Edgar Filing: TELEFONICA BRASIL S.A.

As filed with the Securities and Exchange Commission on February 23, 2017

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 20-F

(Mark One)

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2016

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report________________
For the transition period from ________________ to ________________

Commission file number: 001-14475

TELEFÔNICA BRASIL S.A.
(Exact name of Registrant as specified in its charter)

TELEFÔNICA BRAZIL S.A.
(Translation of Registrant’s name into English)

Federative Republic of Brazil
(Jurisdiction of incorporation or organization)

Avenida Engenheiro Luis Carlos Berrini, 1376, 28º andar
04571-936 São Paulo, SP, Brazil
(Address of principal executive offices)

David Melcon Sanchez-Friera

Telephone +55 11 3430 3687

Avenida Engenheiro Luis Carlos Berrini, 1376, CEP 04571-936, São Paulo, SP, Brazil

Email: ir.br@telefonica.com
(Name, Telephone, Email and/or Facsimile and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Title of each class	Name of each exchange on which registered
Preferred Shares, without par value	New York Stock Exchange*
American Depositary Shares (as evidenced by American Depositary Receipts), each representing one share of Preferred Stock	New York Stock Exchange

* Not for trading purposes, but only in connection with the registration on the New York Stock Exchange of American Depositary Shares representing those Preferred Shares.

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

The number of outstanding shares of each class (excluding treasury shares) as of December 31, 2016 was:

Title of Class	Number of Shares Outstanding (excluding treasury shares)
Shares of Common Stock	569,354,053
Shares of Preferred Stock	1,119,340,367

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. x Yes o No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. o Yes x No

Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those sections.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files) o Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer x Accelerated Filer o Non-accelerated Filer o

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP o

International Financial Reporting Standards as issued by the International Accounting Standards Board x

Othero

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

o Item 17 o Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes x No

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Page

PART I		1
ITEM 1.	IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS	1
ITEM 2.	OFFER STATISTICS AND EXPECTED TIMETABLE	1
ITEM 3.	KEY INFORMATION	1
ITEM 4.	INFORMATION ON THE COMPANY	17
ITEM 4A.	UNRESOLVED STAFF COMMENTS	57
ITEM 5.	OPERATING AND FINANCIAL REVIEW AND PROSPECTS	57
ITEM 6.	DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES	77
ITEM 7.	MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS	90
ITEM 8.	FINANCIAL INFORMATION	92
ITEM 9.	THE OFFER AND LISTING	102
ITEM 10.	ADDITIONAL INFORMATION	106
ITEM 11.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	131
ITEM 12.	DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES	132
PART II		134
ITEM 13.	DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES	134
ITEM 14.	MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS	134
ITEM 15.	CONTROLS AND PROCEDURES	134
ITEM 16.	[RESERVED]	135
ITEM 16A.	AUDIT COMMITTEE FINANCIAL EXPERT	135
ITEM 16B.	CODE OF ETHICS	135
ITEM 16C.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	135
ITEM 16D.	EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES PROCEDURES	136
ITEM 16E.	PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS	136
ITEM 16F.	CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT	137
ITEM 16G.	CORPORATE GOVERNANCE	137
ITEM 16H.	MINE SAFETY DISCLOSURE	140
PART III		141
ITEM 17.	FINANCIAL STATEMENTS	141
ITEM 18.	FINANCIAL STATEMENTS	141
ITEM 19.	EXHIBITS	141
GLOSSARY OF TELECOMMUNICATIONS TERMS		145
SIGNATURES		147

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INTRODUCTION

References in this annual report to “Telefônica Brasil,” “we,” “our,” “us,” “our company” and “the company” are to Telefônica Brasil S.A. and its consolidated subsidiaries (unless the context otherwise requires). All references in this annual report to:

“ADRs” are to the American Depositary Receipts evidencing our ADSs;

“ADSs” are to our American Depositary Shares, each representing one share of our non-voting preferred stock;

“ANATEL” are to Agência Nacional de Telecomunicações – ANATEL, the Brazilian telecommunications regulatory agency;

“BM&FBOVESPA” are to the BM&FBOVESPA S.A. – Bolsa de Valores, Mercadorias e Futuros, the Brazilian Securities, Commodities and Futures Exchange or São Paulo stock exchange;

“BNDES” are to Banco Nacional de Desenvolvimento Econômico e Social, the Brazilian Development Bank;

“Brazil” are to the Federative Republic of Brazil;

“Brazilian Corporate Law” are to Law No. 6,404 of December 15, 1976, as amended;

“CADE” are to Conselho Administrativo de Defesa Econômica, the Brazilian competition authority;

“CDI” are to Certificado de Depósito Interbancário, the Certificate for Interbank Deposits;

“Celular CRT” are to Celular CRT Participações S.A. and its consolidated subsidiaries, formerly Vivo subsidiaries before Vivo’s corporate restructuring;

“Central Bank” are to the Banco Central do Brasil, the Brazilian Central Bank;

“CMN” are to the Conselho Monetário Nacional, the Brazilian Monetary Council;

“CTBC Telecom” are to Companhia de Telecomunicações do Brasil Central;

“CVM” are to the Comissão de Valores Mobiliários, the Brazilian Securities Commission;

“Federal District” are to Distrito Federal, the federal district where Brasilia, the capital of Brazil, is located;

“FGV” are to the Fundação Getúlio Vargas, an economic private organization;

“General Telecommunications Law” are to Lei Geral de Telecomunicações, as amended, the law which regulates the telecommunications industry in Brazil;

“Global Telecom” are to Global Telecom S.A., formerly a Vivo subsidiary before Vivo’s corporate restructuring;

“GVT” are to Operating GVT and GVTPar, collectively, formerly wholly owned subsidiaries of Telefônica Brasil prior to our 2016 corporate restructuring;

“GVTPar” are to GVT Participações S.A., a formerly wholly owned subsidiary of Telefônica Brasil prior to our 2016 corporate restructuring;

“IASB” are to International Accounting Standards Board;

