.01.02	Foreign Currency	267.587	1.719.612
2.01.05	Other Obligations	1.549.917	2.191.101
2.01.05.02	Others	1.549.917	2.191.101
2.01.05.02.01	Dividends payable	64.517	524.779
2.01.05.02.04	Operations with derivatives	67.518	109.512
2.01.05.02.05	Authorizations Payable	481.380	467.687
2.01.05.02.06	Deferred revenues	855.337	1.043.239
2.01.05.02.07	Financial leasing	74.481	38.592
2.01.05.02.08	Other liabilities	6.684	7.292
2.02	Non-Current Liabilities	9.731.100	9.812.202
2.02.01	Loans and Financing	5.332.692	5.600.250
2.02.01.01	Loans and Financing	5.332.692	5.600.250
2.02.01.01.01	Domestic Currency	3.872.253	4.030.016
2.02.01.01.02	Foreign Currency	1.460.439	1.570.234
2.02.02	Other Obligations	3.855.918	3.642.727
2.02.02.02	Others	3.855.918	3.642.727
2.02.02.02.04	Indirect Taxes and Contributions Payable	107	103
2.02.02.02.05	Direct Taxes and Contributions Payable	250.753	243.151
2.02.02.02.06	Authorizations Payable	745.394	690.285
2.02.02.02.07	Deferred revenues	1.094.104	1.098.689
2.02.02.02.08	Financial leasing	1.672.520	1.579.914
2.02.02.02.09	Operations with derivatives	62.466	-
2.02.02.02.10	Other liabilities	30.574	30.585
Account Code	Account Description	06/30/2016	12/31/2015
2.02.03	Deferred Taxes	115.417	120.730
2.02.03.01	Deferred Income Tax and Social Contribution	115.417	120.730
2.02.04	Provisions	427.073	448.495
2.02.04.01	Tax, Labor and Civil Provisions	405.253	416.886
2.02.04.01.01	Tax Provisions	213.176	224.858
2.02.04.01.02	Labor Provisions	68.228	69.312
2.02.04.01.03	Benefits Provisions	1.275	1.275
2.02.04.01.04	Civil Provisions	94.066	92.820
2.02.04.01.05	Regulatory Provisions	28.508	28.621
2.02.04.02	Other Provisions	21.820	31.609
2.02.04.02.03	Asset Retirement Obligation	21.820	31.609
2.03	Shareholders' Equity	16.774.491	16.577.322
2.03.01	Paid up Capital	9.866.298	9.866.298
2.03.02	Capital Reserves	1.439.783	1.438.728
2.03.02.01	Offering's Goodwill	380.560	380.560
2.03.02.04	Stock Option	21.931	20.876
2.03.02.05	Treasury stock	(3.369)	(3.369)
2.03.02.07	Tax benefit reserve	1.040.661	1.040.661
2.03.04	Revenue Reserves	5.270.409	5.270.409
2.03.04.01	Legal Reserve	619.513	619.513
2.03.04.10	Reserve for expansion	4.650.896	4.650.896
2.03.05	Retained earnings	202.357	-
2.03.08	Other Comprehensive Income	(4.356)	1.887

Free Translation into English of Quarterly Information (ITR)Originally Issued in Portuguese Consolidated Company Statements of Cash Flow – Indirect Method (in thousands of Reais)

Accont Code	Account description	Year-to-date - current year 01/01/2016 to 06/30/2016	Year-to-date - prior year 01/01/2015 to 06/30/2015
6.01	Net cash and cash equivalents generated by operating activities	403.378	535.029
6.01.01	Cash and cash equivalents generated by operating activities	2.822.303	3.158.577
6.01.01.01	Earnings before income tax (EBIT)	267.653	1.795.435
6.01.01.02	Depreciation and amortization	1.860.823	1.643.891
6.01.01.03	Gain on sale of fixed assets disposed - Towers	(37.029)	(917.548)
6.01.01.04	Monetary fluctuation on asset retirement	589	2.725
6.01.01.05	Provision for legal and administrative proceedings	147.272	152.283
6.01.01.06	Monetary fluctuation on judicial deposits and provision for legal and administrative proceedings	9.788	11.034
6.01.01.07	Interest and monetary and exchange variation on loans and other financial adjustments	318.816	318.092
6.01.01.09	Gain / (loss) on sale of fixed and intangible assets disposed	6.576	1.463
6.01.01.10	Allowance for doubtful accounts	140.517	116.064
6.01.01.11	Stock options	1.055	2.103
6.01.01.12	Interests on leasing asset	(12.594)	(11.803)
6.01.01.13	Interests on leasing liability	118.837	44.838
6.01.02	Variations in assets and liabilities	(2.418.925)	(2.623.548)
6.01.02.01	Trade Accounts receivable	(18.810)	314.959
6.01.02.02	Taxes and contributions recoverable	113.574	(59.486)
6.01.02.03	Inventories	(31.083)	(63.575)
6.01.02.04	Prepaid expenses	(441.043)	(393.300)
6.01.02.05	Judicial Deposits	(79.934)	(19.683)
6.01.02.06	Other assets	(86.406)	11.539
6.01.02.07	Labor obligations	10.926	25.309
6.01.02.08	Suppliers	(1.256.255)	(1.534.880)
6.01.02.09	Taxes, fees and contributions payable	(162.635)	(279.135)
6.01.02.10	Payment of legal and administrative proceedings	(196.046)	(180.787)
6.01.02.11	Authorizations payable	57.117	(338.796)
6.01.02.12	Deferred revenues	(247.595)	(51.929)
6.01.02.13	Other liabilities	(80.735)	(53.784)
6.02	Net cash and cash equivalents used by investing activities	(1.467.522)	(215.227)
6.02.01	Securities	108.096	(4.190)
6.02.02	Additions to property plant and equipment and intangibles	(1.678.165)	(2.071.602)
6.02.03	ARO obligation	(7.077)	(36.712)
6.02.04	Net cash received on sales of assets	109.624	1.897.277
6.03	Net cash and cash equivalents used by financing activities	(1.717.847)	(710.671)
6.03.01	New loans and financings	500.000	-
6.03.02	Amortization of loans and financings	(2.035.790)	(608.164)
6.03.03	Dividends paid	(460.262)	(360.405)
6.03.04	Operations with derivatives	361.224	274.467
Accont Code	Account description	Year-to-date - current year 01/01/2016 to 06/30/2016	Year-to-date - prior year 01/01/2015 to 06/30/2015
6.03.05	Payments on financial lease	(93.253)	(25.788)
6.03.06	Receipts on financial lease	10.234	9.219
6.05	Decrease on cash and cash equivalents	(2.781.991)	(390.869)
6.05.01	Beginning cash and cash equivalents balance	6.100.403	5.232.992
6.05.02	Ending cash and cash equivalents balance	3.318.412	4.842.123

 

TIM PARTICIPAÇÕES S.A. Announces its Consolidated Results for the Second Quarter of 2016

·

Widening the gap in 4G coverage: 579 cities, more than 2x second player

·

Covering the country with 4G: 64% of urban population covered

·

4G users reached 11.2 million lines , or >17% of total subscribers. 4G traffic represented, in June, 24% of all data utilized

·

Smartphones penetration reached ~70% in May/16 , well above 59% in 2Q15

·

Overall ARPU grew by 7% YoY , second consecutive quarter of growth

·

Innovative Revenues maintained a solid double digit growth of 19.1% YoY, driving Data Services to represent 45% of mobile service net revenues (+7pp from 2Q15)

·

Fixed Net Revenues maintained a solid performance, growing 15.1% in 2Q16

·

Normalized EBITDA Margin expanded to 31.5% in 2Q16 (vs. 29.5% in 2Q15)

 

Conference Call in English:

Conference Call in Portuguese:

July 26 ^th , 2016, at:

July 26 ^th , 2016, at:

11:30 AM Brasília time

09:30 AM Brasília time

10:30 AM US EDT

08:30 AM US EDT

Tel.: +1 888 700-0802 (USA)

Tel.: +55 11 3193-1001 or +55 11 2820-4001 (Brazil)            

            +55 11 3193-1001 or +55 11 2820-4001 (Brazil)     Code: TIM

   

       +1 786 924-6977 (other countries)

Code: TIM

FINANCIAL PERFORMANCE

OPERATING REVENUES

 

Top line performance of -12% YoY shows a rebound when compared to 1Q16 (-15%) performance. The pace of revenues decrease is easing as traditional services and handset revenues reduce its pressure whilst VAS revenues maintain its solid trend. However, these improvements were not sufficient to overcome the overall business downward trends as (i) the economy continues to struggle although with early signs of recovery, (ii) a full quarter of MTR cut impact, (iii) ongoing revenue migration from voice-to-data. All in all, Net Revenues totaled R$3,820 million in 2Q16.

Net Revenues breakdown and other highlights are presented as follows:

Usage and monthly fee net revenues ended 2Q16 down 14.5% YoY, mostly impacted by a continue migration from voice towards data usage. Minutes of Use (MOU) came at 118 minutes in 2Q16, stable when compared to last year confirming the adherence of the new portfolio and its off-net allowance. On a sequential basis, this line was virtually flat versus 1Q16 and improved the YoY performance showed in 1Q16 (-18.2%).

 

+11%
VAS Revenues (YoY)

 

Value Added Services (VAS) net revenues rose 10.5% YoY in 2Q16 as innovative revenues (connectivity services + content & other VAS) became even more relevant in the business. Although short-message revenues continues to negatively impact on total Value-Added-Service line, Innovative Revenues rose 19.1% YoY in 2Q16 , keeping a strong growth even with a more challenging comparative base. VAS revenues continues to improve its participation in both mobile services net revenues and business generated revenues reaching respectively 44.6% and 48.1%. VAS revenues growth represents a positive impact for the company's EBITDA margin as it has a higher contribution magin compared to voice.

TIM’s strategy to switch customers to 4G technology, increase smartphone penetration and also the launch of the new portfolio with larger data allowances are the drivers for Innovative revenues to grow. BOU (bytes of use) rose ~77% in May/2016 comparing to 2Q15.

 

+19%
Innovative Revenues
(YoY)

 

     

Long Distance is the most impacted line of traditional revenues as it is strongly exposed to the switch from voice-to-data. In 2Q16, this revenue stream was down by 21.0% YoY. The commoditization of LD services is speeding up and has impacted the performance in the past quarters.

 

 

 

Interconnection net revenues dropped by 31.9% YoY in 2Q16 reflecting a quarter with full impact of MTR new price reduction, the continuous change in the dynamic of overall voice traffic and SMS reduction tendency. Interconnection revenues have declined by approximately R$114 million YoY in the second quarter, representing a relevant downtrend for mobile service revenues in the period. As a consequence of MTR cuts combined with migration from voice to data, the MTR incidence on net service revenues has been falling significantly every quarter, renewing its lowest level in 2Q16 at approximately 6%.

Excluding the MTR cut effects, Mobile Service Net Revenues would have fallen 3.4% instead of 6.8% .

Other Mobile net revenues showed a sound growth of 39.2% YoY in 2Q16, mainly driven by an increase in network sharing revenues.

 

ARPU (average revenue per user) stood at R$17.2 in 2Q16, up 7.0% YoY , and repeating the level shown in 1Q16. It’s a confirmation of the positive impacts coming from the new offer portfolio, as clients spend more in data and the value base continues to increase in all segments (prepaid, controle and postpaid). ARPU from VAS posted again a solid growth of ~27% YoY.

Fixed services net revenues rose 15.1% YoY, a solid second quarter. This result confirms fixed operations are maintaining a healthy performance despite a though macro environment.

Product net revenues were down by 56.1% in the period, but again with a better margin (product revenues - COGS) due to the change in handset strategy that focus more on value than volume.

 

 

Recent trends in handset volumes are a combination of this strategic move with macroeconomic headwinds and FX volatility. In the quarter, sales were down 77% YoY, to 358 thousand units, while average price increased by 83% YoY, in the same period. As we enter the second half of the year the comparative base will become less uneven, as shown on the chart on the left. Despite all, smartphone penetration reached 70% of total base in May/2016.

OPERATING COSTS AND EXPENSES

 

Total Normalized Opex continues to show improvements, despite some pressures against the overall downward trend. Main drivers for this quarter opex performance were: (i) uninterrupted actions under the scope of TIM’s Efficiency Program and (ii) handset business strategy change introduced in 2015.

Operating expenses analysis for 2Q16 is presented as follows:

Under the pillar of Organization Rightsizing & Efficiency of the Company’s Efficiency Plan, TIM started in 1Q16 a layoff program, which led to a workforce reduction of 6.4% versus 2Q15, reaching a total headcount of 12,104 people by the end of the quarter. This restructure process led Personnel Expenses to fall, in 2Q16, 16.9% YoY.

Selling & Marketing expenses fell 11.0% YoY in 2Q16 , repeating the solid performance of 1Q16, despite increasing costs related to rebranding actions. This dynamic is a consequence of (i) robust reduction in commissioning expenses due to adjustments in remuneration strategies and  lower gross additions (-19.3% YoY) and (ii) a reduction in installation FISTEL expenses, which came down 9.9%, following negative net additions in the quarter of 3.3 million lines.

Network & Interconnection costs grew 3.0% YoY in the quarter , illustrating the significant changes in dynamics of this line. As MTR (VU-M) loses its importance, underlain trends of other costs start to appear more pronouncedly, as becomes clear on the chart below.

 

 

 

Network related costs were up 3.9% YoY, despite another solid reduction in leased lines expenditures (-12.9% YoY). These costs are mainly explained by network sharing costs that accelerate together with the same line in revenues as mentioned above, and sites’ land rental expenses.

 

-13%
Leased lines costs (YoY)

Interconnection costs grew 1.7% YoY, while falling 7.3% compared to 1Q16. This performance is a consequence of (i) increase in costs related to content (Value Added Services) providers, which grows with the expansion of those data services and (ii) the increase in off-net traffic, amid a full impact of the MTR (VU-M) cut.

General & Administrative (G&A) expenses were up 10% YoY in 2Q16 , despite a reduction in rental fees related to the completion of headquarter relocation. G&A performance is explained mainly by a low comparison base, specifically in 2Q15. Notwithstanding, in 2Q16, G&A was also impacted by consultancy services expenses. This line will continue to be a key area of efforts within TIM’s Efficiency Program to guarantee the materialization of savings.

As mentioned before, handset business strategy change implemented in 2015 along with macro environment continue to drive Cost of Goods Sold to a significantly decrease of -57.2% YoY in 2Q16, closing the first year half down by 59%.

In 2Q16, Bad Debt expenses increased by 16.2% YoY, while falling 3.1% QoQ. Despite the tough macro environment and growing efforts towards gaining postpaid clients, TIM is being able to sustain a percentage of Bad Debt/Gross Revenues at very healthy levels (1.2%), repeating the ratio of the first quarter.

Normalized Other Operational expenses were up 7.9% YoY in 2Q16 (excluding effects of the towers sale: R$918 mln in 2Q15 and R$37 mln in 2Q16, more details in subsequent section).  The increase is a function of a low comparison base for FUST/FUNTTEL taxes specifically in 2Q15.

Subscriber Acquisition Costs (SAC = subsidy + commissioning + total advertising expenses) came at R$32.4 per gross addition in 2Q16, an increase of 5.0% YoY , due to higher advertising costs, regardless of the reduction in commissioning.

SAC/ARPU ratio (indicating the payback per customer) reached 1.9x in 2Q16, flat when compared to 2Q15.

FROM EBITDA TO NET PROFIT

 

EBITDA

Normalized EBITDA (excluding towers sale impact) dropped 6.5% YoY in 2Q16 , confirming 1Q16 was the bottom in yearly performance (-13.5% YoY). EBITDA decrease was a combination of effects that are still pressuring the short term performance: (i) traditional services and incoming revenues decline, (ii) more costs related to consultancy services and (iii) higher bad debt provisions. On the positive side, product’s margin keeps reducing its load (-R$23 mln in 2Q16 vs. -R$69 mln in 2Q15) and innovative services are at a solid pace, while traditional revenues are reducing the pressure.

 

Considering the ongoing efforts under TIM’s Efficiency Plan and the update of its targets, savings will become more pronouncedly. For instance, this quarter already showed savings in personnel expenses due to the layoff program occurred in 1Q16, additional savings were generated with HQ relocation.

 

 

VU-M (MTR) incidence on normalized EBITDA fell once more, reaching its lowest level at ~5% in 2Q16. If we exclude the MTR cut effects, normalized EBITDA would have fallen 3.7% instead of 6.5%.

D&A / EBIT

In 2Q16, Depreciation and Amortization increased 14.3% YoY due to higher network equipment depreciation and higher software amortization. This performance follows our Capex deployment intensification in the last years, although we expect a softer increase in the coming quarters. As a consequence, normalized EBIT declined in 2Q16 to R$253 million .

 

 

NET FINANCIAL RESULT

In 2Q16, Net Financial Result worsened versus same period of last year (-R$165 million in 2Q16 versus -R$35 million in 2Q15), mainly due to (i) higher financial expenses affected by leaseback after towers sale and (ii) a decrease in financial income due to poor performance of USD investments (meant to cover USD indexed Capex) and a negative MTM effect.

INCOME AND SOCIAL CONTRIBUTION TAXES

In 2Q16, Normalized Income and Social Contribution decreased to R$40 million compared to R$112 million in 2Q15 , basically due to the reduction of taxable profit.

NET INCOME

In 2Q16, Normalized Net Income decreased to R$48 million compared to R$308 million in 2Q15, while reported Net Income summed R$74 million. Normalized EPS (Earnings per Share) reached R$0.02 in 2Q16 (vs. R$0.13 in 2Q15).

CAPEX

In 2Q16, Capex amounted to R$975 million , an acceleration versus 1Q16 (R$710 mln), but a decrease of 17.7% when compared to 2Q15. Considering 6 months of 2016, Capex summed R$1,685 million, a decrease of 20.1% compared to same period last year, explained by negotiations with vendors and projects optimization.

Capex cycle peaked in 2015 and as we start descending from this level, strong results are confirmed i.e. 4G coverage leadership using spectrum refarming and carrier aggregation, 3G coverage catch up and fiber network expansion.

DEBT, CASH AND FREE CASH FLOW

Gross Debt reached R$7,766 million by the end of June/2016, including the leasing recognition in a total value of R$1,545 million concerning towers sale and LT Amazonas project. Gross debt in Q2 had a moderate increase compared to R$7,494 million in the same period of last year.

Company's debt is concentrated in long-term contracts (88% of the total), composed mainly by financing from BNDES (Brazilian Economic and Social Development Bank) and EIB (European Investment Bank), as well as borrowings from other top international financial institutions.

Approximately 22% of total debt is denominated in foreign currency (USD) , and it is 100% hedged in local currency. In 2Q16, average cost of debt was 12.48% vs. 11.56% in 2Q15.

Cash position totaled R$3,810 million by the end of June/2016, a decrease vs. R$4,842 million in 2Q15. Average cash yield (BRL investments) reached 14.24% in 2Q16 , an increase compared to 13.25% in 2Q15.

Main movements that affected cash and securities in the last 12 months are demonstrated as follow:

 

The Company has an investment fund in foreign exchange of R$491.3 million, basically formed by highly liquid public securities. The investment is intended to reduce foreign exchange risk on payments made to suppliers in foreign currency.

Net Debt/EBITDA ratio reached 0.77x in 2Q16 compared to 0.48x in 2Q15. Due to the above mentioned payments, net debt increased to R$3,957 million by the end of June/16, up from R$2,652 million in the same period of last year.

In 2Q16, Normalized Operating Cash Flow came at R$174 million, a decrease compared to R$313 million in 2Q15 , mainly due to lower revenues and a negative impact of the decrease in working capital. The latter is explained by lower deferred revenues due to a reduction in the exposure of prepaid credits with dealers in the period.

Normalized decrease in cash and cash equivalents came at -R$627 million in 2Q16 vs -R$235 million in 2Q15, mainly due to higher dividends and debt payments (principal and interests) in the period.

TOWERS SALE IMPACTS

In 2Q16, TIM concluded the fourth closing under the Tower Sale agreement signed in November 2014 with American Tower do Brasil (ATC) that comprised overall sale of 6,481 towers for ~R$3 billion cash.

·

First closing: On April 29, 2015, TIM transferred 4,176 towers to ATC and received ~R$1.9 billion.

·

Second closing: On September 30, 2015 TIM transferred 1,125 towers to ATC and received ~R$517 million.

·

Third closing: On December 16, 2015 TIM transferred 182 towers to ATC and received ~R$84 million.

·

Fourth closing: On June 9, 2016 TIM transferred 270 towers to ATC and received ~R$110 million.

The Master lease agreement (MLA) defines the leaseback of the transferred towers for a 20 years period. According to IAS17, this transaction should be registered as (1) sale and (2) leaseback and following its requirements, the leaseback registered as financial leasing.

Please find below the Financial Statements impacts conciliation and the related notes for further details concerning all four closings:

 

 

 QUALITY AND NETWORK

QUALITY Developments

Assuming national coverage and quality had improved quite substantially over this period, Anatel is now shifting its focus from a broader state-oriented perspective to a more granular one, concentrating its efforts on smaller geographic areas and specially those where service is still considered poor.

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

In the last 12 months from March/16 (last data available), TIM kept its solid performance regarding Anatel’s network quality requirements, particularly on data (3G/4G) indicators. As for voice indicators, accessibility metric continues to be close to 100% cities within target, while drop voice indicator has shown an improving trend, reaching the second best performance among the top 4 largest telecom players. This achievement is a result of strong commitment to quality and our goal to accelerate infrastructure development, especially to support data expansion and deliver a better usage experience.

 

Instant Speed & Average Speed: Regarding Anatel’s metrics for instant speed (SMP10) and average speed (SMP11) we highlight both indicators remain above the Agency’s target. However, due to technical issues for a two week period in a few cities within the state of Parana (PR) both indicators were negatively affected in May/2016 – last available data. It’s important to note that such problems have been solved and both indicators are normalized.

NETWORK EVOLUTION: efficient investment allocation to improve quality, expand coverage and provide a better experience to customers in both 4G and 3G.

The company continues to focus on projects such as sites densification, hetnet coverage expansion, backhaul development, carrier aggregation and others. Coverage, capacity and quality continue to be the infrastructure main pillars for 2016 with approximately 80% of the capex distribution committed to infrastructure.

TIM hetnet project accelerated in the second quarter, with 275 new sites totaling almost 3.4 thousand in the entire country. When compared to 2Q15, number of sites increased by 64% or 1.3 thousand new hotspots in 2Q16.

The MBB project continues to prioritize investment allocation in the most critical areas, aiming to provide high quality experience in mobile broadband. In 2016 the MBB project has 20 clusters, totaling 268 cities planned to be covered in 2016-2017. The cluster concept expands the targeted zones to metropolitan areas of cities that were already included in the MBB project in 2015 prioritizing state capitals and their metropolitan areas, conurbation cities, major coastal cities and main primary access roads.

During the second quarter of 2016, TIM kept its leadership in cities covered with 4G technology, reaching 579 cities or 64% of urban population in the country. This remarkable result was accomplished through spectrum refarming that allows the expansion to new locations with 4G signal with less capex. The project uses the 1,800MHz band and reorganizes the frequency usage according to the spectrum availability together with coverage optimization.

As for the 3G, TIM expanded its coverage to 103 new cities in 2Q16, reaching 1,963 cities or 82.8% of urban population. GSM coverage stood at almost 95% of urban population.

OPERATIONAL, MARKETING AND CARING PERFORMANCE

MOBILE MARKET

Following the movement started in 2015, April and May (last data disclosed by Anatel) were marked by relevant clean-up actions from operators due to significant acceleration in multiple SIM card consolidation process driven by macroeconomic pressures and reduction in the community effect.

The prepaid segment posted strong disconnections in the period chiefly by TIM’s performance, in line with Company’s commitment to its efficiency plan. On the other hand, despite the macroeconomic pressures and high penetration of mobile services, postpaid base growth accelerated in the period, with TIM leading the segment net additions in May, as a result of its new offers that already accounts to 15% of the total customer base and network quality improvements.

TIM’s PERFORMANCE

TIM’s subscriber base reached 64.0 million lines by the end of 2Q16, internal figure of June/2016, down 14.2% when compared to June/2015 due to the prepaid disconnections mentioned before.

In 3G technology, total customer base reached 34.0 million users, down 17.8% YoY following an increasing penetration of 4G devices. 4G base reached 11.2 million users in 2Q16, an increase of 22.1% over 1Q16 and up by 193% when compared to 2Q15. In the quarter, 4G customer base grew by more than 2.0 million lines following Company’s ongoing efforts to attract users to the LTE technology, which has been concentrating investments in coverage and quality.

Overall smartphone penetration reached 70% of the customer base in May/16, an important increase of 102bps when compared to 2Q15, as a result of the Company’s strategy of equipping its customers in order to stimulate data services penetration among its users. Unique data users resumed growth in May/16, reaching 32.6 million lines (+3.0% vs. 2Q15). This is another good result of the new portfolio, which is gaining traction. As a percentage of the total base, unique data users reached an important milestone of 50% in May/16, compared to 42% in 2Q15.

 

50%
customer base already using data services

TIM disconnected 3.3 million lines in 2Q16 , as a result of prepaid lines disconnections in the quarter (-3.5 million). Total gross additions fell 19% YoY totaling 7.1 million lines in 2Q16 due to tougher macro and industry scenario, while disconnections accelerated to 10.4 million lines in the period, following Company’s focus in its efficiency plan. Consequently, churn rate came at 15.6% in 2Q16, an increase when compared to 2Q15 (13.2%).

 

 

Postpaid customer base reached 13.7 million users by the end of 2Q16, up by 1.6% YoY. Postpaid base ex-M2M grew 2.2% YoY while M2M lines fell 3.6% in the same period. In the quarter, postpaid base posted an important growth of 213 thousand lines, which together with strong Mobile Number Portability (MNP) figures, point to a reversal in the last quarter negative trend.

  In 2Q16, TIM expanded its positive results in postpaid MNP. Since the introduction of the new portfolio in November 2015, the Company has been posting positive MNP figures in all postpaid segments , reverting years of negative performance. Also in postpaid, gross adds grew 11% YoY in 2Q16.

As already mentioned, TIM disconnected 3.5 million lines in the prepaid segment, followed by the other operators. This is one of the many efforts made by the Company seeking to reduce significantly its costs. By the end of 2Q16, our prepaid base reached 50.2 million lines, down 17.7% YoY.

 CORPORATE SOCIAL RESPONSIBILITY & GOVERNANCE

CSR - Energy Consumption

In line with its Environmental and Climate Change Management Policies guidelines, TIM considers the efficiency of energy consumption as one of its challenges that evolves according to the table below.

Energy Consumption	2Q16	2Q15	% YoY
Electricity consumption in MWh	110,379 (*)	123,330	-10.5%
Fuels consumption in liters (gasoline and diesel)	280,594 (*)	362,957	-22.7%

^(*) Data subject to change - after external verification closing

Energy efficiency is carried out through some actions such as Swap Project (replacing access equipment with more modern and efficient models), the RAN Sharing agreement (sharing model of network infrastructure with other telecom operators) and Freecooling (container ventilation system through the cooler installation in sites, which reduces the use of energy and refrigerants gases by air conditioning equipment). In environmental terms, the RAN Sharing agreement reduces electricity consumption and also has a positive urban impact as it implies in reducing the number of new Radio Base Stations (RBS), minimizing the inconvenience to population. (Indicators EN5 and EN6, GRI-G4 1 ).

Aware of the potential of Brazilian renewable energy sources, we are testing the implementation of photovoltaic panels on sites of Northeast and Southeast regions of Brazil. TIM intends to invest and operate in the energy generation market, providing a sustainable model that will secure prices. The investments and efficiency actions underway will leverage the company’s competitiveness, in addition to mitigating environmental impacts.

The currently increasing research for space for the installation of antennas and telecommunications equipment associated with rapid population growth provided a competition scenario that unleashed antennas agglomerations on top of buildings, facades and metal structures. In this context, the Biosite emerged, a structure with a significant reduction in visual impact that helps harmonize with the environment and urban infrastructure. Its multifunctionality can add beyond telecommunications transmission, contributing for lighting and security through surveillance cameras. At the end of June, the project reached a total of 139 activated Biosites (80 Biosites at the end of June 2015).

Moreover, TIM’s 2015 Sustainability Report was published in June, which provides information about our achievements, challenges and projects related to the commitment to sustainable development, embracing the economic, social and environmental dimensions. The document covers the period from 1st January to December 31th 2015 and was based on the international guidelines of the Global Reporting Initiative (GRI) ¹ , G4 version. The main highlights of the publication are our goals in different spheres (training, recycling, energy and suppliers), profile and management of our human capital, our energy efficiency initiatives and the management of greenhouse gas (GHG). Learn more about TIM’s 2015 Sustainability Report clicking here.

Governance

Seeking to improve transparency and increase disclosure of governance themes TIM remains presenting the activities carried by its Board of Directors and Committees. Find below the highlights for 2Q16:

Board and Committees Activities

Board of Directors

o

Members: 10 members (3 independents);

o

Meetings: 2 meetings with average attendance of 90%;

o

Most relevant activities:

§

Analyze of the First Quarter Financial Report (“ITR”) of 2016;

§

Appreciation of the Innovation Projects and Business Development;

§

Election of the Statutory Directors of the Company and indication the Directors of TIM Celular S.A. and of Intelig Telecomunicações Ltda;

§

Resolution on the Execution of an Agreement between Related Parties.

Fiscal Council

o

Members: 3 members (3 independents);

o

Meetings: 1 meeting; average attendance of 100%;

o

Most relevant activities:

§

Analyze the Independent Audit, BDO RCS Auditores Independentes S.S., Report for the First Quarter Financial Report (“ITR”) of 2016;

§

Discussion on Labor, Civil, Tax and Regulatory contingencies;

§

Election of the Fiscal Council President for the fiscal year 2016/2017.

Statutory Audit Committee

o

Members: 3 members (3 independents);

o

Meetings: 5 meetings; average attendance of 100%;

o

Most relevant activities:

§

Analysis of Enterprise Risk Management Report (ERM);

§

Discussion on Labor, Civil, Tax and Regulatory contingencies;

§

Evaluate Due Diligence and status of TIM’s Anti-Corruption Program;

§

Monitor and Supervision of Annual SOx Certification Process & Internal Deficiencies Control;

§

Monitor and Supervision of 20-F Report and Formulário de Referência 2016;

§

Opinion on an Agreement between Related Parties;

§

Opinion on Financial Statements Report for the first quarter of 2016;

§

Opinion on the Chosen of the Independent Audit of the Company;

§

Supervision and Evaluation of Internal Audit Committee.

Compensation Board

o

Members: 3 members;

o

Meetings: 1 meeting; average attendance 100%;

o

Most relevant activities:

§

Discussion of the Proposal Management by Objectives (“MBO”) of the Company for the year.

Control and Risk Board

o

Members: 5 members (2 independent);

o

Meetings: 2 meetings; average attendance of 90%;

o

Most relevant activities:

§

Evaluate Due Diligence and status of TIM’s Anti-Corruption Program;

§

Monitor and Supervision of Annual SOx Certification Process & Internal Deficiencies Control;

§

Present the Sustainability Report of 2015;

§

Supervision and Evaluation of Internal Audit Committee.

 STOCK PERFORMANCE

TIMP3 ended 2Q16 at R$6.84, down by 33.2% in the last 12 months mostly due to the pressured macroeconomic scenario, while the Bovespa Index (Ibovespa) was down 2.9% over the same period. The Company's ADRs closed 2Q16 at US$10.55, a decrease of 35.5% in the last 12 months.

DISCLAIMER

The financial and operating consolidated information disclosed in this document, except where otherwise indicated, is presented according to IFRS (International Financial Reporting Standards) and in Brazilian Reais (R$), pursuant to Brazilian Corporate Law. All comparisons refer to the second quarter of 2015 (2Q15) and first quarter of 2016 (1Q16), except when otherwise indicated.

This document may contain forward-looking statements. Such statements are not statements of historical fact and reflect the beliefs and expectations of the Company's management. The words "anticipates”, "believes”, "estimates”, "expects”, "forecasts”, "plans”, "predicts”, "projects”, "targets" and similar words are intended to identify these statements, which necessarily involve known and unknown risks and uncertainties foreseen, or not, by the Company. Therefore, the Company’s future operating results may differ from current expectations and readers of this release should not base their assumptions exclusively on the information given herein. Forward-looking statements only reflect opinions on the date on which they are made and the Company is not obliged to update them in light of new information or future developments.

INVESTOR RELATIONS CONTACTS

Telephones: (+55 21) 4109-3360 / 4109-4017 / 4112-6088 / 4112-5517

E-mail: ri@timbrasil.com.br

Investor Relations Website: www.tim.com.br/ir

For more information about TIM please click on this link.

Twitter: @TIM_RI

TIM IR App:

ATTACHMENTS

Attachment 1:

 

Operational Indicators

Attachment 1

TIM PARTICIPAÇÕES S.A.