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“IBGE” are to Instituto Brasileiro de Geografia e Estatística, the Brazilian Institute of Geography and Statistics;

“IFRS” are to International Financial Reporting Standards, as issued by the IASB;

“IGP-DI” are to the Índice Geral de Preços - Disponibilidade Interna, an inflation index developed by the FGV used by fixed broadband and mobile service providers to adjust their prices;

“IGP-M” are to the Índice Geral de Preços ao Mercado, an inflation index developed by the FGV used by TV and cable service providers to adjust their prices;

“IOF Tax” are to Imposto sobre Operações de Crédito, Câmbio e Seguros, a tax on credit, exchange and insurance transactions;

“IPCA” are to Índice Nacional de Preços ao Consumidor Amplo, the consumer price index, published by the IBGE;

“IST” are to Índice de Serviços de Telecomunicações, the inflation index of the telecommunications sector;

“Number portability” are to Portabilidade Numérica, the service mandated by ANATEL that provides customers with the option of keeping the same telephone number when switching telephone service providers;

“NYSE” are to the New York Stock Exchange;

“Oi” are to Oi S.A., the mobile operator branch of Telemar;

“Operating GVT” are to Global Village Telecom S.A., a formerly wholly owned subsidiary of Telefônica Brasil prior to our 2016 corporate restructuring;

“Real,” “reais” or R$ are to the Brazilian real, the official currency of Brazil;

“SEC” are to the U.S. Securities and Exchange Commission;

“Telebrás” are to Telecomunicações Brasileiras S.A.–Telebrás;

“Telefonica” or are to Telefonica S.A., our parent company;

“TJLP” are to Taxa de Juros de Longo Prazo, or long-term interest rate;

“UMBNDES” are to a monetary unit of the BNDES, consisting of a currency basket of BNDES debt obligations in foreign currencies, which are mostly denominated in U.S. dollars;

“U.S. dollar,” “U.S. dollars” or “US$” are to U.S. dollars, the official currency of the United States;

“Vivo” are to Vivo S.A., a formerly wholly owned subsidiary of Telefônica Brasil, which conducted cellular operations including SMP (as defined in the Glossary of Telecommunication Terms), nationwide.

“Vivo Participações” are to Vivo Participações S.A. (formerly TELESP Celular Participações S.A.) and its consolidated subsidiaries (unless the context otherwise requires); and

Unless otherwise specified, data relating to the Brazilian telecommunications industry included in this annual report were obtained from ANATEL.

The “Glossary of Telecommunications Terms” that begins on page 145 provides the definition of certain technical terms used in this annual report.

iii

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This annual report contains statements that constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements in this Annual Report can be identified, in some instances, by the use of words such as “will,” “expect,” “aim,” “hope,” “anticipate,” “intend,” “believe” and similar language or the negative thereof or by the forward-looking nature of discussions of strategy, plans or intentions. These statements appear in a number of places in this Annual Report including, without limitation, certain statements made in “Item 3. Key Information—D. Risk Factors,” “Item 4. Information on the Company,” “Item 5. Operating and Financial Review and Prospects” and “Item 11. Quantitative and Qualitative Disclosures about Market Risk” and include statements regarding our intent, belief or current expectations with respect to, among other things:

the size and growth rate of the Brazilian telecommunications market;

the accuracy of our estimated demand forecasts;

our ability to successfully execute our strategic initiatives and capital expenditure plans;

our ability to secure and maintain telecommunications spectrum and infrastructure licenses, rights-of-way and other regulatory approvals;

our ability to comply with the terms of our concession agreements;

decisions by applicable regulatory authorities to terminate, modify or renew our concession agreements or the terms thereof;

new telecommunications regulations or changes to existing regulations;

technological advancements in our industry and our ability to successfully implement them in a timely manner;

network completion and product development schedules;

the level of success of competing networks, products and services;

the possible requirement to record impairment charges relating to goodwill and long-lived assets;

increased competition in the Brazilian telecommunications sector;

the cost and availability of financing;

uncertainties relating to political and economic conditions in Brazil as well as those of other emerging markets;

inflation, interest rate and exchange rate risks;

the Brazilian government’s policies regarding the telecommunications industry;

the Brazilian government’s tax policy;

the Brazilian government’s political instability;

adverse decisions in ongoing litigation;

regulatory and legal developments affecting the telecommunications industry in Brazil; and

other risk factors discussed under “Item 3. Key Information—D. Risk Factors.”

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We undertake no obligation to publicly update or revise any forward-looking statements as a result of new information, future events or otherwise. Because of these risks and uncertainties, the forward-looking information, events and circumstances discussed in this annual report might not occur. Our actual results and performance could differ substantially from those anticipated in our forward-looking statements.

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PRESENTATION OF FINANCIAL INFORMATION

We maintain our books and records in reais. We prepared our consolidated financial statements included in this annual report in accordance with IFRS.

The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying our accounting policies. Those areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements, are disclosed in Note 3 to our consolidated financial statements.

Our financial statements prepared in accordance with IFRS as of December 31, 2016 and December 31, 2015 and for the years ended December 31, 2016, December 31, 2015 and December 31, 2014 have also been filed with the CVM, the local securities regulator in Brazil and made publicly available. Our selected financial information included in “Item 3. Key Information—A. Selected Financial Data” should be read in conjunction with, and is qualified in its entirety by, our financial statements and “Item 5. Operating and Financial Review and Prospects” appearing elsewhere in this annual report.

The consolidated financial statements as of December 31, 2016 and 2015 and for each of the three years in the period ended December 31, 2016 are in compliance with IFRS, as issued by the IASB and also with the pronouncements, interpretations and guidance issued by the IASB and the IFRS Interpretations Committee, or the IFRIC, which entered into force as of January 1, 2016.

We have made rounding adjustments to reach some of the figures included in this annual report. Accordingly, numerical figures shown as totals in some tables may not be an arithmetic aggregation of the figures that preceded them.

Results of GVT Participações S.A. are consolidated into our financial statements as from May 1, 2015. Consequently, our results of operations for the year ended December 31, 2016 are not comparable with our results of operations for the years ended December 31, 2015, 2014, 2013 and 2012.

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PART I

ITEM 1.

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

ITEM 2.

OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM 3.

KEY INFORMATION

Selected Financial Data

The selected financial data presented below should be read in conjunction with our consolidated financial statements, including the notes thereto included elsewhere in this annual report. Our consolidated financial statements included herein as of December 31, 2016 and 2015 and for the years ended December 31, 2016, 2015 and 2014 have been audited by Ernst & Young Auditores Independentes S.S. The report of Ernst & Young Auditores Independentes S.S. on the consolidated financial statements appears elsewhere in this annual report.

Results of GVT are consolidated into our financial statements as from May 1, 2015. Consequently, our results of operations for the years ended December 31, 2016 are not comparable with our results of operations for the year ended December 31, 2015, 2014, 2013 and 2012. For further information on our corporate restructurings, see “Item 4.A Historical Background—Acquisition of GVT.”

The following tables present a summary of our selected financial data at the dates and for each of the periods indicated. You should read the following information together with our audited consolidated financial statements and the notes thereto included elsewhere in this annual report and with “Item 5. Operating and Financial Review and Prospects.”

	Year ended December 31,
Income Statement Data:	2016			2016			2015			2014			2013			2012
	(in millions of U.S. dollars)(1)			(in millions of reais)
	(except for share and per share data)
Net operating revenue		13,043			42,508			40,287			35,000			34,722			33,919
Cost of goods and services		(6,389	)		(20,823	)		(20,345	)		(17,223	)		(17,542	)		(16,557	)
Gross profit		6,654			21,685			19,942			17,777			17,180			17,362
Operating expenses, net		(4,700	)		(15,317	)		(14,702	)		(12,668	)		(12,248	)		(10,152	)
Equity in earnings (losses) of associates		-			1			2			7			(55	)		1
Operating income, net		1,954			6,369			5,242			5,116			4,877			7,211
Financial expense, net		(379	)		(1,234	)		(848	)		(362	)		(215	)		(291	)
Income before tax		1,575			5,135			4,394			4,754			4,662			6,920
Income and social contribution taxes		(322	)		(1,050	)		(974	)		183			(946	)		(2,468	)
Net income		1,253			4,085			3,420			4,937			3,716			4,452
Attributable to:
Controlling shareholders		1,253			4,085			3,420			4,937			3,716			4,453
Non-controlling shareholders		—			—			—			—			—			(1	)
Basic and diluted earnings per share:
Common Shares		0.70			2.27			2.15			4.12			3.10			3.72
Preferred Shares		0.77			2.50			2.37			4.53			3.41			4.09
Cash Dividends per share in reais, net of withholding tax:
Common Shares		0.51			1.65			2.04			2.04			1.86			2.57
Preferred Shares		0.56			1.81			2.25			2.25			2.04			2.82

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Balance Sheet Data:	As of December 31,
	2016		2016		2015		2014		2013		2012
	(in millions of U.S. dollars)(1)		(in millions of reais)
	(except for share and per share data)
Property, plant and equipment, net		9,796		31,925		30,477		20,454		18,442		17,604
Total assets		31,317		102,066		101,685		73,065		69,504		70,251
Loans and financing—current portion		780		2,543		2,222		1,509		1,237		1,270
Loans and financing—noncurrent portion		959		3,127		4,455		2,123		3,215		3,774
Debentures—current portion		651		2,120		121		755		287		702
Debentures—noncurrent portion		440		1,434		3,424		3,412		4,015		2,254
Shareholders’ equity		21,246		69,244		68,567		44,950		42,894		44,681
Attributable to:
Controlling shareholders		21,246		69,244		68,567		44,950		42,894		44,681
Noncontrolling shareholders		—		—		—		—		—		—
Capital stock		19,506		63,571		63,571		37,798		37,798		37,798
Number of shares outstanding (in thousands)(2)				1,688,694		1,688,694		1,123,269		1,123,269		1,123,269

Cash Flow Data:	Year ended December 31,
	2016			2016			2015			2014			2013			2012
	(in millions of U.S. dollars)(1)			(in millions of reais)

Operating activities:
Net cash provided by operating activities		3,510			11,440			9,897			9,384			9,576			10,054
Investing activities:
Net cash used in investing activities		(2,115	)		(6,895	)		(14,626	)		(7,608	)		(5,543	)		(3,721	)
Financing activities:
Net cash provided by (used in) financing activities		(1,466	)		(4,777	)		5,373			(3,627	)		(4,622	)		(2,089	)
Increase (decrease) in cash and cash equivalents		(71	)		(232	)		644			(1,851	)		(589	)		4,244
Cash and cash equivalents at beginning of year		1,637			5,337			4,693			6,544			7,133			2,889
Cash and cash equivalents at end of year		1,566			5,105			5,337			4,693			6,544			7,133

(1)

Translated for convenience only using the commercial offer rate as reported by the Central Bank as of December 31, 2016 for reais into U.S. dollars of R$3.2591 to US$1.00. These translations should not be considered representations that any such amounts have been, could have been or could be converted into U.S. dollars at that or at any other exchange rate as of that or any other date. In addition, translations should not be construed as representations that the real amounts represent or have been or could be converted into U.S. dollars as of that or any other date.

(2)

As of the date of this annual report, we held 2,291 thousand treasury shares.

Exchange Rates

The Central Bank allows the real/U.S. dollar exchange rate to float freely and has intervened to control the exchange rate volatility. However, the exchange market may continue to be volatile, and the real may depreciate or appreciate substantially in relation to the U.S. dollar. The Central Bank or the Brazilian government may intervene in the exchange rate market.

Since 1999, the Central Bank has allowed the real/U.S. dollar exchange rate to float freely, and, since that time, the real/U.S. dollar exchange rate has fluctuated considerably. In 2012, the real depreciated 8.9% against the U.S. dollar. In 2013 and 2014, the real depreciated further 14.6% and 13.4%, respectively against the U.S. dollar. In 2015, the depreciation of the real against the U.S. dollar was 47%. In 2016, the real appreciated 16.5%, against the U.S. dollar, ending the year at an exchange rate of R$3.2591 per US$1.00.