Operational Indicators

		Dec/2015	Jun/2016
Number of towers sold		5,483	270
Sales value		2,498,421	109,624
Cost of assets and transaction costs		(487,795)	(27,110)
Gain on the transaction		2,010,626	82,514
Effect on sales revenue:
Revenues from disposal of assets		1,253,618	36,085
Cost of assets written off and transaction costs		(235,843)	(2,358)
Reversal of provision for dismantling of assets		193,205	3,302
Effect on pre-tax income (heading “other operating revenues (expenses), net”)		1,210,980	37,029
IR and CS		(372,140)	(10,632)
Net effect on income for the period		838,840	26,397
Deferred revenues		1,002,393	55,107
Leaseback property		1,244,803	73,539
Financial leaseback		1,244,803	73,539
Effect on net debt (*)		1,253,618	36,085

	Parent company				Consolidated
	Balance Sheet 01/01/13 (Reported)	Adjustments	Balance Sheet 01/01/13 (Adjusted)		Balance Sheet 01/01/13 (Reported)	Adjustments	Balance Sheet 01/01/13 (Adjusted)
ASSETS
Current (1)	447,320	-	447,320		9,967,717	12,943	9,980,660
Non current (4 / 1)	13,803,370	(440,048)	13,363,322		16,068,344	165,092	16,233,436
Total assets	14,250,690	(440,048)	13,810,642		26,036,061	178,035	26,214,096
LIABILITIES
Current (2 and 3)	384,451	-	384,451		7,375,222	618,083	7,993,305
Non current	33,369	-	33,369		4,827,969	-	4,827,969
Shareholders’ equity	13,832,870	(440,048)	13,392,822		13,832,870	(440,048)	13,392,822
Total liabilities and shareholders’ equity	14,250,690	(440,048)	13,810,642		26,036,061	178,035	26,214,096

	Parent company				Consolidated
	Balance Sheet 12/31/13 (Reported)	Adjustments	Balance Sheet 12/31/13 (Adjusted)		Balance Sheet 12/31/13 (Reported)	Adjustments	Balance Sheet 12/31/13 (Adjusted)
ASSETS
Current (1)	443,803	-	443,803		10,740,804	6,548	10,747,352
Non current (4 / 1)	14,593,438	(372,704)	14,220,734		17,190,918	134,362	17,325,280
Total assets	15,037,241	(372,704)	14,664,537		27,931,722	140,910	28,072,632
LIABILITIES
Current (2 and 3)	409,780	-	409,780		8,048,103	513,614	8,561,717
Non current	32,821	-	32,821		5,288,979	-	5,288,979
Shareholders’ equity	14,594,640	(372,704)	14,221,936		14,594,640	(372,704)	14,221,936
Total liabilities and shareholders’ equity	15,037,241	(372,704)	14,664,537		27,931,722	140,910	28,072,632

	Parent company				Consolidated
	Statement of income 12/31/13 (Reported)	Adjustments	Statement of income in 12/31/13 (Adjusted)		Statement of income 12/31/13 (Reported)	Adjustments	Statement of income in 12/31/13 (Adjusted)
Net operating revenues (5)	-	-	-		19,921,291	104,338	20,025,629
Cost of services rendered and goods sold	-	-	-		(10,822,202)	-	(10,822,202)
Gross income	-	-	-		9,099,089	104,338	9,203,427
Operating income (expenses) (4 / 6 and 7)	1,505,097	67,344	1,572,441		(6,660,216)	(6,930)	(6,667,146)
Operating income	1,505,097	67,344	1,572,441		2,438,873	97,408	2,536,281
Financial income (expenses) (8)	517	-	517		(302,720)	12,172	(290,548)
Income before income tax and social contribution	1,505,614	67,344	1,572,958		2,136,153	109,580	2,245,733
Income tax and social contribution (9)	-	-	-		(630,539)	(42,236)	(672,775)
Net income for the year	1,505,614	67,344	1,572,958		1,505,614	67,344	1,572,958
Basic earnings per share	0.6230	0.0278	0.6508		0.6230	0.0278	0.6508
Diluted earnings per share	0.6228	0.0279	0.6507		0.6228	0.0279	0.6507

	Parent company				Consolidated
	Statement of added value 12/31/13 (Reported)	Adjustments	Statement of added value 12/31/13 (Adjusted)		Statement of added value 12/31/13 (Reported)	Adjustments	Statement of added value 12/31/13 (Adjusted)
Revenues					26,225,901	109,342	26,335,243
Inputs acquired from third parties	(8,073)		(8,073)		(11,894,210)	(6,929)	(11,901,139)
Retentions	-		-		(2,767,870)	-	(2,767,870)
Value added received by transfer	1,530,611	67,344	1,597,955		686,154	12,171	698,325
Total added value to share	1,522,538	67,344	1,589,882		12,249,975	114,584	12,364,559
Sharing added value:
Personnel and charges	6,448	-	6,448		686,149	-	686,149
Taxes, charges and contributions	1,551	-	1,551		8,575,353	47,240	8,622,593
Remuneration of third party capital	8,925	-	8,925		1,482,859	-	1,482,859
Remuneration of shareholders’ equity	1,505,614	67,344	1,572,958		1,505,614	67,344	1,572,958
	1,522,538	67,344	1,589,882		12,249,975	114,584	12,364,559

	Parent company				Consolidated
	Balance Sheet 12/31/14 (Reported)	Adjustments	Balance Sheet 12/31/14 (Adjusted)		Balance Sheet 12/31/14 (Reported)	Adjustments	Balance Sheet 12/31/14 (Adjusted)
ASSETS
Current (1)	463,010	-	463,010		11,174,415	6,535	11,180,950
Non current (4 / 1)	15,324,516	(370,020)	14,954,496		21,168,729	139,513	21,308,242
Total assets	15,787,526	(370,020)	15,417,506		32,343,144	146,048	32,489,192
LIABILITIES
Current (2 and 3)	432,125	-	432,125		9,123,256	516,068	9,639,324
Non current	33,367	-	33,367		7,897,854	-	7,897,854
Shareholders’ equity	15,322,034	(370,020)	14,952,014		15,322,034	(370,020)	14,952,014
Total liabilities and shareholders’ equity	15,787,526	(370,020)	15,417,506		32,343,144	146,048	32,489,192

	Parent company				Consolidated
	Statement of income 12/31/14 (Reported)	Adjustments	Statement of income in 12/31/14 (Adjusted)		Statement of income 12/31/14 (Reported)	Adjustments	Statement of income in 12/31/14 (Adjusted)
Net operating revenues (5)					19,498,165	3,951	19,502,116
Cost of services rendered and goods sold	-	-	-		(10,083,920)	-	(10,083,920)
Gross income	-	-	-		9,414,245	3,951	9,418,196
Operating income (expenses) (4 / 6 and 7)	1,554,575	2,684	1,557,259		(6,928,556)	(7,100)	(6,935,656)
Operating income	1,554,575	2,684	1,557,259		2,485,689	(3,149)	2,482,540
Financial income (expenses) (8)	(8,156)	-	(8,156)		(292,772)	12,130	(280,642)
Income before income tax and social contribution	1,546,419	2,684	1,549,103		2,192,917	8,981	2,201,898
Income tax and social contribution (9)	-	-	-		(646,498)	(6,297)	(652,795)
Net income for the year	1,546,419	2,684	1,549,103		1,546,419	2,684	1,549,103
Basic earnings per share	0.6396	0.0011	0.6407		0.6396	0.0011	0.6407
Diluted earnings per share	0.6393	0.0011	0.6404		0.6393	0.0011	0.6404

	Parent company				Consolidated
	Statement of added value 12/31/14 (Reported)	Adjustments	Statement of added value 12/31/14 (Adjusted)		Statement of added value 12/31/14 (Reported)	Adjustments	Statement of added value 12/31/14 (Adjusted)
Revenues					25,973,031	4,443	25,977,474
Inputs acquired from third parties	(11,952)		(11,952)		(10,906,860)	(7,099)	(10,913,959)
Retentions	-		-		(3,052,579)	-	(3,052,579)
Value added received by transfer	1,582,453	2,684	1,585,137		1,003,425	12,130	1,015,555
Total added value to share	1,570,501	2,684	1,573,185		13,017,017	9,474	13,026,491
Sharing added value:
Personnel and charges	9,945	-	9,945		782,589	-	782,589
Taxes, charges and contributions	2,531	-	2,531		8,843,917	6,791	8,850,708
Remuneration of third party capital	11,606	-	11,606		1,844,092	-	1,844,092
Remuneration of shareholders’ equity	1,546,419	2,684	1,549,103		1,546,419	2,683	1,549,102
	1,570,501	2,684	1,573,185		13,017,017	9,474	13,026,491

 

	Parent company				Consolidated
	Balance Sheet 12/31/15 (Reported)	Adjustments	Balance Sheet 12/31/15 (Adjusted)		Balance Sheet 12/31/15 (Reported)	Adjustments	Balance Sheet 12/31/15 (Adjusted)
ASSETS
Current (1)	542,751		542,751		12,033,273	6,973	12,040,246
Non current (4 / 1)	16,962,981	(355,722)	16,607,259		23,370,379	145,763	23,516,142
Total assets	17,505,732	(355,722)	17,150,010		35,403,652	152,736	35,556,388
LIABILITIES
Current (2 and 3)	538,523		538,523		8,658,406	508,458	9,166,864
Non current	34,165		34,165		9,812,202	-	9,812,202
Shareholders’ equity	16,933,044	(355,722)	16,577,322		16,933,044	(355,722)	16,577,322
Total liabilities and shareholders’ equity	17,505,732	(355,722)	17,150,010		35,403,652	152,736	35,556,388

	Parent company				Consolidated
	Statement of income 12/31/15 (Reported)	Adjustments	Statement of income in 12/31/15 (Adjusted)		Statement of income 12/31/15 (Reported)	Adjustments	Statement of income in 12/31/15 (Adjusted)
Net operating revenues (5)	-	-	-		17,138,851	3,414	17,142,265
Cost of services rendered and goods sold	-	-	-		(8,306,857)	-	(8,306,857)
Gross income					8,831,994	3,414	8,835,408
Operating income (expenses) (4 / 6 and 7)	2,065,868	14,297	2,080,165		(5,587,777)	3,809	(5,583,968)
Operating income	2,065,868	14,297	2,080,165		3,244,217	7,223	3,251,440
Financial income (expenses) (8)	5,277	-	5,277		(264,378)	13,971	(250,407)
Income before income tax and social contribution	2,071,145	14,297	2,085,442		2,979,839	21,194	3,001,033
Income tax and social contribution (9)	-	-	-		(908,694)	(6,897)	(915,591)
Net income for the year	2,071,145	14,297	2,085,442		2,071,145	14,297	2,085,442
Basic earnings per share	0.8558	0.0059	0.8617		0.8558	0.0059	0.8617
Diluted earnings per share	0.8557	0.0059	0.8616		0.8557	0.0059	0.8616

	Parent company				Consolidated
	Statement of added value 12/31/15 (Reported)	Adjustments	Statement of added value 12/31/15 (Adjusted)		Statement of added value 12/31/15 (Reported)	Adjustments	Statement of added value 12/31/15 (Adjusted)
Revenues					23,156,529	3,689	23,160,218
Inputs acquired from third parties	(16,444)		(16,444)		(7,526,175)	3,809	(7,522,366)
Retentions	-		-		(3,361,971)	-	(3,361,971)
Value added received by transfer	2,103,012	14,297	2,117,309		1,996,752	13,971	2,010,723
Total added value to share	2,086,568	14,297	2,100,865		14,265,135	21,469	14,286,604
Sharing added value:
Personnel and charges	11,214	-	11,214		850,362	-	850,362
Taxes, charges and contributions	2,207	-	2,207		8,441,124	7,172	8,448,296
Remuneration of third party capital	2,002	-	2,002		2,902,504	-	2,902,504
Remuneration of shareholders’ equity	2,071,145	14,297	2,085,442		2,071,145	14,297	2,085,442
	2,086,568	14,297	2,100,865		14,265,135	21,469	14,286,604

	Parent company				Consolidated
	Balance Sheet 06/30/15 (Reported)	Adjustments	Balance Sheet 06/30/15 (Adjusted)		Balance Sheet 06/30/15 (Reported)	Adjustments	Balance Sheet 06/30/15 (Adjusted)
ASSETS
Current (1)	95,548	-	95,548		10,897,865	6,477	10,904,342
Non current (4 / 1)	16,574,619	(348,194)	16,226,425		22,698,397	141,048	22,839,445
Total assets	16,670,167	(348,194)	16,321,973		33,596,262	147,525	33,743,787
LIABILITIES
Current (2 and 3)	73,475	-	73,475		7,304,588	495,719	7,800,307
Non current	33,461	-	33,461		9,728,443	-	9,728,443
Shareholders’ equity	16,563,231	(348,194)	16,215,037		16,563,231	(348,194)	16,215,037
Total liabilities and shareholders’ equity	16,670,167	(348,194)	16,321,973		33,596,262	147,525	33,743,787

	Parent company				Consolidated
	Statement of income 06/30/15 (Reported)	Adjustments	Statement of income in 06/30/15 (Adjusted)		Statement of income 06/30/15 (Reported)	Adjustments	Statement of income in 06/30/15 (Adjusted)
Net operating revenues (5)	-	-	-		8,899,749	12,100	8,911,849
Cost of services rendered and goods sold	-	-	-		(4,538,314)	-	(4,538,314)
Gross income	-	-	-		4,361,435	12,100	4,373,535
Operating income (expenses) (4 / 6 and 7)	1,236,414	21,826	1,258,240		(2,476,365)	7,824	(2,468,541)
Operating income	1,236,414	21,826	1,258,240		1,885,070	19,924	1,904,994
Financial income (expenses) (8)	2,681	-	2,681		(115,967)	6,408	(109,559)
Income before income tax and social contribution	1,239,095	21,826	1,260,921		1,769,103	26,332	1,795,435
Income tax and social contribution (9)	-	-	-		(530,008)	(4,506)	(534,514)
Net income for the period	1,239,095	21,826	1,260,921		1,239,095	21,826	1,260,921
Basic earnings per share	0.5120	0.009	0.5210		0.5120	0.009	0.5210
Diluted earnings per share	0.5119	0.009	0.5209		0.5119	0.009	0.5209

	Parent company				Consolidated
	Statement of added value 06/30/15 (Reported)	Adjustments	Statement of added value 06/30/15 (Adjusted)		Statement of added value 06/30/15 (Reported)	Adjustments	Statement of added value 06/30/15 (Adjusted)
Revenues	-	-	-		12,025,482	12,403	12,037,885
Inputs acquired from third parties	(3,244)	-	(3,244)		(3,819,098)	7,823	(3,811,275)
Retentions	-	-	-		(1,643,891)	-	(1,643,891)
Value added received by transfer	1,249,315	21,826	1,271,141		851,111	6,408	857,519
Total added value to share	1,246,071	21,826	1,267,897		7,413,604	26,634	7,440,238
Sharing added value:
Personnel and charges	5,006	-	5,006		419,996	-	419,996
Taxes, charges and contributions	1,512	-	1,512		4,479,897	4,808	4,484,705
Remuneration of third party capital	458	-	458		1,274,616	-	1,274,616
Remuneration of shareholders’ equity	1,239,095	21,826	1,260,921		1,239,095	21,826	1,260,921
	1,246,071	21,826	1,267,897		7,413,604	26,634	7,440,238

Reconciliation of the effects on Shareholders’ Equity:

	Capital	Reserves	Other comprehensive income	Retained earnings	Total
Balance as at January 1, 2013	9,839,770	3,993,332	(232)	-	13,832,870
Prior year adjustments	-	(440,048)	-	-	(440,048)
Balance as at January 1, 2013 adjusted	9,839,770	3,553,284	(232)	-	13,392,822
Net income for the year	-	-	-	1,505,614	1,505,614
Adjustment on the year	-	-	-	67,344	67,344
Net income adjusted	-	-	-	1,572,958	1,572,958
Other movements	-	826,869	2,245	(1,572,958)	(743,844)
Balance as at December 31, 2013 adjusted	9,839,770	4,380,153	2,013	-	14,221,936
Net income for the year	-	-	-	1,546,419	1,546,419
Adjustment on the year	-	-	-	2,684	2,684
Net income adjusted	-	-	-	1,549,103	1,549,103
Increase on capital stock	26,528	-	-	-	26,528
Other movements	-	703,260	290	(1,549,103)	(845,553)
Balance as at December 31, 2014 adjusted	9,866,298	5,083,413	2,303	-	14,952,014
Net income for the year	-	-	-	2,071,145	2,071,145
Adjustment on the year	-	-	-	14,297	14,297
Net income adjusted	-	-	-	2,085,442	2,085,442
Other movements	-	1,625,724	(416)	(2,085,442)	(460,134)
Balance as at December 31, 2015 adjusted	9,866,298	6,709,137	1,887	-	16,577,322

f.

Approval of interim financial information

This interim financial information was approved by the Company ’ s Board of Directors on July 25 , 2016.

g .