The Brazilian government has implemented various economic plans and utilized a number of exchange rate policies, including sudden devaluations, periodic mini-devaluations during which the frequency of adjustments ranged from a daily to a monthly basis, floating exchange rate systems, exchange controls and dual exchange rate markets. We cannot predict whether the Central Bank or the Brazilian government will continue to let the real float freely or intervene in the exchange rate market by returning to a currency band system or otherwise. The real may depreciate or appreciate substantially against the U.S. dollar.

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The following tables set forth the selling exchange rate, expressed in reais per U.S. dollar (R$/US$) for the periods indicated, as reported by the Central Bank.

	Exchange Rates of R$ per US$1.00
	Period-End		Average(1)		High		Low
Year ended December 31,
2012		2.0435		1.9550		2.1121		1.7024
2013		2.3426		2.1605		2.4457		1.9528
2014		2.6562		2.3547		2.7403		2.1974
2015		3.9048		3.3387		4.1949		2.5754
2016		3.2591		3.4833		4.1558		3.1193

Month
August 2016		3.2403		3.2097		3.2733		3.1302
September 2016		3.2462		3.2564		3.3326		3.1934
October 2016		3.1811		3.1858		3.2359		3.1193
November 2016		3.3967		3.3420		3.4446		3.2024
December 2016		3.2591		3.3523		3.4650		3.2591
January 2017		3.1270		3.1966		3.2729		3.1270
February 2017 (through February 22)		3.0824		3.1070		3.1479		3.0510

Source: Brazilian Central Bank.

(1)

Annually, represents the average of the exchange rates on the last day of each month during the periods presented; monthly, represents the average of the end-of-day exchange rates during the periods presented.

On February 22, 2017, the exchange rate was R$3.0824 to US$1.00. The real/dollar exchange rate fluctuates and, therefore, this exchange rate may not be indicative of future exchange rates.

Capitalization and Indebtedness

Not applicable.

Reasons for the Offer and Use of Proceeds

Not applicable.

Risk Factors

This section is intended to be a summary of more detailed discussions contained elsewhere in this annual report. The risks described below are not the only ones we face. Additional risks that we do not presently consider material, or of which we are not currently aware, may also affect us. Our business, results of operations or financial condition could be impacted if any of these risks materializes and, as a result, the market price of our preferred shares and our ADSs could be affected.

Risks Relating to Brazil

The Brazilian government has exercised, and continues to exercise, significant influence over the Brazilian economy. This influence, as well as Brazilian political and economic conditions, could adversely affect us and the trading price of our preferred shares and ADSs.

In the past, the Brazilian government has intervened in the Brazilian economy and made changes in policy and regulations. The Brazilian government’s actions to control inflation and affect other policies have often involved wage and price controls, currency devaluations, capital controls and limits on imports, among other things. Our business, financial condition, results of operations and the market price of our preferred shares and ADSs may be adversely affected by changes in government policies, especially those related to our sector, such as changes in telephone fees and competitive conditions, as well as general economic factors, including:

currency fluctuations;

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exchange control policies;

internal economic growth;

inflation;

energy policy;

interest rates;

liquidity of domestic capital and lending markets;

tax policies; and

other political, diplomatic, social and economic developments in or affecting Brazil.

Uncertainty regarding changes by the Brazilian government to the policies, regulations or standards affecting these or other factors in the future may contribute to economic uncertainty in Brazil and heightened volatility in the Brazilian securities markets and securities issued abroad by Brazilian companies. In addition, possible political crises may affect the confidence of investors and the public in general, which may result in economic deceleration and affect the trading prices of shares issued by companies listed on the stock exchange, such as us.

Our business may be vulnerable to the current disruptions and volatility in the global financial markets.

We are susceptible to swings in global economic conditions, typified most recently by difficult credit and liquidity conditions and disruptions leading to greater volatility commencing in mid-2007 with the global financial crisis. The global economy has largely recovered, however markets remain subject to ongoing volatility factors including interest rate divergence, geopolitical events, and global growth expectations, and there is no assurance that similar conditions will not arise again. In the long term, as a consequence, global investor confidence may remain low and credit may remain relatively lacking. Hence, additional volatility in the global financial markets may occur. The Brazilian economy remains subject to risks and adjustments arising from international financial conditions. Various governments may continue to intervene in their financial systems and perform fiscal and monetary adjustments. There is no assurance, however, that these measures will be successful in stimulating growth or in stabilizing conditions in international financial markets.

The conditions and volatility in the global financial markets may have a material adverse effect on our ability to access the capital markets under appropriate financial conditions, which may adversely affect our operations. Furthermore, an environment of economic downturn may negatively affect the financial stability of our customers, which could result in a general reduction in Brazil’s economic activity and the consequent loss of income for us.

Political instability may have an adverse impact on the Brazilian economy and on our business.

Political conditions in Brazil may affect the confidence of investors and the public in general, as well as the development of the economy. For example, 2016 was marked by an unstable political scenario evidenced by widespread protests and ongoing investigations into allegations of corruption in state-controlled enterprises that contributed to the decline of the confidence of investors and the public in general. The Brazilian Congress commenced impeachment proceedings against then President Dilma Rousseff on December 2, 2015, for violating budgetary laws to prop up the Brazilian economy during her reelection campaign in 2014. On April 17, 2016, more than two-thirds of Brazil’s Congress voted to proceed with the impeachment proceedings. The proceedings then moved to the Senate, which on May 12, 2016 voted to commence a trial of President Rousseff, resulting in her suspension from the post for up to 180 days, during which time Vice President Michel Temer assumed the Presidency. On August 31, 2016, President Rousseff was convicted by the Senate and definitively removed from office. On the same date, Michel Temer assumed the Presidency of Brazil until the next general elections, scheduled for October of 2018. Rousseff appealed the Senate’s final decision to the Supreme Court, whose decision is pending. In this context, it is currently uncertain whether Temer will enjoy the support of the Brazilian Congress, or what policies he will be able to implement. In addition, Temer and his government have been the target of protests throughout Brazil since he assumed power on a provisional and now definitive basis. The resolution of the political and economic crisis in Brazil still depends on the outcome of Operation “Lava Jato” and approval of reforms that are expected to be promoted by the new president. We have no control over the situation and cannot foresee what policies or actions the Brazilian government may pursue. The Brazilian government may be subject to internal pressure to change its current macroeconomic policies, including its fiscal policy, in order to achieve higher rates of economic growth and/or meet its fiscal targets. During the past years, the Central Bank has maintained a tight monetary policy with high interest rates, thus restricting the availability of credit and reducing economic growth in order to control inflation. We cannot foresee what policies the government will adopt. Furthermore, any indecision by the Brazilian government in implementing changes in certain policies or regulations may contribute to economic uncertainty in Brazil, and increase stock market volatility. Any of these factors may adversely affect the Brazilian economy, our business, financial condition, results of operations and the market price of our preferred shares and ADSs.

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Inflation and government efforts to curb inflation may contribute to economic uncertainty in Brazil, adversely affecting our business and results of operations.

Brazil has historically experienced high rates of inflation. Inflation and certain governmental measures taken in the attempt to curb inflation have had significant negative effects on the Brazilian economy. In 2015, inflation measured by the Brazilian consumer price index (Índice de Preços ao Consumidor), or IPCA, reached 10.67%, above the upper limit of 6.5%, established by the CMN. In 2016, inflation as measured by the IPCA retreated to 6.3%, below the upper limit of 6.5%, established by the CMN. In 2017, the Brazilian monetary policy will continue to use the IPCA as a reference for the inflation target. The inflation target for 2017 is set at 4.5%, allowing 1.5 percentage points below or above this target, which means a reduction of 0.5 percentage points to this interval in relation to the target for 2016. If the Central Bank’s assessment is that inflation will be above this target, it may raise interest rates, directly affecting the cost of our debt and indirectly reducing the demand for products and services related to telecommunications. In 2017, factors that may adversely affect consumer inflation are, among others, the depreciation of the real against global benchmark currencies, a possible decision by the Brazilian federal government to raise utility prices (such as electricity tariffs) and potential tax increases.

Currently, fixed broadband and mobile service providers use the internal general price index (Índice Geral de Preços - Disponibilidade Interna), or IGP-DI, to adjust their prices and TV and cable service providers use the market general price index (Índice Geral de Preços ao Mercado), or IGP-M. The IGP-DI and IGP-M are inflation indexes developed by the Fundação Getúlio Vargas, a private organization. Since 2006, telephone fees for fixed line services have been indexed to the telecommunication services index, or IST, adjusted by a factor of productivity, which is defined by ANATEL Resolution 507/2008. The IST is an index composed of other domestic price indexes that is intended to reflect the telecommunications industry’s operating costs. As a result, this index serves to reduce potential discrepancies between our industry’s revenue and costs, and thus reduce the apparent adverse effects of inflation upon our operations.

The authorization by ANATEL to adjust the rate of fees, which is pegged to the IST, is reduced by a factor of productivity, which is calculated based on a compensation index established by ANATEL to share earnings from fixed charge services with their users. The IST is calculated based on a 12-month period average. This may cause increases in our revenues above or below our costs (including salaries), with potentially adverse impacts on our profitability.

Increases in interest rates may have a material adverse effect on our business. The Monetary Policy Committee of the Central Bank (Comitê de Política Monetária do Banco Central do Brasil) sets the basic interest rate for the Brazilian financial system based on the future inflation rate and the central inflation target. On December 31, 2016, the basic interest rate was 13.75% per year, compared to 14.25% per year on December 31, 2015. The basic interest rate decreased 75 basis points on January 11, 2017 and is currently 13.00% per year. The current market consensus is converging towards an IPCA target of 4.5%. The Copom justified its decision based on the lower-than-expected economic activity, lower inflation expectations and positive advances on the necessary economic reforms. As a result, the Central Bank may keep the pace of the cuts of the overnight rate (Sistema Especial de Liquidação e de Custódia – Selic) in the next months, but may increase rates depending on how the macroeconomic scenario evolves. Such rate increases may adversely affect our business and results of operations.

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Fluctuations in exchange rates may adversely affect our ability to meet liabilities denominated or linked to foreign currencies or reduce our income in foreign currency, and may have a material adverse effect on the market value of our preferred shares and ADSs.

The exchange rate between the U.S. dollar and the Brazilian real has experienced significant fluctuations in recent years. The Real depreciated 12.6% against the U.S. dollar in 2011, 8.9% in 2012, 14.6% in 2013, 13.4% in 2014, 47% in 2015 and appreciated 16.5% in 2016.

As of December 31, 2016, 14% of our total indebtedness of R$9.2 billion was denominated in foreign currency (of which 10% was denominated in U.S. dollars). As of December 31, 2016, we had currency hedges in place to cover all of our financial foreign currency-denominated indebtedness.

Approximately 6.2% of our operating costs and expenses are payable or linked to payment by us in U.S. dollars or Euros. By contrast, 99.7% of our revenue is generated in reais, except income derived from hedging transactions, international long-distance interconnection fees and services to customers outside of Brazil.

To the extent that the value of the real decreases relative to the U.S. dollar or the Euro, our commitments payable or linked to payment by us in foreign currencies become more expensive. Although our accounts receivable denominated in foreign currencies would also appreciate, the net effect could adversely affect our revenue and expenses.

Nearly all of our transactions denominated in foreign currencies are covered by hedge transactions. Since May 2010, we have been using a “net balance coverage” strategy, pursuant to which we seek to hedge our net foreign exchange exposure arising from invoices issued or received in foreign currencies. Our corporate market risk department periodically reviews our foreign currency invoices and manages our commitments linked to foreign currencies to limit our overall foreign currency exposure. We believe this strategy has substantially reduced our exposure to fluctuations in exchange rates.