New standards, changes and interpretations of standards not yet in force

The following new standards were issued by the IASB, but they are not in force for the year 201 6 . The early adoption of these standards, although encouraged by IASB, was not allowed in Brazil by the CVM, based on a pronouncement of the Accounting Pronouncements Committee (CPC).

IFRS 9	“ Financial Instruments ” deals with the classification, measurement and recognition of financial assets and liabilities. IFRS 9 was issued in November 2009 and October 2010 and replaces the parts of IAS 39 relating to the classification and measurement of financial instruments. IFRS 9 requires the classification of financial assets in two categories: measured at fair value and measured at amortized cost. The determination is made at the initial recognition. The classification basis depends on the entity ’ s business model and on the contractual characteristics of the financial instruments ’ cash flow. Regarding financial liabilities, the standard maintains the majority of the requirements set forth in IAS 39. The main change is that, in cases where the fair value option is adopted for financial liabilities, the portion of the change in fair value which is due to the entity ’ s own credit risk is recorded in other comprehensive income, not in the income statement, except when this would result in an accounting mismatch. The Group is assessing the overall impact of IFRS 9 . The standard comes into force on January 1 st , 2018.
IFRS 15	This new standard determines the concepts that an entity has to apply in revenue measurement and when it must be recognized. It was initially issued to come into effect on January 1 st , 2017 and replace IAS 11 – “ Construction Contracts ” , IAS 18 – “ Revenues ” and related interpretations. The standard comes into effect on January 1 st , 2018. The Group is assess ing the overall impact of IFRS 15 .
IFRS16	This standard supersedes the existing standard on leasing, IAS 17/CPC 06 (R1) – Leases, and related interpretations, and establishes the principles to recognition, measurement, presentation and disclosure on leasing for both parts on a contract, in other words, clients (lessee) and suppliers (lessor). Lessees are required to recognize a leasing liability reflecting future payments of the leasing and a “ right to use an asset ” to almost all leases contracts, excepting some short term leases and contract of small amounts assets. For lessors the accounting treatment remains almost unchanged, with the classification on leases in operational or financial leases, and the accounting of these two kind of leases contracts in different manners. The standard comes into effect on January 1 st , 2019. The Group is assessing the impacts on its adoption and have still not defined the transition method that will be used.

There are no other present IFRS standards or IFRIC interpretations not yet in force that could have a significant impact on interim financial information of the Group.

3

Critical judgment in the application of the Company’s accounting policies

Accounting estimates and judgments are continuously reassessed. They are based on Company´s historical experience and other factors, such as expectations of future events, considering the circumstances presented as of the interim financial information date.

By definition, the accounting estimates resulting from such assumptions rarely equal the actual outcome. The estimates and assumptions that presents significant risk with probability to cause relevant adjustments in the book values of assets and liabilities for the next fiscal years, are shown below:

  (a)

Impairment losses of non-financial assets

Losses from impairment take place when the book value of assets or cash generating unit exceeds the respective recoverable value, which is considered as the fair value less costs to sell, or the value in use, whichever is greater. The calculation of fair value less costs to sell is based on information available from sale transactions involving similar assets or market prices less additional costs that would be incurred to dispose of those assets. The value in use is based on the discounted cash flow model. Cash flows derive from the Company’s business plan. Since this is an ongoing business, as from the fifth projection year a perpetuity of nominal growth of cash flows was estimated.

Any reorganization activities to which the Company has not committed itself on the financial statements disclosure date on which the interim financial information is reported or any material future investments aimed at improving the asset base of the cash generating unit being tested are excluded for the purposes of the impairment test.

The recoverable value is sensitive to the discount rates used in the discounted cash flow method, as well as to the expected future cash receivables and the growth rate of revenue and expenses used for extrapolation purposes. Adverse economic conditions may lead to significant changes in these assumptions.

The principal non-financial assets valued in this way was the goodwill recorded by the Company (note 15).

In the half year ended June 30, 2016, there was no change in the estimates and assumptions posing a significant risk, which might cause a material adjustment to the book values of property, plant and equipment or intangible assets during this period.

(b)

Income tax and social contribution (current and deferred)

Income tax and social contribution (current and deferred) are calculated in accordance with interpretations of the legislation currently in force. This process normally includes complex estimates in order to define the taxable income and differences. In particular, deferred tax assets on income tax and social contribution losses and temporary differences are recognized to the extent that it is probable that future taxable income will be available and can be offset. The recoverability of deferred income tax and social contribution losses carryforward and of temporary differences takes into account estimates of taxable income (note 10).

(c)

Provision for legal and administrative proceedings

Legal and administrative proceedings are analyzed by the Company’s management and internal and external legal advisors. The Company’s reviews take into account factors such as the hierarchy of laws, case law available, recent court decisions and their relevance in the legal order. Such reviews involve Management’s judgment (note 23).

(d)

Fair value of derivatives and other financial instruments

Financial instruments presented at fair value in the balance sheet are measured using evaluation techniques that considers observable data or observable data derived from the market (note 39).

(e)

Unbilled revenues

Considering that some billing cut-off dates occur at intermediate dates within the months, at the end of each month there are revenues already earned by the Company but not effectively billed to the customers. These unbilled revenues are recorded based on estimates which take into account historical data of usage, number of days since the last billing date, among other factors.

(f)

Sale and leaseback

The sale and leaseback transaction is that where the Group sells an asset and immediately requires the use of the same asset by entering into a lease agreement with the buyer. The accounting treatment of the sale and leaseback transaction depends on the substance of this transaction (by applying the principles of lease classification).

For financial sale and leaseback, the total gain is deferred and amortized over the lease term. For operational sale and leaseback, generally the assets are sold at fair value, and consequently, the gain or loss on the sale is immediately recognized in the income statement.

At the beginning of the lease term, the Company recognizes finance leases as assets and liabilities on its balance sheet by amounts equal to the fair value of the leased property or, if lower, the present value of the minimum lease payments, each determined at the beginning of lease.

The discount rate used in a sale and leaseback transaction is determined based on observable market transactions where the lessee would have to pay on a similar lease contract or loan. As mentioned in note 1.b, discount rates applied by Management in the transactions carried out during the year were decisive for the calculation of the portion of the gain recorded through profit and loss, as well as the portion of deferred gain and amortized over the lease term.

4

Cash and cash equivalents

These are financial assets classified as loans and receivables, being accounted at the amortized cost through the effective interest rate method. The Company’s Management determines the classification of its financial assets upon their initial recognition.

		Parent Company				Consolidated
		Jun/2016		Dec/2015		Jun/2016		Dec/2015
Cash and banks		457		555		73,237		113,244
Unrestrictedly available financial investments:
CDB/Repurchases		35,337		24,208		3,245,175		5,987,159
		35,794		24,763		3,318,412		6,100,403

Bank Deposit Certificates (“CDB”) and Repurchases are nominative securities issued by banks and sold to the public as a means of raising funds. Such securities can be traded during the contracted period, at any time, without any significant loss of value and are used to repay short-term obligations of the Company.

The annual average return of the Company’s investments regarding CBDs and Repurchases, including those not classified as cash and cash equivalents, is 101.24% (101.30% as of 31 December, 2015) of the Interbank Deposit Certificate - CDI rate.

5

Securities

		Consolidated
		Jun/2016		Dec/2015
Foreign exchange fund		491,318		599,414
		491,318		599,414
Current portion		(491,318)		(599,414)

Shares in a non-exclusive foreign exchange fund were purchased during 2015. This foreign exchange fund has daily liquidity in order to follow the variations of the US Dollar, and is basically formed by highly liquid public securities. The investment is intended to reduce foreign exchange risk on repayments to suppliers in foreign currency. The classification as securities occurs due to significant changes in value in the event of an early redemption.

During the half year ended June 30, 2016, approximately 7.87% of the foreign exchange fund shares were designated as cash-flow hedge.

6

Trade accounts receivable

These are financial assets classified as borrowings and receivables, and they refer to accounts receivable from users of telecommunications services, from network use (interconnection) and from sales of handsets and accessories. Accounts receivable are recorded at the price charged at the time of the transaction. The balances of accounts receivable also include services provided and not billed until the balance sheet date. Accounts receivable from clients are initially recognized at fair value and are subsequently measured at amortized cost using the effective interest rate method less the allowance for doubtful accounts ( “ impairment ” ) .

Losses on doubtful accounts were recognized as a reduction at accounts receivable based on the profile of the subscriber portfolio, the overdue aging of accounts receivable, the economic situation, the risks involved in each case and the collection curve, at an amount deemed sufficient.

The fair value of accounts receivable equals the book value recorded at June 30, 2016 and December 31, 2015. A portion of the accounts receivable, relating to the post-paid segment, is used to secure the total amount of BNDES borrowings (note 19).

		Consolidated
		Jun/2016		Dec/2015
Billed services		1,077,224		995,879
Unbilled services		602,729		667,886
Network use		429,361		448,064
Sale of goods		1,020,405		1,120,449
Other accounts receivable		5,388		2,053
		3,135,107		3,234,331
Losses on doubtful accounts		(362,717)		(351,381)
		2,772,390		2,882,950
Current portion		(2,743,937)		(2,858,089)
Non-current portion		28,453		24,861

Changes in losses on doubtful accounts, controlled as an asset offset account, were as follows:

		Consolidated
		Jun/2016 (6 months)		Dec/2015 (12 months)
Opening balance		351,381		373,577
Additions		140,517		230,357
Write-off		(129,181)		(252,553)
Closing balance		362,717		351,381

The aging of the accounts receivable is as follows:

		Consolidated
		Jun/2016		Dec/2015
Falling due		2,006,511		2,153,088
Past due for up to 30 days		183,513		189,186
Past due for up to 60 days		73,733		57,822
Past due for up to 90 days		424,394		406,850
Past due for more than 90 days		446,956		427,385
		3,135,107		3,234,331

7

Inventories

Inventories are stated at average acquisition cost. A loss is recognized to adjust the cost of handsets and accessories to net realizable value (selling price) when this amount is less than the average acquisition cost.

		Consolidated
		Jun/2016		Dec/2015
Mobile handsets and tablets		147,022		123,664
Accessories and pre-paid cards		26,049		19,762
TIM chips		17,848		12,170
		190,919		155,596
Losses on adjustment to realizable amount		(18,116)		(13,876)
		172,803		141,720

 

8

Indirect taxes and contributions recoverable

			Consolidated
			Jun/2016		Dec/2015 (Revised)
ICMS			1,601,154		1,708,059
Others			35,866		34,241
			1,637,020		1,742,300
Current portion			(846,429)		(924,624)
Non-current portion			790,591		817,676

ICMS amounts recoverable basically refer to (i) credits on the acquisition of property, plant and equipment directly related to the provision of telecommunication services (credits divided into 48 months), (ii) ICMS tax substitution amounts from goods acquired for resale, mainly mobile handsets, chips, tablets and modems sold by TIM Celular and (iii) credits deriving from objections (debit reversal) in UFs which still did not implement the presumed credit.

9

Direct taxes and contributions recoverable

		Parent Company				Consolidated
		Jun/2016		Dec/2015		Jun/2016		Dec/2015 (Revised)
Income tax and social contribution		195		387		289,209		185,804
PIS/COFINS		20,185		20,185		143,853		233,326
Others		1,558		1,339		80,172		81,113
		21,938		21,911		513,234		500,243
Current portion		(21,938)		(21,911)		(330,122)		(329,722)
Non-current portion		-		-		183,112		170,521

The PIS/COFINS amounts recoverable refer (i) to credits recorded considering favorable case law on legal proceeding questioning on the unconstitutionality of broadening the calculation base for these contributions under Law 9.718/98. By providing that billing corresponds to all income earned by legal entity, the law broadened the definition of billing, as it added other revenues to the calculation base of these contributions, besides goods and services; (ii) credits for the purchase of inventories of goods for resale, basically handsets, tablets and modems; and (iii) credits calculated on rights and services used as input, electricity and rentals, pursuant to Law No. 10.637/2002 and No. 10.833/2003.

10

Deferred income tax and social contribution

Deferred income tax and social contribution are recognized on (1) accumulated income tax and social contribution losses carry forward and on (2) temporary differences arising from differences between the tax bases of assets and liabilities and their carrying values in the interim financial information. Deferred income tax is determined using enacted tax rates (and tax laws), or substantially enacted, up to the balance sheet date. Subsequent changes in tax rates or tax legislation may modify deferred tax credit and debit balances.

Deferred income tax and social contribution credits are recognized only in the event of a profitable track record and/or when the annual forecast prepared by the Company, examined by the Fiscal Council and Statutory Audit Committee and approved by other management bodies, indicates the likelihood of future realization of those tax credits.

The balances of deferred income tax and social contribution credits and debits are shown in the balance sheet at net amount, when there is both a legal right and the intention to offset them at the time when current taxes are ascertained, usually in relation to the same legal entity and the same taxation authority. Thus deferred tax credits and debits belonging to different entities are in general shown separately, not at their net amount.

As of June 30, 2016 and December 31, 2015, the prevailing tax rates were 25% for income tax and 9% for social contribution. The tax incentives shown in note 34 are also being considered in deferred taxes.

The amounts recorded are as follows:

		Parent company				Consolidated
Assets (liabilities)
		Jun/2016		Dec/2015		Jun/2016		Dec/2015
Deferred taxes – Liabilities
Deemed cost – Intelig		-		-		(115,417)		(120,730)
		-		-		(115,417)		(120,730)
Deferred taxes – Assets
Tax losses		30,609		27,756		963,887		1,034,243
Social contribution losses		11,084		10,057		360,618	3	385,946
Temporary differences
Provision for legal and administrative proceedings		1,034		1,497		137,291		141,246
Losses on doubtful accounts		-		-		128,698		122,299
Adjustment to present value – 3G license		-		-		13,979		14,950
Deferred tax on CPC adjustments
Acquisition of stocks from minority shareholders		53,569		53,569		53,569		53,569
Business combination – Intelig acquisition		-		-		71,405		71,405
Depreciation related to asset retirement obligations		-		-		4,886		6,482
Monetary adjustments related to asset retirement obligations		-		-		3,933		4,363
Capitalized interests		-		-		329		499
Authorization charges		-		-		1		387
Lease of LT Amazonas Infrastructure		-		-		13,624		11,022
Effect of merger of TIM Fibers		-		-		684		770
Profit sharing		201		336		17,861		16,594
Taxes with suspended enforceability		-		-		12,872		12,872
Fistel – Recovery TFI		-		-		32,670		50,721
Amortized goodwill – TIM Fiber		-		-		(296,395)		(264,639)
Derivative transactions		-		-		(30,263)		(336,621)
Capitalized interests on 4G authorization		-		-		(128,169)		(84,751)
Other		-		-		2,227		5,484
		96,497		93,215		1,363,707		1,246,841
Provision for realization of tax credits (Intelig and TIM Participações)		(96,497)		(93,215)		(1,231,681)		(1,232,315)
		-		-		132,026		14,526

TIM Celular

The subsidiary TIM Celular has set up deferred income tax and social contribution assets on its total tax losses, social contribution losses and temporary differences, based on a profitability history and the projected future taxable earnings.

Based on these projections, the subsidiary expects to recover the credits as follows:

	Deferred income tax and social contribution
2016	25,205
2017	91,305
2018	105,951
2019 onwards	57,679
Tax losses and negative base	280,140
Temporary differences	(148,114)
Total credits recoverable	132,026

The estimates for recovery of tax assets were calculated taking into account the financial and business assumptions available at the close of 2015, which are also valid for the half year ended June 30, 2016.

The subsidiary TIM Celular used credits related to tax losses carried forward and negative basis of social contribution in the amount of R$95,687 in the first six months of 2016 (R$138,207 as of June 30, 2015).

Losses on the realization of tax credits

Considering that TIM Participações S.A. does not carry out activities that may generate income tax and social contribution taxable bases, the full loss on tax credits arising from income tax and social contribution tax losses and temporary differences, totaling R$96,498 at June 30, 2016 (R$93,215 at December 31, 2015), was recognized.

In the case of subsidiary Intelig, considering that it has not presented a taxable income history, a total provision for realization of tax credits mentioned was set up, in the amount of R$1,135,183 as of June 30, 2016 (R$1,139,100 as of December 31, 2015), of which R$1,002,673 refers to tax losses and negative base of social contribution and R$132,510 to temporary differences.

11

Prepaid expenses

		Consolidated
		Jun/2016		Dec/2015
Fistel (*)		502,341		-
Advertising not released (**)		92,160		162,145
Rentals and insurance		61,374		46,936
Network swap (***)		33,304		37,674
Others		17,154		18,535
		706,333		265,290
Current portion		(643,265)		(210,056)
Non-current portion		63,068		55,234

(*) The Fistel fee paid in March 2016 refers to the 2016 fiscal year and has been amortized monthly according to the respective triggering event.