Additionally, the IST does not adequately reflect the true effect of exchange rate fluctuations. Thus, our revenue, when translated to U.S. dollars, does not adequately reflect the true effect of exchange rate fluctuations, which may affect our results of operations.

Political, economic and social developments and the perception of risk in other developed and emerging countries may adversely affect the Brazilian economy, our business, and the market price of Brazilian securities, including our preferred shares and ADSs.

The market for securities issued by Brazilian companies may be influenced, to varying degrees, by economic conditions in both developing and developed economies. The reaction of investors to developments in other countries may have an adverse impact on the market value of securities of Brazilian companies. Crises in other emerging countries or the economic policies of other countries may reduce investor demand for securities of Brazilian companies, including our preferred shares. Any of the foregoing developments may adversely affect the market value of our preferred shares and hinder our ability to access the capital markets and finance our operations in the future on acceptable terms and costs, or at all.

Exchange controls and restrictions on remittances abroad may adversely affect holders of our preferred shares and ADSs.

Brazilian law allows for the Brazilian government to impose temporary restrictions on capital outflows whenever there is a significant imbalance in Brazil’s balance of payments or a significant possibility that such imbalance will exist. Such restrictions could hinder or prevent the holders of our preferred shares or the custodian of our shares in Brazil, Citibank N.A. (acting as the agent for the depositary), from remitting dividends abroad. The Brazilian government last imposed restrictions on capital outflows for a six-month period at the end of 1989. If similar restrictions are introduced in the future, they would likely have an adverse effect on the market price of our preferred shares and ADSs.

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Risks Relating to the Brazilian Telecommunications Industry and Us

Extensive government regulation of the telecommunications industry and our concession may limit, in some cases, our flexibility in responding to market conditions, competition and changes in our cost structure or impact our fees.

Our business is subject to extensive regulation, including any regulatory changes that may occur during the terms of our concession agreements and our authorizations to provide telecommunication services. ANATEL, the main telecommunications industry regulator in Brazil, regulates, among other things:

industry policies and regulations;

licensing;

fees and tariffs;

competition, including our ability to grow by acquiring other telecommunications businesses;

telecommunications resource allocation;

service standards;

technical standards;

quality standards;

interconnection and settlement arrangements; and

universal service obligations.

Brazil’s telecommunications regulatory framework is continuously evolving. The interpretation and enforcement of regulations, the assessment of compliance with regulations and the flexibility of regulatory authorities are all marked by uncertainty. We operate under authorizations and a concession from the Brazilian government, and our ability to maintain these authorizations and concession is a precondition to our success. However, because of the regulatory framework, we cannot provide assurances that ANATEL will not adversely modify the terms of our authorizations. Furthermore, according to the terms of our operating authorizations and concession, we must meet certain requirements and maintain minimum quality, coverage and service standards. Failure by us to comply with these requirements may result in the imposition of fines or other regulatory responses, including the termination of our operating authorizations and concession. Any partial or total revocation of any of our operating authorizations or our concession would have a material adverse effect on our business, financial condition, revenues, results of operations and prospects.

In recent years, ANATEL has also been reviewing and introducing changes to its regulation, especially regarding asymmetric competition measures and interconnection fees charged among Brazilian telecommunications service providers. Asymmetric competition measures can include regulations intended to rebalance markets in which a market participant has distinct market power over other competitors. The adoption of disproportionately asymmetric measures could materially adversely affect our business, financial condition, revenues, results of operations and prospects.

Interconnection fees, which are fees charged by telecommunications service providers to each other to interconnect to each other’s networks, are an important part of our revenue and cost bases. To the extent that changes to the rules governing interconnection fees reduce the amount of interconnection fees we are able to collect, our businesses, financial conditions, revenues, results of operations and prospects could be materially adversely affected.

Therefore, our business, results of operations, revenues and financial conditions could be negatively affected by the actions of the Brazilian authorities, including, in particular, the following:

the introduction of new or stricter operational and/or service requirements;

the granting of operating licenses in our areas;

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limitations on interconnection fees we may charge to other telecommunications service providers;

delays in the granting of, or the failure to grant, approvals for rate increases; and

antitrust limitations imposed by ANATEL and CADE.

We may be unable to successfully accomplish expected synergies of the GVT acquisition.

In order to achieve the full potential of expected GVT synergies, we will depend on our ability to continue to effectively integrate GVT’s business and management into our business and management, as well as the overall macroeconomic environment. The integration of GVT into Telefônica has been progressing according to schedule; however, there are inherent risks to any integration that may harm the process. We have to integrate certain systems and processes, such as customer service, field operations, investments optimization, as well as GVT’s services into our mix of products. While the integration process has progressed smoothly so far, it consumes time and brings uncertainties to the business. An inability to fully capture the benefits of synergy opportunities, including delays on integration process, would have an adverse effect on our operations and financial results.

Our concession may be terminated by the Brazilian government under certain circumstances.

We operate our fixed line business in the state of São Paulo under a concession granted by the Brazilian government. According to the terms of the concession, we are obligated to meet certain universal service requirements and to maintain minimum quality and service standards. For example, ANATEL requires that we satisfy certain conditions with respect to, among other things, expansion of our network to provide public pay-phone service for all locations with a population over 100 inhabitants, expansion of our network to provide private individual telephone service for all locations with a population over 300 inhabitants, as well as several quality of service targets. Our ability to satisfy these and other terms and conditions may be affected by factors beyond our control. Our failure to comply with the requirements of our concession may result in the imposition of fines up to R$50.0 million or other government actions, including the termination of our concession. Any partial or total revocation of our concession would have a material adverse effect on our financial condition and results of operations.

Moreover, the concession agreements establish that all assets owned by us, which are indispensable to the provision of the services described in such agreements, are considered “reversible assets” (bens reversíveis) and are deemed to be part of the concession assets. According to recent interpretations by ANATEL of current regulation, reversible assets will be automatically returned to ANATEL upon expiration of the concession agreements, according to the regulation in force at that time and would not be available to creditors in the event of insolvency, bankruptcy or similar events. As of December 31, 2016, the net book value of our reversible assets is estimated at R$8.8 billion, which are comprised of switching and transmission equipment and public use terminals, external network equipment, energy equipment and system and operation support equipment.

Review of our concession agreements and/or the implementation of a new regulatory framework in Brazil could have a materially adverse effect on our operations.

The expiration date of our fixed line concession agreements is December 31, 2025. The concession agreements contain a provision allowing ANATEL to review the concession terms in 2015 and 2020. This provision permits ANATEL to update the renewed concession agreements with respect to network expansion, modernization and quality of service targets in response to changes in technology, competition in the marketplace and domestic and international economic conditions.

On June 27, 2014, as set forth in our concession agreement for fixed line services, ANATEL opened a public review and comment period for the revision of the terms of our concession agreement with respect to the 2016-2020 period. The review period was scheduled to expire on December 26, 2014. As the Federal Senate is currently holding discussions over a new regulatory framework for telecommunications that are expected to affect our concession agreement, the deadline for the termination of this review period and the finalization of any revisions to our concession contracts has been continuously postponed. On December 30, 2016, the review period deadline was postponed once more, to June 30, 2017, as ANATEL cannot publish a new version of the contract while this discussion is in progress within the Brazilian legislative branch.

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Changes to our concession agreement, or to the regulatory framework more broadly, may entail new requirements imposed on us, including requirements to make certain investments and/or capital expenditures, as well as the imposition of conditional investment requirements in order to obtain certain benefits under a new regulatory framework. Moreover, ANATEL may impose new service targets on us, with values that we are not able to predict. The conditions, terms and criteria being considered with respect to any such changes in the regulatory framework are still uncertain, and will only be defined by ANATEL after the approval of a law amending the General Telecommunications Act. Any such changes to laws, rules or regulations could have a material adverse effect on our operations and financial condition.

Telefônica Brasil is exposed to risks in relation to compliance with anti-corruption laws and regulations.

Telefônica Brasil is required to comply with Brazilian anti-corruption laws and regulations, as well as laws and regulations on the same subject in jurisdictions where it has its securities traded. In particular, the Company is subject, in Brazil, to the Law nº 12.846/2013 and, in the United States, to the U.S. Foreign Corrupt Practices Act of 1977.

Although the Company has internal policies and procedures designed to ensure compliance with the aforementioned anti-corruption laws and regulations, there can be no assurance that such policies and procedures will be sufficient or that the Company’s employees, directors, officers, partners, agents and service providers will not take actions in violation of the Company’s policies and procedures (or otherwise in violation of the relevant anti-corruption laws and regulations) for which the Company or they may be ultimately held responsible. Violations of anti-corruption laws and regulations could lead to financial penalties, damage to the Company’s reputation or other legal consequences that could have a material adverse effect on the Company’s business, results of operations and financial condition.

In connection with the above-mentioned policies, Telefônica Brasil is currently conducting an internal investigation - which is part of a broader investigation being conducted by the controlling shareholder of the Company (Telefónica, S.A.) - regarding possible violations of the abovementioned laws and regulations. Telefônica Brasil is in contact with governmental authorities about this matter and intends to cooperate with those authorities as the investigation continues. It is not possible at this time to predict the scope or duration of this matter or its likely outcome.

We are dependent on key personnel and the ability to hire and retain additional personnel.

We believe that our success will depend on the continued services of our senior management team and other key personnel. Our management team is comprised of highly qualified professionals, with extensive experience in the telecommunications industry. The loss of the services of any of our senior management team or other key employees could adversely affect our business, financial condition and results of operations. We also depend on the ability of our senior management and key personnel to work effectively as a team.

Our future success also depends on our ability to identify, attract, hire, train, retain and motivate highly skilled technical, managerial, sales and marketing personnel. Competition for such personnel is intense, and we cannot guarantee that we will successfully attract, assimilate or retain a sufficient number of qualified personnel. Failure to retain and attract the necessary technical, managerial, sales and marketing and administrative personnel could adversely affect our business, financial condition and results of operations.

We depend on key suppliers to obtain necessary equipment and services for our business.

We depend on certain key suppliers of equipment and services, especially telecommunications network equipment and handsets, for the execution and development of our business. These suppliers may delay delivery, alter prices and limit supply as a result of problems related to their own businesses, over which we have no control. If these suppliers are not able to deliver equipment and services regularly, we may face problems with the continuity of our business activities, which may have an adverse effect on our business and results of operations.

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We are subject to liabilities relating to third party contractors, which may have a material adverse effect on our business and results of operations.

We are exposed to contingent liabilities resulting from our contracting structure, which includes third party service providers. Such potential liabilities may involve labor claims by third party providers that are treated as direct employees as well as joint liability claims relating to wage or overtime pay complaints and workplace injury claims. If a significant portion of these contingent liabilities are decided against us and for which we have not made adequate provisions, our financial condition and results of operation may be adversely affected.

Furthermore, if the contracting of third party service are considered to involve the main activities of the company, it may be characterized as a direct employment, which would significantly increase our costs and as a result we may be subject to administrative proceedings by the relevant labor regulators and may be required to pay fines to the third party service providers.

Certain key inputs are subject to risks related to importation, and we acquire other key inputs from a limited number of domestic suppliers, which may further limit our ability to acquire such inputs in a timely and cost effective manner.

The high growth in data markets in general and broadband in particular may result in a limited supply of equipment essential for the provision of such services, such as data transmission equipment and modems. The restrictions on the number of manufacturers imposed by the Brazilian government for certain inputs, mainly data transmission equipment and modems, and the geographical locations of non-Brazilian manufacturers of these inputs, pose certain risks, including:

vulnerability to currency fluctuations in cases where inputs are imported and paid for with U.S. dollars, Euros or other non-Brazilian currency;

difficulties in managing inventory due to an inability to accurately forecast the domestic availability of certain inputs; and

the imposition of customs or other duties on key inputs that are imported.