(**) Represent early payments of expenses from the advertising of TIM brand’s products and services, which were recognized in income for the period of broadcasting.

(***) On April 1 ^st , 2010, the subsidiary Intelig and GVT entered into onerous contract and a reciprocal agreement of assignment of fiber optic infrastructure (network swap), in order to expand their respective areas of operation. Given the economic nature of the transaction, the amount was recognized in the (current and non-current) prepaid expenses and deferred revenues (current and non-current). Both amounts are being appropriated to income in the same proportion over a period of 10 years.

12

Judicial deposits

These are recorded at their historical cost and updated according to the legislation in force:

		Parent Company				Consolidated
		Jun/2016		Dec/2015		Jun/2016		Dec/2015
Civil		11,139		9,218		424,336		361,689
Labor		68,840		63,043		441,916		420,112
Tax		1,511		1,437		279,554		268,825
Regulatory		-		-		110		109
Others (*)		137		127		67,412		55,306
Non-current portion		81,627		73,825		1,213,328		1,106,041

(*) Refer to financial investments related to judicial proceedings.

Civil

These are court deposits to guarantee execution of civil proceedings where the Company is challenging the amounts involved. Most of these proceedings refer to lawsuits filed by customers, involving issues of consumers’ rights, among others.

There are some proceedings involving different issues, challenging the amount fixed by ANATEL for quitting the V1 sub-bands, to allow the implementation of 4G technology, after TIM Celular has won the auction. In this case, the court deposit amounts to R$56,529 (R$53,559 as of December 31 ^st , 2015).

Labor

These are amounts deposited in court related to guarantees of execution and the filing of appropriate appeals, the relevant matter or amounts involved are still being discussed. The amount has been distributed among the several claims filed by the Company’s employees and third-party service providers.

Tax

The Company and its subsidiaries have placed court deposits for tax issues to back various current court proceedings. These deposits refer mainly to the following matters:

(i) 2% increase in the ICMS rate for the Fund for the Eradication of Poverty (FECP) in the State of Bahia on prepaid telephone services provided by the Company. The current value of these deposits is R$83,623 (R$ 80,205 as of December 31, 201 5 ) .

(ii) Use of credit for the purchase of electricity used directly by the companies for production purposes. The court is tending to give a favorable judgment. The current value of these deposits is R$67,821 (R$6 4,968 as of December 31, 201 5 ) .

(iii) Liability for CPMF on capitalization of loans; recognition of the right not to pay contributions allegedly due on the mere change of ownership of current accounts as a result of a takeover. The current value of these deposits is R$32,462 (R$ 31,450 as of December 31, 201 5 ) .

(iv) Constitutionality of collection of the Operations Monitoring Charge (TFF) by a number of municipal authorities. The current value of these deposits is R$12,813 (R$ 11,450 as of December 31, 201 5 ) .

(v) Failure to approve set-off of federal debts against credits for Withholding Tax (IRRF) because it is alleged that the credits are insufficient, as well as the deposit placed to ensure the issue of a Tax Clearance Certificate. The current value of these deposits is R$9,685 (R$ 9,340 as of December 31, 201 5 ) .

(vi) Liability for ISS on import services and outsourced services; alleged failure to pay for land clearance and ERB maintenance service, for ISS on the Company’s services and for ISS on Co-billing services and software licensing (Blackberry). Guarantee of the right to take advantage of the benefit of volunteered information and seeking to reverse confiscatory fines for late payment. The current value of these deposits is R$6,076 (R$ 5,524 as of December 31, 201 5 ) .

(vii) Ancillary services provided for in ICMS Agreement 69/98. The current value of these deposits is R$5,611 (R$5, 479 as of December 31, 201 5 ) .

(viii) Volunteered report of tax debits and consequent cancellation of charge of fine for late payment. The current value of these deposits is R$4,111 (R$ 4,001 as of December 31, 201 5 ) .

(ix) Deposit made by Intelig related to the unconstitutionality and illegality of charging by FUST. Plea for the recognition of the right not to pay FUST, and not to include in its calculation base revenues transferred for interconnections and EILD (Industrial Exploitation of Dedicated Line); and of the right not to be charged retroactively for differences arising from failure to comply with ANATEL ruling 7/2005. The current value of these deposits is R$46,293 (R$ 43,323 as of December 31, 201 5 ) .

13

Investments - Parent company

Equity interests in subsidiaries are valued using the equity method only in the individual interim financial information.

(a)

Interest in subsidiaries

	Jun/2016
	TIM Celular		Intelig		Total
Number of shares held	38,254,833,561		3,279,157,266
Interest in total capital	100%		100%
Shareholders’ equity	15,520,838		1,043,643
Unrealized results	-		(753)
Revised shareholders’ equity	15,520,838		1,042,890
Net profit for the period	188,873		22,754
Unrealized results	-		402
Revised profit for the period	188,873		23,156		212,029
Income from equity accounting	188,873		23,156		212,029
Investment amount	15,520,838		1,042,890		16,563,728

	Dec/2015 (Revised)
	TIM Celular		Intelig		Total
Number of shares held	38,254,833,561		3,279,157,266
Interest in total capital	100%		100%
Shareholders’ equity	15,353,019		1,023,959
Unrealized results	-		(1,157)
Revised shareholders’ equity	15,353,019		1,022,802
Profit for the year	2,087,114		22,266
Unrealized results	-		808
Revised profit for the year	2,087,114		23,074		2,110,188
Income from equity accounting	2,087,114		23,074		2,110,188
Investment amount	15,353,019		1,022,802		16,375,821

(b)

Changes in investment in subsidiaries

		TIM Celular		Intelig		Total
Balance of investments at December 31, 2014 (represented)		13,731,610		999,601		14,731,211
Income from equity accounting (represented)		2,087,114		23,074		2,110,188
Stock options		3,724		127		3,851
Proposed dividends		(469,013)		-		(469,013)
Effect of post-employment benefit supplementary amount		(416)		-		(416)
Balance of investments at December 31, 2015 (represented)		15,353,019		1,022,802		16,375,821
Income from equity accounting		188,873		23,156		212,029
Stock options		2,014		107		2,121
Cash flow hedge		(3,068)		(3,175)		(6,243)
Supplementary dividends		(20,000)		-		(20,000)
Balance of investments at June 30, 2016		15,520,838		1,042,890		16,563,728

14

Property, Plant and Equipment

Property, plant and equipment are stated at acquisition and/or construction cost, less accumulated depreciation and impairment losses (the latter, only if applicable). Depreciation is calculated on the straight-line method over terms that take into account the expected useful lives of the assets and their residual values.

The estimated costs of dismantling towers and equipment on rented properties are capitalized and depreciated over the estimated useful life of these assets. The Company recognizes the present value of these costs in property, plant and equipment with a counter-entry to the liability “provision for future asset retirement”. Interest incurred on updating the provision is classified as financial expenses.

Gains and losses from disposals are determined by comparing the amounts of these disposals with the carrying values at the time of the transaction and are recognized in “other operating incomes (revenues), net” in the statement of income.

On January 1 ^st , 2009, Intelig on its first adoption of IFRS / CPCs, used deemed cost to measure its property, plant and equipment assets, according to ICPC 10, as approved by a CVM Deliberation. After this, its property, plant and equipment is demonstrated by acquisition and / or construction historical cost. Both (deemed cost and historical cost) are deductible from the accumulated depreciation and from the impairment losses (this one, if applicable).

(a)

Change in property, plant and equipment

	Consolidated
	Balance Dec/2015	Additions	Write-offs	Transfers	Balance Jun/2016
Cost of property, plant and equipment, gross
Commutation / transmission equipment	16,565,919	-	(56,914)	479,571	16,988,576
Fiber optic cables	583,447	-	(18)	18,563	601,992
Free leased handsets	1,952,079	6	(14,984)	55,210	1,992,311
Infrastructure	5,024,183	73,539	(77,922)	132,885	5,152,685
Informatics assets	1,501,507	-	(3,764)	29,716	1,527,459
General use assets	657,086	-	(619)	24,159	680,626
Land	40,794	-	-	-	40,794
Construction in progress	601,634	675,398	32,365	(740,104)	569,293
Total property, plant and equipment, gross	26,926,649	748,943	(121,856)	-	27,553,736
Accumulated depreciation
Commutation/transmission equipment	(10,653,118)	(676,888)	49,518	-	(11,280,488)
Fiber optic cables	(200,123)	(20,955)	3	-	(221,075)
Free leased handsets	(1,783,940)	(62,014)	9,129	-	(1,836,825)
Infrastructure	(1,884,692)	(207,552)	33,651	-	(2,058,593)
Informatics assets	(1,296,837)	(41,219)	3,764	-	(1,334,292)
General use assets	(440,591)	(19,989)	611	-	(459,969)
Total accumulated depreciation	(16,259,301)	(1,028,617)	96,676	-	(17,191,242)
Property, plant and equipment, net
Commutation / transmission equipment	5,912,801	(676,888)	(7,396)	479,571	5,708,088
Fiber optic cables	383,324	(20,955)	(15)	18,563	380,917
Free leased handsets	168,139	(62,008)	(5,855)	55,210	155,486
Infrastructure	3,139,491	(134,013)	(44,271)	132,885	3,094,092
Informatics assets	204,670	(41,219)	-	29,716	193,167
General use assets	216,495	(19,989)	(8)	24,159	220,657
Land	40,794	-	-	-	40,794
Construction in progress	601,634	675,398	32,365	(740,104)	569,293
Total property, plant and equipment, net	10,667,348	(279,674)	(25,180)	-	10,362,494

Consolidated figures for the period include the total effect, amounting to R$ 25,292 , of the net amount of write-offs relating to the sale of towers, and additions in the amount of R$73,539 for assets under sale and leaseback.

(b)

Depreciation rates

		Annual rate %
Commutation / transmission equipment		8 to 14.29
Fiber optic cables		4 to 10
Free-leased handsets		50
Infrastructure		4 to 20
Informatics assets		20
General use assets		4 to 20

In 2015, pursuant to IAS 16 (CPC 27), approved by CVM Deliberation, the Company and its subsidiaries assessed the useful life estimates for their property, plant and equipment, concluding that there was no significant change or alteration to the circumstances on which the estimates had been based that would justify changes to the useful lives currently in use. To determine the useful life of the assets, the Company considers not just the type of the asset, but also the way it is used and the conditions to which the asset is submitted during its use.

15

Intangible assets

Intangible assets are measured at historical cost less accumulated amortization and impairment losses (if applicable), and reflect: (i) the purchase of authorizations and rights to use radio frequency bands and (ii) software in use and/or development. Intangibles also include (i) the purchase of the right to use the infrastructure of other companies, (ii) customer lists, (iii) goodwill on the purchase of companies, and (iv) cost of deferred commission.

Amortization charges are calculated on the straight-line method over the estimated useful life of the assets contracted and over the terms of the authorizations. The useful life estimates of intangible assets are reviewed regularly.

Any financial charges on funds generically raised (that is, without a specific destination) and used for obtaining qualified assets, which are assets that necessarily require a significant time to be ready for use, are capitalized as a portion of the cost of the asset when it is likely to bring future economic benefits for the entity and such costs can be accurately measured. These costs are amortized throughout the estimated useful life of assets.

The amounts of the SMP authorizations and radio frequency right to use, as well as software, goodwill and other items, were recorded as follows:

(a)

Change in intangible

			Consolidated
		Balance Dec/2015	Additions	Transfers	Write-offs	Capitalized Interests	Balance Jun/2016
Cost of intangible assets, gross
Software rights to use		13,088,536	29,372	631,019	(1,477)	-	13,747,450
Authorizations		5,189,022	63,967	637	-	-	5,253,626
Goodwill		1,527,219	-	-	-	-	1,527,219
Cost of deferred commission to dealers		28,991	76,195	-	-	-	105,186
List of clients		95,200	-	-	-	-	95,200
Right to use infrastructure LT Amazonas		198,202	-	-	-	-	198,202
Other assets		167,125	-	30,206	-	-	197,331
Intangible assets under development		3,361,641	862,597	(661,862)	-	139,383	3,701,759
Total intangible assets, gross		23,655,936	1,032,131	-	(1,477)	139,383	24,825,973
Accumulated amortization
Software rights to use		(9,591,782)	(637,381)	-	1,477	-	(10,227,686)
Authorizations		(3,962,749)	(129,877)	-	-	-	(4,092,626)
Cost of deferred commission to dealers		(1,688)	(46,591)	-	-	-	(48,279)
List of clients		(70,000)	(8,400)	-	-	-	(78,400)
Right to use infrastructure LT Amazonas		(22,711)	(4,955)	-	-	-	(27,666)
Other assets		(47,813)	(5,002)	-	-	-	(52,815)
Total Accumulated Amortization		(13,696,743)	(832,206)	-	1,477	-	(14,527,472)
Intangible assets, net
Software rights to use (c)		3,496,754	(608,009)	631,019	-	-	3,519,764
Authorizations		1,226,273	(65,910)	637	-	-	1,161,000
Goodwill (d)		1,527,219	-	-	-	-	1,527,219
Cost of deferred commission to dealers (h)		27,303	29,604	-	-	-	56,907
List of clients (e)		25,200	(8,400)	-	-	-	16,800
Right to use infrastructure LT Amazonas (f)		175,491	(4,955)	-	-	-	170,536
Other assets (h)		119,312	(5,002)	30,206	-	-	144,516
Intangible assets under development (g)		3,361,641	862,597	(661,862)	-	139,383	3,701,759
Total Intangible Assets, net		9,959,193	199,925	-	-	139,383	10,298,501

	Annual rate %
Software rights to use	20
Authorizations	5 to 50
Cost of deferred commission to dealers	50
List of clients	18
Right to use infrastructure - LT Amazonas	5
Other assets	20 to 50

		Consolidated
		Jun/2016		Dec/2015
LT Amazonas		202,294		199,935
		202,294		199,935
Current portion		(2,231)		(1,969)
Non-current portion		200,063		197,966

Nominal amount
Up to June 2017		24,794
July 2017 to June 2020		90,252
July 2021 onwards		288,521
		403,567

		Consolidated
		Jun/2016		Dec/2015
LT Amazonas		346,402		340,582
Sale of Towers ( leaseback )		1,371,227		1,277,924
Others		29,372		-
		1,747,001		1,618,506
Current portion		(74,481)		(38,592)
Non-current portion		1,672,520		1,579,914

		Nominal amount
Up to June 2017		49,767
July 2017 to June 2020		171,426
July 2021 onwards		547,082
		768,275

		Nominal amount
Up to June 2017		173,711
July 2017 to June 2020		608,460
July 2021 onwards		2,140,252
		2,922,423

		Parent Company				Consolidated
		Jun/2016		Dec/2015		Jun/2016		Dec/2015 (Revised)
Local currency
Suppliers of materials and services (a)		5,504		3,549		2,226,287		3,474,351
Interconnection (b)		-		-		70,906		76,670
Roaming (c)		-		-		2,437		1,206
Co-billing (d)		-		-		70,922		71,548
		5,504		3,549		2,370,552		3,623,775
Foreign currency
Suppliers of materials and services (a)		431		522		91,124		87,528
Interconnection (b)		-		-		-		-
Roaming (c)		-		-		36,861		23,253
		431		522		127,985		110,781
Current portion		5,935		4,071		2,498,537		3,734,556

	Consolidated
Authorizations payable	Jun/2016		Dec/2015
700 MHz frequency band cleaning, net of AVP	957,547		918,388
Updated ANATEL Debt	84,334		77,450
Guarantee insurance on authorizations	12,730		15,985
Renewal of authorizations	172,163		146,149
	1,226,774		1,157,972
Current portion	(481,380)		(467,687)
Noncurrent portion	745,394		690,285

			Maturity Date
Authorization Instruments			450 MHz		800 MHz, 900 MHz and 1,800 MHz	Additional frequencies 1,800 MHz	1,900 MHz and 2,100 MHz (3G)	2,500 MHz V1 Band (4G)	2,500 MHz (P** Band (4G)	700 MHz (4G)
Amapá, Roraima, Pará, Amazonas and Maranhão			-		March, 2031*	April, 2023	April, 2023	October, 2027	PA – February, 2024*	December, 2029
Rio de Janeiro and Espírito Santo			October, 2027		March, 2031*	ES - April, 2023	April, 2023	October, 2027	RJ – February, 2024*	December, 2029
Acre, Rondônia, Mato Grosso, Mato Grosso do Sul, Tocantins, Distrito Federal, Goiás, Rio Grande do Sul (except the municipality of Pelotas and region) and the municipalities of Londrina and Tamarana, in Paraná			PR - October, 2027		March, 2031*	April, 2023	April, 2023	October, 2027	DF – February, 2024*	December, 2029
São Paulo			-		March, 2031*	Countryside - April, 2023	April, 2023	October, 2027	-	December, 2029
Paraná (except the municipalities of Londrina and Tamarana)			October, 2027		September, 2022*	April, 2023	April, 2023	October, 2027	February, 2024*	December, 2029
Santa Catarina			October, 2027		September, 2023*	April, 2023	April, 2023	October, 2027	-	December, 2029
Municipality and region of Pelotas, in the State of Rio Grande do Sul			-		April, 2024*	-	April, 2023	October, 2027	-	December, 2029
Pernambuco			-		May, 2024*	-	April, 2023	October, 2027	-	December, 2029
Ceará			-		November, 2023*	-	April, 2023	October, 2027	-	December, 2029
Paraíba			-		December, 2023*	-	April, 2023	October, 2027	-	December, 2029
Rio Grande do Norte			-		December, 2023*	-	April, 2023	October, 2027	-	December, 2029
Alagoas			-		December, 2023*	-	April, 2023	October, 2027	-	December, 2029
Piauí			-		March, 2024*	-	April, 2023	October, 2027	-	December, 2029
Minas Gerais (except the municipalities of the PGO sector 3 for 3G the radio frequencies and others)			-		April, 2028*	April, 2023	April, 2023	October, 2027	February, 2030*	December, 2029
Bahia and Sergipe			-		August, 2027*	-	April, 2023	October, 2027	-	December, 2029

Description	Currency	Charges	Maturity	Jun/2016	Dec/2015
BNDES (1)	URTJLP	TJLP to TJLP + 3.62% p.a.	Jul/17 to Jul/22	2,339,256	2,528,140
BNDES (1)	UMIPCA	UMIPCA + 2.62% p.a.	Jul/17	75,630	68,628
BNDES (1)	UM143	SELIC + 2.52% p.a.	Jul/22	1,575,867	1,475,426
BNDES (PSI) (1)	R$	2.50% to 4.50% p.a.	Jul/18 to Jan/21	507,447	563,465
BNB (2)	R$	10.00% p.a.	Jan/16	-	931
Banco BNP Paribas (3)	USD	Libor 6M + 2.53% p.a.	Dec/17	115,311	187,038
Banco Europeu de Investimento (BEI) (2)	USD	Libor 6M + 0.941% a 1.32% p.a.	Aug/19 a Feb/20	612,747	1,859,839
Bank of America (Res. 4131) (4)	USD	Libor 3M + 1.35% p.a.	Sep/16	-	468,114
Bank of America (Res. 4131) (4)	USD	Libor 3M + 2.00% p.a.	Sep/18	319,877	-
KFW (3)	USD	Libor 6M+ 1.35% p.a.	Apr/19	215,003	304,924
KFW Finnvera (3)	USD	Libor 6M+ 0.75% p.a.	Jan/24	127,110	-
Cisco Capital (4)	USD	1.80% to 2.50% p.a.	Sep/18 to Dec/20	337,977	469,931
Total				6,226,225	7,926,436
Current portion				(893,533)	(2,326,186)
Non-current portion				5,332,692	5,600,250

		Consolidated
2017		608,084
2018		1,468,585
2019		1,411,793
2020		900,042
2021		582,492
2022		343,858
2023		8,882
2024		8,956
		5,332,692

		Parent Company				Consolidated
		Jun/2016		Dec/2015		Jun/2016		Dec/2015
ICMS		-		-		422,112		419,547
ANATEL taxes and fees		-		-		19,517		21,354
ISS		265		165		41,133		43,109
Others		5		152		3,737		17,861
		270		317		486,499		501,871
Current portion		(270)		(317)		(486,392)		(501,768)
Non-current portion		-		-		107		103

		Parent Company				Consolidated
		Jun/2016		Dec/2015		Jun/2016		Dec/2015
Income tax and social contribution		-		-		415,018		338,351
PIS/COFINS		16		25		54,797		63,658
Others (*)		3		21		46,115		55,022
		19		46		515,930		457,031
Current portion		(19)		(46)		(265,177)		(213,880)
Non-current portion		-		-		250,753		243,151

		Consolidated
		Jun/2016		Dec/2015 (Revised)
Prepaid services to be provided (1)		757,294		958,872
Government grants (2)		132,255		145,892
Network swap (3)		33,304		37,674
Anticipated receipts		22,924		25,877
Deferred revenues for sale of towers (4)		1,003,664		973,613
		1,949,441		2,141,928
Current portion		(855,337)		(1,043,239)
Non-current portion		1,094,104		1,098,689

		Parent company				Consolidated
		Jun/2016		Dec/2015		Jun/2016		Dec/2015
Civil (a)		-		-		94,066		92,820
Labor (b)		3,041		4,403		68,228		69,312
Tax (c)		-		-		213,176		224,858
Regulatory (d)		-		-		28,508		28,621
		3,041		4,403		403,978		415,611

	Dec/2015	Additions, net of reversals	Payments	Monetary adjustment	Jun/2016
Civil (a)	92,820	142,913	(176,493)	34,826	94,066
Labor (b)	69,312	7,831	(12,691)	3,776	68,228
Tax (c)	224,858	(4,829)	(4,056)	(2,797)	213,176
Regulatory (d)	28,621	1,357	(2,806)	1,336	28,508
	415,611	147,272	(196,046)	37,141	403,978

a.

Civil processes

The Company and its subsidiaries are subject to various legal and administrative proceedings filed against them by consumers, suppliers, service providers and consumer protection agencies, in connection with a number of issues that arise in the regular course of business of the entities. The main cases are summarized as follows:

a.1.

Consumer lawsuits

The subsidiaries are parties to lawsuits that refer to some claims that have been filed by consumers at the legal and administrative levels. These claims, which amount to R$ 48,842 (R$51,953 as of December 31, 2015) refer basically to alleged wrong collections, contract cancellation, service quality, deficiencies and failures in equipment delivery, and unjustified inclusion in credit protection services.

a.2.

Procon and Public Prosecutor’s Office

TIM is a party to court and administrative lawsuits filed by the Public Prosecutor’s Office and Procon (Consumer Protection Agency) arising from consumer complaints that include: (i) alleged failure in the provision of network services; (ii) challenges about the quality of client assistance; (iii) alleged violation of SAC Decree; (iv) alleged violation of agreements; (v) alleged false advertising; and (vi) discussion about the charging of loyalty fine in cases of theft of handset. The amounts involved total R$ 3,108 (R$3,324 as of December 31, 2015).

a.3.

Former trade partners

TIM is a defendant in lawsuits filed by former trade partners that claim, among others, amounts on the basis of alleged non-compliance with agreements. The amounts involved total R$1 8 , 202 (R$18,496 as of December 31, 2015).

a.4.

Others

TIM is a defendant in other non-consumer lawsuits filed by different agents to challenge, among other: (i) renewal of lease agreements; (ii) share subscription; (iii) indemnities; (iv) alleged non-compliance with agreements; and (v) collection suit. The amounts involved total R$1 5,653 (R$ 10,812 as of December 31, 2015).

a.5

Social and environmental, and infrastructure

The subsidiaries are parties to lawsuits involving different agents that challenge several licensing aspects, such as environmental licensing and structure licensing (installation/operation). The amounts involved total R$2, 331 (R$3,606 as of December 31, 2015).

b.

Labor claims

The main oustanding labor claims are summarized below:

Claims filed by former employees, in relation to matters such as salary differences, wage parity, payments of variable compensation/commissions, additional legal payments, overtime and other provisions established during the period prior to privatization, as well as by former employees of service providers who, in accordance with the labor legislation in force, have filed claims against the Company and/or its subsidiaries on the grounds that they are responsible for labor related obligations that were not satisfied by the service provider companies.

Out of the 1,048 labor claims at June 30, 2016 (1,148 at December 31, 2015) filed against the Company and its subsidiaries, most of them relate to claims that involve former employees of service providers. The provision for these cases amounts to R$52,938 (R$55,412 at December 31, 2015).

Another significant portion of the existing provision relates to the organizational restructuring processes, especially the closure of the Client Relationship Centers (call centers) in Fortaleza, Salvador and Belo Horizonte, which resulted in the termination of some 800 in-house staff and outsourced personnel. At June 30, 2016, the provision for these cases amounts to R$5,358 (R$7,232 as of December 31, 2015).

c.

Tax processes

Consolidated

			Jun/2016				Dec/2015
Federal taxes		54,542				52,576
State taxes		62,570				75,970
Municipal taxes		1,552				1,477
Intelig proceedings (purchase price allocation)		94,512				94,835
		213,176				224,858

The Company and its subsidiaries have received tax assessments for which our internal and external legal counsel consider the risk of loss as probable. Most of these assessments refer to one-off operational issues where some supporting documentation required has not yet been complied with in full, until now, or where formal procedures have not been strictly observed.

The total provision recorded is substantially composed by the following proceedings:

Federal taxes

 

The provision for TIM Celular has been made for ten cases referring to questionings regarding the taxes levied on CIDE, CPMF, CSLL, and IRRF transactions, and the voluntary reporting of the penalty regarding FUST payment. From these cases, the main amounts relate to court actions in which TIM intends to have the right not to pay for the CPMF (a Federal contribution on financial movements) allegedly due to simultaneous purchase and sale transactions of foreign currency and change of accountholder as result of merger, whose amounts provisioned currently total R$32,248 (R$31,338 as of December 31, 2015), as well as the amount corresponding to the fine and interest on FUST contribution for the year 2009, which does not include benefit from voluntary reporting, for which the amount provisioned and updated in August 2015 is R$12,082 (R$11,512 as of December 31, 2015).

The provision for Intelig regarding federal taxes has been made for three cases of questioning of federal tax offsetting using the negative balance of IRPJ and the CSLL carried forward from periods prior to offsetting, totaling the updated amount of R$5,169 (R$4,968 as of December 31, 2015).

State taxes

The provision for TIM Celular covers forty-six proceedings, of which the most important are the amounts for tax assessments questioning the usage of ICMS debits, as well as the documentation supporting the credits appropriated by the Company, for which the updated amount provided is R$12,984 (R$24,626 as of December 31, 2015).

The provision for Intelig referring to state taxes covers seven proceedings, in the total updated amount of R$22,507 (R$21,726 as of December 31, 2015). This total includes the amounts for assessments questioning the documentation that supported the credits appropriated by the Company, for which the updated amount provided is R$17,993 (R$17,369 as of December 31, 2015).

Municipal taxes

These include the amounts involved in assessments questioning the withholding and payment of the ISS-source on services provided by third parties with no employment relationship, as well as the payment of own ISS regarding co-billing services.

Intelig cases

Tax proceedings arising from the acquisition of Intelig and included in its purchase price allocation process, amount to R$94,512 (R$94,835 as of December 31, 2015).

d.

Regulatory processes

ANATEL has brought administrative proceedings against the subsidiaries for: (i) failure to meet with certain quality service indicators; (ii) default on certain obligations assumed under the Instruments of Authorization; and (iii) non-compliance with the regulations of SMP and STFC, among others.

On June 30, 2016, the amount classified as probable risk related to Procedures to Verify Breaches of Obligations (“PADOs”), after monetary adjustment, was R$28,508 (R$28,621 on December 31, 2015).

e.

Legal and administrative processes involving possible losses

Civil, labor, tax and regulatory actions have been filed against the Company and its subsidiaries involving risk of loss that is classified as possible by the Company’s legal advisors and the Management. No provisions have been set up for these legal and administrative proceedings and no materially adverse effects are expected on the interim financial information as shown below:

		Consolidated
		Jun/2016		Dec/2015
Civil (e.1)		1,331,371		1,189,130
Labor (e.2)		540,646		442,800
Tax (e.3)		8,519,964		8,400,356
Regulatory (e.4)		45,006		65,849
		10,436,987		10,098,135

The administrative and legal proceedings assessed as possible losses by the Management are monitored and disclosed at their historical values.

The main actions where the risk of loss is classified as possible are described below:

e.1. Civil

		Consolidated
					Jun/2016				Dec/2015
Actions filed by consumers (e.1.1)				587,392				525,406
ANATEL (e.1.2)				135,139				129,061
Procon and Public Prosecutor’s Office (e.1.3)				283,806				255,008
Former trade partners (e.1.4)				117,007				118,698
Social and environmental, and infrastructure (e.1.5)				92,320				41,240
Others				115,707				119,717
				1,331,371				1,189,130

e.1.1. Actions filed by consumers

These actions refer particularly to alleged undue billing, contract cancellation, service quality, deficiencies and failures in equipment delivery, and unjustified inclusion in bad debtors’ lists.

e.1.2. ANATEL

The subsidiaries are parties to lawsuits filed against ANATEL, due to the following reasons: (i) debit regarding the collection of 2% on the revenues obtained from value-added services – VAS and interconnection; (ii) pro rata monetary restatement applied to the price proposal established in the call notice for use of 4G frequencies; and (iii) alleged non-compliance with service quality targets.

e.1.3. Procon and Public Prosecutor’s Office

TIM is a party to court and administrative lawsuits filed by the Public Prosecutor’s Office and Procon (Consumer Protection Agency) arising from consumer complaints that include: (i) alleged failure in the provision of network services; (ii) alleged failure in the delivery of devices; (iii) alleged non-compliance with state legislations; (iv) contract model and alleged undue charging of Value-Added Services - VAS; (v) alleged violation of SAC Decree; (vi) alleged violation of agreements; and (vii) blocking of data.

e.1.4 . Former trade partners

TIM is a defendant in actions filed by several former trade partners who are claiming, among others, amounts on the basis of alleged non-compliance with agreements.

e.1.5. Social, environmental and infrastructure

The subsidiaries are parties to lawsuits involving different agents that challenge aspects related to (1) licensing, such as Environmental licensing and Structure licensing (installation/operation) and (2) (i) electromagnetic radiation emitted by the Telecom structures; (ii) renewal of leasing land agreements to install sites; (iii) eviction from land leased to install sites; and (iv) presentation of registration data; among others.

e.2. Labor claims

Most of the 4,453 labor claims filed against the Company and its subsidiaries as of June 30, 2016 (3,400 as of December 31, 2015) refer to claims made by former employees of service providers in the amount of R$549,514 (R$374,807 at December 31, 2015).

 

A significant percentage of the existing proceedings relate to organizational restructuring processes, with highlight going to the closure of the Client Relationship Centers (Call centers) in Fortaleza, Salvador and Belo Horizonte, and other internal sites of TIM, which resulted in the termination of some 800 employees, including in-house staff and outsourced personnel. In addition to these proceedings, there are also those filed by outsourced service providers alleging an employment relationship with TIM, in the total amount of R$ 71,722 (R$12,150 as of December 2015).

The Company is a party to public civil actions filed by the Labor District Attorney’s Office alleging irregular outsourcing practices and with collective moral damages due to outsourcing totaling R$56,000 (R$56,000 at December 31, 2015).

A group of actions have been filed in the State of Paraná, involving claims for damages in connection with contractual provisions stamped in the employees` work register. According to an internal rule, TELEPAR undertook to supplement the retirement benefits of employees hired up until 1982. Prior to privatization, TELEPAR had proposed to implement this benefit by means of the payment of a certain amount in cash in the amount of R$4,472, and a probable amount of R$1,614.

It should also be pointed out that there is a group of labor claims, particularly in São Paulo and Rio de Janeiro, from former Gazeta Mercantil, Jornal do Brasil and JB Editora employees who have filed claims requesting inclusion of Holdco as defendant. Prior to the merger with TIM Participações, Holdco belonged to the Docas economic group, of which Gazeta Mercantil and Jornal do Brasil is part.

e.2.1. Social Security

TIM Celular received a Debit Assessment Notice referring to alleged irregularity in the payment of social security contributions in connection with the payment of profit-sharing amounting to R$4,282 (R$4,282 at December 31, 2015).TIM Celular was also assessed for social security contributions that were allegedly due in connection with hiring bonus, non-Revised bonus, payments to self-employed persons and sales incentives in the amount of R$7,708 (R$7,708 at December 31, 2015).

Intelig received Tax Assessments Debits regarding alleged irregularity in the payment of social security contributions levied on profit sharing; retention of 11% on service agreements; failure to pay Management’s fees and failure to properly fill out the FGTS– GFIP tax form, and erroneous GFIP declaration totaling R$46,494 (R$41,116 at December 31, 2015).

e.3. Tax

				Consolidated
			Jun/2016					Dec/2015
Federal Taxes (e.3.1)		2,016,433					1,905,594
State Taxes (e.3.2)		4,522,887					4,585,810
Municipal Taxes (e.3.3)		321,834					345,089
FUST, FUNTTEL and EBC (e.3.4)		1,658,810					1,563,863
		8,519,964					8,400,356

e.3.1. Federal Taxes

Assessment against the TIM Group for federal taxes amounted to R$2,016,433 as of June 30, 2016. Of this total, the following issues stand out:

(i)

Amortization of goodwill paid on the acquisition of mobile phone companies, deduction of goodwill amortization expenses, exclusion of goodwill reversal, other effects and the disallowance of set-offs and estimated deductions paid, allegedly improper use of SUDENE benefits caused by lack of formalization on these benefits on Federal Revenue Department (RFB) and failure to pay the estimated IRPJ and CSLL amounts. The amount involved is R$1,336,742 (R$1,264,205 at December 31, 2015).

(ii)

Method of offsetting tax losses and negative bases. The amount involved is R$101,523 (R$85,135 at December 31, 2015).

(iii)

Collection of CSLL on monetary variations for swap transactions, registered through on a cash basis. The amount involved is R$35,662 (R$35,662 at December 31, 2015).

(iv)

Payment of IRRF on revenues from overseas residents, including those remitted for international roaming and payment to unidentified beneficiaries, as well as collection of CIDE on royalties remitted overseas, including remittances for international roaming. The amount involved is R$151,545 (R$150,763 at December 31, 2015) for TIM Celular and R$33,722 (R$33,722 at December 31, 2015) for Intelig.

(v)

Charge of IRPJ, PIS/COFINS and CSLL debts for the non-approval or partial approval of offsettings carried out by the Company using credits from withholding tax on financial investments and negative IRPJ balance. The amount involved is R$229,823 (R$229,823 at December 31, 2015).

e.3.2. State Taxes

Assessment against the TIM Group for state taxes amounted to R$4,522,887 as of June 30, 2016. Of the total amount the following issues stand out:

(i)

Failure to include unconditional discounts offered to customers in the ICMS calculation base, and a fine for alleged failure to comply with related ancillary obligations, including failure to submit register 60i of the SINTEGRA file. The amount involved is R$974,113 (R$932,584 at December 31, 2015).

(ii)

Use of tax benefit (Program for Promoting the Integrated and Sustainable Economic Development of the Federal District - PRÓ-DF) granted by the tax authority itself, but subsequently declared unconstitutional and alleged undue credit of ICMS on interstate purchases of goods with tax benefits granted in the State of origin. The amount involved is R$680,593 (R$649,778 at December 31, 2015).

(iii)

Credit reversal and late use of credit for purchase of fixed assets. The amount involved is R$634,498 (R$549,627 at December 31, 2015).

(iv)

ICMS credits booked and debits reversed as well as identification and supporting documentation for amounts and information passed to customer bills, such as tax rates and credit granted, as well as credits related to transactions with tax substitution. The amount involved is R$661,280 (R$772,336 at December 31, 2015).

(v)

Use of credit to purchase electricity for the companies’ production processes. The amount involved is R$135,176 (R$135,176 at December 31, 2015).

(vi)

Alleged failure to deduct tax on network lease of means operations where the tax originally deferred was allegedly not paid in the subsequent phase, pursuant to Agreement 128/98. The amount involved is R$87,550 (R$87,550 at December 31, 2015).

(vii)

Liability for ICMS and FECOP (State Anti-Poverty Fund) on fixed asset purchases and other transactions and on the provision of telecommunications services in specific cases determined by the law. The amount involved is R$67,941 (R$67,941 at December 31, 2015).

(viii)

Alleged conflict between ancillary obligations data and the payment of the tax. The amount involved is R$77,254 (R$64,744 at December 31, 2015).

(ix)

Alleged failure to pay ICMS arising from debts reversed regarding pre-paid services, as well as alleged undue ICMS credit regarding outgoing goods allegedly benefiting from a reduction in the calculation base. The amount involved is R$47,496 (R$60,322 at December 31, 2015).

(x)

 Taxation of international roaming services. The amount involved is R$25,267 (R$25,567 at December 31, 2015).

(xi)

Credits booked for the return of cell phones on free lease. The amount involved is R$85,134 (R$20,358 at December 31, 2015).

(xii)

Cancellation of telecommunications service due to improper invoicing/subscription fraud, and alleged incorrect use of credit and duplication of ICMS The amount involved is R$17,568 (R$17,568 at December 31, 2015).

e.3.3. Municipal Taxes

The total assessment against the TIM Group for municipal taxes is R$321,834 as of June 30, 2016. Of this amount, the following issues stand out:

(i)

payment of ISS and of a punitive fine for failure to pay the alleged tax on various revenue accounts of the Company. The amount involved is R$92,499 (R$92,499 at December 31, 2015).

(ii)

collection of ISS on import of services. The amount involved is R$94,359 (R$94,359 at December 31, 2015).

e.3.4. FUST, FUNTTEL and EBC

The amount assessed against the TIM Group for contributions to FUST, FUNTTEL and EBC is R$1,658,808 as of June 30, 2016 (R$1,563,863 at December 31, 2015). The principal discussion involves the payment of the contributions to FUST (Telecommunications Services Universalization Fund ) and FUNTTEL (Telecommunications Technical Development Fund) as from the issue by ANATEL of Ruling No. 07/2005, relating primarily to the payment of the FUST and FUNTTEL contributions on interconnection revenues earned by telecommunications service providers, as from the effective date of Law N ^o . 9998/2000.

Additionally, we are challenging the legality of charging the contribution for development of public radio broadcasting (Contribution to EBC, Brazil’s Communication Agency), according to Law No. 11652/2008.

e.4. Regulatory issues

ANATEL has filed administrative proceedings against the subsidiaries for: (i) not complying with certain quality indicators; (ii) defaulting on other obligations under Instruments of Authorization and; (iii) not complying with SMP and STFC regulations, among others.

At June 30, 2016, the amount stated for Breach of Obligation procedures (locally PADOs), considering the monetary restatement that was rated ‘possible loss’ was R$44,906 (R$65,849 as of December 31, 2015).

On obtaining an extension of authorization to use radio frequencies associated with SMP, the TIM Celular subsidiary incurs contractual charges on net revenue from service plans sold under each authorization. However, ANATEL has included interconnection revenues in the calculation base for these charges since 2011, and revenues from value-added services since 2012. In our opinion, this revenue should not be included because it is not expressly stipulated in the original Instruments of Authorization; therefore the charges were challenged in administrative appeals, and will be forwarded for legal when this instance’s procedure has been exhausted.

24

Asset retirement obligations

The changes in the obligations deriving from future asset retirement are set forth below:

	Consolidated
	Jun/2016		Dec/2015
	(6 months)		(12 months)
Opening balance	31,609		286,275
Reversal/write-offs recorded throughout the year, net of additions (*)	(10,378)		(258,627)
Monetary adjustment for the year	589		3,961
Closing balance	21,820		31,609

(*) The amounts consolidated include the effects of R$193,205 and R$3,302 in 2015 and 2016 respectively , arising from the write-off related to the sale of towers (note 1.b).

The provision is recorded based on the following assumptions:

·

the unitary dismantling costs are estimated, taking into account the services and materials involved in the process. The estimate is prepared by the network department based on the information currently available;

·

a timetable for the dismantling is estimated based on the useful life of the assets and the estimated initial costs are allocated through this timetable, updated by the expected inflation rate. The expected inflation rate is aligned with the projections prepared by the main market institutions; and

·

the rate used to discount the cash flows is the Company´s average debt cost, that was 12.52% p.a. at June 30, 2016 (12.27% p.a. at December 31, 2015).

25

Shareholders’ equity

a.

Capital stock

The capital stock is stated at the amount effectively raised from shareholders, net of the costs directly linked to the issuance process.

When a company within the Group purchases Company ’ s shares, aiming at holding them as treasury shares, the amount paid, including any directly attributable additional costs, is deducted from the Company ’ s shareholders ’ equity until the shares are cancelled or reissued. When these shares are reissued subsequently, any amount received, net of additional costs directly attributable to the transaction, is included in shareholders ’ equity.

The Company is authorized to increase its capital upon resolution by the Board of Directors, without amending the bylaws, up to the limit of 4,450,000,000 common shares.

The subscribed and paid up capital is represented as follows:

		Jun/2016		Dec/2015
Value paid up		9,913,415		9,913,415
(-) Funding costs		(47,117)		(47,117)
Net value paid up		9,866,298		9,866,298
Number of common shares		2,421,032,479		2,421,032,479

b.

Capital reserves

The use of capital reserves is according to the provisions of Article 200 of Law No. 6404/76, which refers to joint stock companies. These reserves are comprised of:

		Jun/2016		Dec/2015
Special goodwill reserve		380,560		380,560
Stock options		21,931		20,876
Tax benefit reserve		1,040,661		1,040,661
		1,443,152		1,442,097

b.1 Special goodwill reserve

The special goodwill reserve arose from the following transactions:

(i)

Takeover of the former subsidiaries TIM Sul and TIM NE - acquisition of minority shares

In 2005 the Company acquired all the shares held by the minority shareholders of TIM Sul S.A. and TIM Nordeste Telecomunicações S.A. This acquisition took place by issuing new shares of TIM Participações S.A., converting those companies into full subsidiaries. At that time, this transaction was recorded at the book value of the shares, no goodwill being recorded arising from the difference between market value and the shares negotiated.

When first adopting IFRS, the Company availed itself of the exemption that allows a subsidiary, when it adopts international accounting practices subsequent to its parent company having adopted IFRS, to consider the balances previously reported to the parent company for consolidation purposes. In the balance sheet of the transition to IFRS, the Company recorded the acquisition price based on the market value of the shares of TIM Participações S.A. at that time, recording goodwill amounting to R$157,556.

(ii)

Acquisition of the shares of Holdco - purchase of Intelig

On December 30, 2009, the Special General Meeting of TIM Participações approved the takeover of Holdco, a company that held 100% of the equity of Intelig, by TIM Participações. As a result of this transaction, the Company issued 127,288,023 shares.

Based on the former Brazilian accounting principles (“BR GAAP”), the acquisition was recorded at the net book value of the assets acquired on the base date November 30, 2009.

When IFRS was first adopted, the acquisition was recorded on the base date December 31, 2009, taking into account the market value of the common and preferred shares of TIM Participações on December 30, 2009, amounting to R$739,729. The difference between this amount and the book value recorded under the former BR GAAP (R$516,725) created goodwill against capital reserves of R$223,004.

b.2 Stock options

The balances recorded in these items represent the expenses of the Company and its subsidiaries for the stock options granted to their employees (Note 26).

b.3 Tax benefit reserve

TIM Celular enjoys tax benefits that provide for restrictions in the distribution of profits of this subsidiary. According to the legislation that establishes such tax benefits, the amount of taxes waived as a result of exemptions and reductions in the tax charge may not be distributed to shareholders and must be registered as a tax incentive reserve of the legal entity. This reserve should only be used for offsetting of losses or capital increase. The accumulated amount of benefits enjoyed by TIM Celular as of June 30, 2016 and December 31, 2015 was R$1,040,661 and R$1,040,661, respectively.

c

Revenue reserves

c.1 Legal reserve

This refers to 5% of profit for every year ended December 31, until the legal reserve equals 20% of capital stock. Also, the Company is authorized to stop setting up a legal reserve when, together with the capital reserves, it exceeds 30% of capital stock.

This reserve can be used only for capital increase or offsetting of accumulated losses.

c.2 Statutory reserve for expansion

 

This reserve is set up based on paragraph 2, Article 46 of the Company’s bylaws and is intended for the expansion of the corporate business.

The balance of profits that are not compulsorily allocated to other reserves and that is not allocated for the payment of dividends, is allocated to this reserve, which may not exceed 80% of the capital stock. Once this limit is reached, it is incumbent on the shareholders’ meeting to decide on the balance, either distributing this to shareholders or increasing the capital.

d

Dividends

Dividends are calculated in accordance with the bylaws and Brazilian Corporate Law.

As stipulated in its latest bylaws approved on December 12, 2013, the Company must distribute a mandatory dividend for each business year ended December 31, provided that funds are available for distribution, equivalent to 25% of the Revised profit.

At December 31, 2015, dividends were calculated as shown below:

			Dec/2015
Net income for the year			2,071,145
(-) Legal reserve constitution			(103,557)
(-) Tax incentives not to be distributed			(93,123)
Revised profit			1,874,465
Dividends to be distributed:
Minimum dividends calculated considering 25% of the Revised profit			468,616
Dividends per share (Reais per share)			0.1936

The Annual and Extraordinary General Meetings of TIM Participações S.A. held on April 12, 2016, approved payment of minimum mandatory dividends in the amount of R$468,616. Said amount was paid on June 10, 2016.

26

Stock options

2011-2013 Plan and 2014-2016 Plan

At the annual meeting on August 5, 2011, and April 10, 2014, the shareholders of TIM Participações S.A. approved the long-term incentives plans, respectively the “ 2011-2013 Plan” and the “2014-2016 Plan,” for senior management and key executives of the Company and its subsidiaries.

The exercise of options of the 2011-2013 Plan depends on the achievement of specific performance targets, while the exercise of options of the 2014-2016 Plan is not subject to this condition. The Exercise Price is calculated with an upward or downward adjustment to the Base Share Price, according to shares performance, as provided for in each Plan.

Stock options are effective for 6 years and the Company has no legal or informal obligation to repurchase or settle the options in cash. On October 16, 2015, the 2nd Grant was made under 2014-2016 Plan.

The variation in the quantity of options are presented below:

Date of grant	Stock Options Granted	Maturity date	Exercise price	Balance at the beginning of the year	Granted in the year	Exercised in the year (*)	Forfeited in the year		Falling due in the year		Balance at the end of the year
2016
2014-2016 Plan – 2nd grant	3,355,229	Oct/21	8,4526	3,355,229	-	-	(780,144)		-		2,575,085
2014-2016 Plan – 1st grant	1,687,686	Sep/20	13,4184	1,305,562	-	-	(240,903)		-		1,064,659
2011-2013 Plan – 3rd grant	3,072,418	Jul/19	8,1349	1,531,984	-	-	(440,520)		-		1,091,464
2011-2013 Plan – 2nd grant	2,661,752	Sep/18	8,9571	513,904	-	-	(11,615)		-		502,289
2011-2013 Plan – 1st grant	2,833,595	Aug/17	8,8404	-	-	-	-		-		-
Total	13,610,680			6,706,679	-	-	(1,473,182)		-		5,233,497
Average weighted price for the year			9.4450

(*) No options were exercised in 2015 for” 2011-2013 plan”, since minimum performance conditions have not been met.

Date of grant	Stock Options Granted	Maturity date	Exercise price	Balance at the beginning of the year	Granted in the year	Exercised in the year (*)	Forfeited in the year	Falling due in the year	Balance at the end of the year
2015
2014-2016 Plan – 2nd grant	3,355,229	Oct/21	8,4526	-	3,355,229	-	-	-	3,355,229
2014-2016 Plan – 1st grant	1,687,686	Sep/20	13,4184	1,456,353	-	-	(150,791)	-	1,305,562
2011-2013 Plan – 3rd grant	3,072,418	Jul/19	8,1349	1,971,900	-	-	(439,916)	-	1,531,984
2011-2013 Plan – 2nd grant	2,661,752	Sep/18	8,9571	671,091	-	-	(157,187)	-	513,904
2011-2013 Plan – 1st grant	2,833,595	Aug/17	8,8404	-	-	-	-	-	-
Total	13,610,680			4,099,344	3,355,229	-	(747,894)	-	6,706,679
Average weighted price for the year			9.3854
(*)No options were exercised in 2015 for” 2011-2013 plan”, since performance minimum conditions have not been met.

Below are the significant data included in the model:

Date of grant	Weighted average price of shares on the date of grant	Volatility	Expected useful life of the option	Annual interest rate without risk
2011 Grant	R$8.31	51.73% p.a	6 years	11.94%p.a
2012 Grant	R$8.96	50.46% p.a	6 years	8.89%p.a
2013 Grant	R$8.13	48.45% p.a	6 years	10.66%p.a
2014 Grant	R$13.42	44.60% p.a	6 years	10.66%p.a
2015 Grant	R$8.45	35.50% p.a	6 years	16.10%p.a

The Base Share Price was calculated using the weighted prices of the shares of TIM Participações, during the following periods:

·

2011-2013 Plan – 1st Grant - Volume traded and the trading price of the shares in TIM Participações in the period of 30 days prior to 07/20/2011 (the date when the Company Board of Directors approved the benefit).

·

2011-2013 Plan– 2nd Grant - Volume traded and the trading price of TIM Participações shares during the period 07/01/2012 to 08/31/2012.

·

2011-2013 Plan– 3rd Grant - Volume traded and the trading price of TIM Participações shares during the period of 30 days preceding 07/20/2013 .

·

2014-2016 Plan– 1st Grant - Volume traded and the trading price of TIM Participações shares during the period of 30 days preceding the date determined by the Board of Directors (September 29, 2014).

·

2014-2016 Plan– 2nd Grant - Volume traded and the trading price of TIM Participações shares during the period of 30 days preceding the date determined by the Board of Directors (September 29, 2015) .

Using the accrual basis of accounting, the expenses related to the long-term benefit plan are being accounted for on a monthly basis and, at the end of the 6 -month period ended at June 30, 2016 , totaled R$ 1,055 (R$2,103 in the same period of 2015).

27

Net operating revenues

Revenues from services rendered

The principal service revenues derives from monthly subscription, the provision of separate voice, SMS and data services, and user packages combining these services, roaming charges and interconnection revenue. The revenues are recognized as the services are used, net of sales taxes and discounts granted on services. These revenues are recognized only when the amount of services rendered can be estimated reliably.

The revenues are recognized monthly via invoicing, and billable revenues between the billing date and the end of the month (unbilled) are identified, processed and recognized in the month in which the service was rendered. Calculations of unbilled revenues from the previous month are reversed out and unbilled amounts are calculated at each month end.

Interconnection traffic and roaming revenues are recorded separately, without offsetting the amounts owed to other telecom operators (the latter are accounted for as operating costs).

The minutes not used by customers in the prepaid service system are recorded as deferred revenues and allocated to income when these services are actually used by customers.

Revenues from product sales

Revenues from product sales (telephones, mini-modems, tablets and other equipment) are recognized when the significant risks and benefits of the ownership of such products are transferred to the buyer.

		Consolidated
		Jun/2016		Jun/2015 (Revised)
Service revenue - Mobile
Subscription and use		4,085,416		5,053,348
Network use		563,170		847,679
Long distance		1,120,765		1,406,168
VAS - Additional services		4,104,447		3,738,604
Others		185,194		169,596
		10,058,992		11,215,395
Service revenue - Landline		571,887		479,242
Service revenue		10,630,879		11,694,637
Goods sold		731,380		1,772,903
Gross operating revenue		11,362,259		13,467,540
Deductions from gross revenue
Taxes		(2,899,253)		(3,242,100)
Discounts given		(765,590)		(1,182,893)
Returns and others		(22,919)		(130,698)
		(3,687,762)		(4,555,691)
Total net revenue		7,674,497		8,911,849

 

28

Cost of services provided and goods sold

		Consolidated
		Jun/2016		Jun/2015
Personnel		(36,267)		(46,548)
Third party services		(243,878)		(252,526)
Interconnection and means of connection		(1,410,463)		(1,441,076)
Depreciation and amortization		(1,438,935)		(1,245,295)
ANATEL fees		(12,006)		(7,335)
Rentals and insurance		(278,997)		(241,646)
Others		(6,263)		(9,182)
Cost of services provided		(3,426,809)		(3,243,608)
Cost of goods sold		(526,936)		(1,294,706)
		(3,953,745)		(4,538,314)

29

Selling expenses

		Consolidated
		Jun/2016		Jun/2015 (Revised)
Personnel		(349,519)		(333,269)
Third party services (*)		(938,299)		(1,076,627)
Advertising and publicity		(245,136)		(294,124)
Allowance for doubtful accounts		(140,517)		(116,064)
ANATEL fees		(497,946)		(509,654)
Depreciation and amortization		(83,891)		(80,601)
Rentals and insurance		(47,640)		(41,750)
Others		(18,627)		(20,020)
		(2,321,575)		(2,472,109)

(*) Includes mainly the expenses with commissions, and professional and technical services.

30

General and administrative expenses

		Parent company				Consolidated
		Jun/2016		Jun/2015		Jun/2016		Jun/2015
Personnel		(4,750)		(5,665)		(137,916)		(137,324)
Third party services		(4,937)		(3,516)		(228,704)		(218,882)
Depreciation and amortization		-		-		(208,120)		(142,261)
Rentals and insurance		(118)		(105)		(34,094)		(31,308)
Others		(472)		(978)		(24,346)		(21,845)
		(10,277)		(10,264)		(633,180)		(551,620)

 

31

Other incomes (expenses), net

	Parent Company				Consolidated
	Jun/2016		Jun/2015		Jun/2016		Jun/2015 (Revised)
Income
Subsidy income, net	-		-		13,636		12,178
Fines on telecommunications services	-		-		19,831		19,184
Income from disposal of assets (*)	-		-		37,872		922,374
Other income	191		695		30,796		12,519
	191		695		102,135		966,255
Expenses
FUST/FUNTTEL (*)	-				(83,964)		(77,063)
Taxes, fees and contributions	-		-		(2,114)		(973)
Provision for legal and administrative proceedings, net of reversal	55		(272)		(140,184)		(146,473)
Other expenses	(116)		(7)		(10,716)		(10,824)
	(61)		(279)		(236,978)		(235,333)
Amortization of authorizations	-		-		(129,877)		(175,734)
	(61)		(279)		(366,855)		(411,067)
Other income (expenses), net	130		416		(264,720)		555,188

(*) During the year 2015, 5,483 towers were transferred to ATC, relating to the 1 ^st , 2 ^nd and 3 ^rd tranches, and in 2016 a further 270 were transferred, relating to the 4 ^th tranche, pursuant to the agreements executed by the parties (notes 14 and 1.b). The leaseback was analyzed and classified as a financial lease, taking into account the requirements of IAS17/CPC 06 (R1), approved by resolution of the CVM.

The risks and benefits of the assets were transferred to the purchaser on the date of each transfer (April 29, 2015, September 30, 2015, December 16, 2015 and June 9, 2016) and the amount of R$1,253,618 was recognized in 2015 and R$36,085 in 2016 (R$1,210,980 net of residual values and write-off of the ARO in 2015 and R$37,029 in 2016) as other operating revenues, on disposal of the assets.

(* * ) Expenses incurred with contributions on several telecommunications revenues due to ANATEL, according to the legislation in force.

32

Financial income

		Parent company				Consolidated
		Jun/2016		Jun/2015		Jun/2016		Jun/2015 (Revised)
Interest on financial investments		1,117		2,544		201,812		255,330
Interest received from clients		-		-		21,557		29,441
Swap interest		-		-		65,013		61,645
Interest on leasing		-		-		12,594		11,803
Monetary adjustment		803		477		49,005		24,866
Foreign exchange variation		70		32		1,658,883		470,165
Other income				-		6,445		4,268
		1,990		3,053		2,015,309		857,518

33

Financial expenses

		Parent company				Consolidated
		Jun/2016		Jun/2015		Jun/2016		Jun/2015
Interest on borrowings and financing		-		-		(103,001)		(99,548)
Interest paid to suppliers		-		-		(16,780)		(75,019)
Interest on taxes and fees		(15)		2		(18,054)		(16,042)
Swap interest		-		-		(130,187)		(138,201)
Interest on leasing		-		-		(118,837)		(44,838)
Monetary adjustment		(244)		(142)		(117,615)		(76,419)
Discounts granted		-		-		(27,121)		(30,437)
Foreign exchange variation		(35)		(76)		(1,664,329)		(462,985)
Other expenses		(1,221)		(156)		(53,009)		(23,588)
		(1,515)		(372)		(2,248,933)		(967,077)

The exchange variation for the period relates to borrowings and financing and suppliers in foreign currency. Derivative transactions were used to reduce their effects (note 39).

34. Income tax and social contribution expenses

		Consolidated
		Jun/2016		Jun/2015 (Revised)
Current income tax and social contribution
Income tax for the period		(165.735)		(238.557)
Social contribution for the period		(61.565)		(88.319)
Tax incentive – SUDENE/SUDAM (*)		39.191		51.287
		(188.109)		(275.589)
Deferred income tax and social contribution
Deferred income tax		90.794		(187.840)
Deferred social contribution		32.019		(67.621)
		122.813		(255.461)
Provision for income tax and social contribution contingencies		-		(3.464)
		(65.296)		(534.514)

The reconciliation of income tax and social contribution expenses calculated at the applicable tax rates plus the amounts reflected in the statement of income is set forth below:

	Parent company				Consolidated
	Jun/2016		Jun/2015		Jun/2016		Jun/2015 (Revised)
Income before income tax and social contribution	202,357		1,260,921		267,653		1,795,435
Combined tax rate	34%		34%		34%		34%
Income and social contribution taxes at the combined tax rate	(68,801)		(428,713)		(91,002)		(610,448)
(Additions)/exclusions:
Unrecognized tax losses and temporary differences	(3,282)		(2,385)		635		(3,249)
Income from equity accounting	72,090		431,150		-		-
Permanent additions and exclusions
Non-deductible donations	-		-		(1,351)		(1,588)
Non-deductible fines	(7)		(52)		(4,598)		(3,311)
Losses accounts receivable – Co billing	-		-		(3,563)		(2,654)
Sale of towers impact	-		-		(13,217)		52,759
Other permanent additions and exclusions	-		-		4,981		(3,600)
Tax incentive – SUDENE/SUDAM (*)	-		-		39,191		51,287
Deferred IR and CS on write-off of ARO	-		-		(1,439)		(22,698)
Other amounts	-		-		5,067		8,988
	68,801		428,713		25,706		75,934
Income tax and social contribution charged to income for the year	-		-		(65,296)		(534,514)
Effective tax rate	-		-		24.40%		29.77%

(*) As mentioned on note 25.b.3, according to Article 443, item I, of Decree N ^o . 3000/1999, investments subsidies not to be considered within the taxable income, they must be recorded as capital reserves, to be used only to offset losses or increase share capital. The subsidiary TIM Celular has tax benefits compliant to these rules.

35

Earnings per share

(a)

Basic

Basic earnings per share are calculated by dividing income attributable to shareholders of the Company by the weighted average number of shares issued during the period.

		Jun/2016		Jun/2015 (Revised)
Income attributable to shareholders of the Company		202,357		1,260,921
Weighted average number of common shares issued (thousands)		2,420,237		2,420,237
Basic earnings per share (expressed in R$)		0.0836		0.5210

		Jun/2016		Jun/2015 (Revised)
Income attributable to shareholders of the Company		202,357		1,260,921
Weighted average number of common shares issued (thousands)		2,418,068		2,420,629
Diluted earnings per share (expressed in R$)		0.0837		0.5209

		Assets
		Jun/2016		Dec/2015
Telecom Argentina Group (1)		-		3,073
Telecom Italia Sparkle (1)		5,402		6,212
Lan Group (4)		3,146		3,881
TIM Brasil (6)		2,823		2,822
Italtel (3)		5,409		-
Others		674		674
Total		17,454		16,662

		Liabilities
		Jun/2016				Dec/2015
Telecom Italia S.p.A. (2)		18,589			38,823
Telecom Argentina Group (1)		-			5,304
Telecom Italia Sparkle (1)		16,433			14,657
Italtel (3)		27,564			45,004
Lan Group (4)		7,307			3,854
TIM Brasil (6)		4,418			4,309
Vivendi Group (7)		2,192			1,035
Others		38			38
Total		76,541			113,024

		Revenue
		Jun/2016		Jun/2015
Telecom Italia S.p.A. (2)		1,769		1,605
Telecom Argentina Group (1)		8,232		2,730
Telecom Italia Sparkle (1)		2,713		610
Lan Group (4)		873		3,099
Total		13,587		8,044
		Costs/Expenses
		Jun/2016		Jun/2015
Telecom Italia S.p.A. (2)		4,730		3,332
Telecom Italia Sparkle (1)		14,969		18,998
Telecom Argentina Group (1)		713		1,201
Lan Group (4)		27,509		23,164
Generali (5)		194		471
Vivendi Group (7)		3,232		-
Others		455		149
Total		51,802		47,315

		Consolidated
		Jun/2016		Dec/2015
Assets		286,079		351,147
Liabilities		(105,504)		(122,301)
		Jun/2016		Jun/2015
Revenues		365,957		489,471
Costs/Expenses		263,092		313,997

		Jun/2016				Dec/2015
		Assets	Liabilities	Net		Assets	Liabilities	Net
Transactions with derivatives		218,993	(129,984)	89,009		1,099,574	(109,512)	990,062
Current portion		63,046	(67,518)	(4,472)		608,915	(109,512)	499,403
Non-current portion		155,947	(62,466)	93,481		490,659	-	490,659

Jun/2016
	Level 1	Level 2	Total balance
Assets
Financial assets valued at fair value
Trading securities	491,318	-	491,318
Derivatives used for hedging purposes	-	218,993	218,993
Total assets	491,318	218,993	710,311
Liabilities
Financial liabilities valued at fair value through profit loss
Derivatives used for hedging purposes	-	129,984	129,984
Total liabilities	-	129,984	129,984

Dec/2015
	Level 1	Level 2	Total balance
Assets
Financial assets valued at fair value
Trading securities	599,414	-	599,414
Derivatives used for hedging purposes	-	1,099,574	1,099,574
Total assets	599,414	1,099,574	1,698,988
Liabilities
Financial liabilities valued at fair value through profit loss
Derivatives used for hedging purposes	-	109,512	109,512
Total liabilities	-	109,512	109,512

	Borrowings and Receivables		Assets valued at fair value		Assets held to maturity		Assets held for trading		Total
June 30, 2016
Assets, as per balance sheet
Derivative financial instruments	-		218,993		-		-		218,993
Trade accounts receivable and other accounts receivable, excluding prepayments	2,772,390		-		-		-		2,772,390
Securities			-		38,659		452,659		491,318
Cash and cash equivalents	3,318,412		-		-		-		3,318,412
Leasing	202,294		-		-		-		202,294
	6,293,096		218,993		38,659		452,659		7,003,407

	Consolidated
	Liabilities valued at fair value through profit or loss		Other financial liabilities		Total
June 30, 2016
Liabilities, as per balance sheet
Borrowings and financings	-		6,226,225		6,226,225
Derivative financial instruments	129,984		-		129,984
Suppliers and other obligations, excluding legal obligations	2,498,537		-		2,498,537
Leasing	1,747,001		-		1,747,001
	4,375,522		6,226,225		10,601,747

			Consolidated
	Borrowings and Receivables		Assets valued at fair value through profit or loss		Total
December 31,2015
Assets, as per balance sheet
Derivative financial instruments	-		1,099,574		1,099,574
Trade accounts receivable and other accounts receivable, excluding prepayments	2,882,950		-		2,882,950
Securities	-		599,414		599,414
Cash and cash equivalents	6,100,403		-		6,100,403
Leasing	199,935		-		199,935
	9,183,288		1,698,988		10,882,276

	Consolidated (Revised)
	Liabilities valued at fair value through profit or loss		Other financial liabilities		Total
December 31, 2015
Liabilities, as per balance sheet
Borrowings and financings	-		7,926,436		7,926,436
Derivative financial instruments	109,512		-		109,512
Suppliers and other obligations, excluding legal obligations	-		3,734,556		3,734,556
Leasing	-		1,618,506		1,618,506
	109,512		13,279,498		13,389,010

Description		Jun/2016		Probable Scenario		Possible Scenario		Remote Scenario
Debt in USD (BNP Paribas, BEI, BOFA, Cisco and KFW)		1,823,314		1,823,314		2,290,986		2,763,396
A) ∆ Aggregate Debt Variation				-		467,672		940,082
Fair value of the asset side of the swap		1,823,314		1,823,314		2,290,986		2,763,396
Fair value of the liability side of the swap		(1,734,032)		(1,734,032)		(1,733,303)		(1,733,306)
Swap r esult		89,282		89,282		557,683		1,030,090
B) ∆ Aggregate Swap Variation				-		468,400		940,808
C) Final result (B-A)				-		728		726

		Jun/2016		Jun/2015
Interest paid		290,869		195,243
Income tax and social contribution paid		81,430		63,671
Leasing		102,909		976,544

JOSINO DE ALMEIDA FONSECA Chairman of the Fiscal Council	JARBAS BARSANTI Member of the Fiscal Council
OSWALDO ORSOLIN Member of the Fiscal Council

STEFANO DE ANGELIS Diretor Presidente	GUGLIELMO NOYA Chief Financial Officer
MARIO GIRASOLE Regulatory and Institutional Affairs Officer	LEONARDO DE CARVALHO CAPDEVILLE Chief Technology Officer
DANIEL JUNQUEIRA PINTO HERMETO Purchasing & Supply Chain Officer	PIETRO LABRIOLA Chief Operating Officer
ROGÉRIO TOSTES LIMA Diretor de Relações com Investidores	JAQUES HORN Diretor Jurídico

STEFANO DE ANGELIS Diretor Presidente	GUGLIELMO NOYA Chief Financial Officer
MARIO GIRASOLE Regulatory and Institutional Affairs Officer	LEONARDO DE CARVALHO CAPDEVILLE Chief Technology Officer
DANIEL JUNQUEIRA PINTO HERMETO Purchasing & Supply Chain Officer	PIETRO LABRIOLA Chief Operating Officer
ROGÉRIO TOSTES LIMA Diretor de Relações com Investidores	JAQUES HORN Diretor Jurídico