If any of these risks materialize, they may result in our inability to provide services to our customers in a timely manner or may affect the prices of our services, which may have an adverse effect on our business, financial condition and results of operations.

We make investments based on demand forecasts that may become inaccurate due to economic volatility and may result in revenues that lower than expected.

We make certain investments, such as the procurement of materials and the development of physical sites, based on our forecasts of the amount of demand that customers will have for our services at a later date (generally several months later). However, any major changes in the Brazilian economic scenario may affect this demand and therefore our forecasts may turn out to be inaccurate. For example, economic crises may restrict credit to the population, and uncertainties relating to employment may result in a delay in the decision to acquire new products or services (such as broadband or Pay TV). As a result, it is possible that we may make larger investments based on demand forecasts than were necessary given actual demand at the relevant time, which may directly affect our cash flow.

Furthermore, improvements in economic conditions may have the opposite effect. For example, an increase in demand not accompanied by our investment in improved infrastructure may result in a possible loss of opportunity to increase our revenue or result in the degradation of the quality of our services.

Consolidation in the telecommunications market may increase competition in the near future and may change Brazilian market dynamics.

Mergers and acquisitions may change market dynamics, create competitive pressures, force small competitors to find partners and impact our financial condition; and may require us to adjust our operations, marketing strategies (including promotions), and product portfolio.

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The entry of a new market participant with significant financial resources or potential changes in strategy by existing telecommunications service providers can change the competitive environment in the Brazilian market. We may be unable to keep pace with these changes, which could affect our ability to compete effectively and have a material adverse effect on our business, financial condition and results of operations.

Additional joint ventures, mergers and acquisitions among telecommunications service providers are possible in the future. If such consolidation occurs, it may result in increased competition within our market. We may be unable to adequately respond to pricing pressures resulting from consolidation in our market, adversely affecting our business, financial condition and results of operations. We may also consider engaging in merger or acquisition activity in response to changes in the competitive environment, which could divert resources away from other aspects of our business.

We face significant competition in the Brazilian market.

The Brazilian telecommunications market growth (measured in revenues) declined in 2016, mainly due to mandatory reductions in mobile termination rates required by Brazilian regulators, as well as a decrease in the use of traditional services (voice and lower speed broadband). By contrast, premium services such as ultra-broadband and mobile data boosted the revenues of telecommunications companies. Customers are demanding higher quality and more data availability, which require investments in the development and expansion of new technologies (Fiber and 4G), pressing companies’ results.

Additionally, the following factors have also impacted competition in the telecommunications sector: (1) commercial and pricing pressures from new mobile portfolios launched by competitors; (2) competitors increasing 3G and 4G coverage, improving the quality of service provided by them; and (3) low-cost alternative services, such as voice and text services provided over IP and Video on Demand, may affect our competitive position in the market.

We continuously monitor the market progress in order to anticipate future challenges and opportunities and how to address them. Nevertheless, our operational results, market position, competitiveness in the market and margins may be negatively affected if we are unable to keep the same pace as our competitors.

Our results of operations may be negatively affected by the application of the Fixed Commuted Telephone Service (Serviço de Telefonia Fixa Comutada), or STFC, rules relating to fixed telephone service and the Personal Mobile Service (Serviço Móvel Pessoal), or SMP, rules relating to mobile services.

We receive payments for the termination of calls in our fixed network. On May 18, 2014, ANATEL established a gradual decrease in termination rates for the STFC concessionaries, including TU-RL (Urban Usage Rate), TU-RIU1 (Interurban Usage Rate Level 1) and TU-RU2 (Interurban Usage Rate Level 2).

In 2014, ANATEL established gradual decreases in mobile interconnection fees, also known as mobile termination rates, or MTR, based on a cost model. Such figures appear in the following table:

	2015		2016		2017		2018		2019
Sector 31 (fixed)
TU-RL		N/A		0.01139		0.00574		0.00289		0.00146
TU-RU1		N/A		0.05339		0.02191		0.00899		0.00369
TU-RU2		N/A		0.06129		0.02348		0.009		0.00345
Mobile
Region I		0.16751		0.09317		0.04928		0.02606		0.01379
Region II		0.16237		0.10309		0.05387		0.02815		0.01471
Region III		0.14776		0.11218		0.06816		0.04141		0.02517

We cannot assure you that new mobile service plans will not be suspended by ANATEL, that the mobile interconnection fees we negotiated will not be changed or that future negotiations regarding mobile termination rates will be as favorable as those that were previously set by ANATEL. If the readjustments to mobile interconnection fees that we negotiated are cancelled or if negotiated mobile interconnection fees in the future are less favorable to us, our business, financial condition, revenues, results of operations and prospects may be adversely affected.

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ANATEL’s annual regulations regarding interconnection fees could have an adverse effect on our results.

ANATEL has the authority to issue new regulations affecting many of our areas of operations. Such new regulations could have an adverse effect on our operating results because: (1) ANATEL could significantly reduce the interconnection fees we are able to charge, thereby reducing our revenues (see “—Our results of operations may be negatively affected by the application of the Fixed Commuted Telephone Service (Serviço de Telefonia Fixa Comutada), or STFC, rules relating to fixed telephone service and the Personal Mobile Service (Serviço Móvel Pessoal), or SMP, rules relating to mobile services”); (2) ANATEL may allow more favorable conditions for economic groups without significant market power; (3) the granting of new licenses may increase competition in our area from other operators, which could adversely affect our prices or market share, thereby reducing our revenues; (4) ANATEL may require that revenue received for the usage of the SMP network must be included in the calculation of operating revenue, which will increase the cost of renewing licenses; and (5) ANATEL’s general plan of updating the telecommunications regulations targets several areas of vital importance for the mobile telecommunications business, such as regulations (A) to improve the quality of services, which may cause an increase in operating costs, (B) of virtual mobile operations, or MVNO, which may cause an increase in competitive pressure, (C) against SMP providers exercising market power to negotiate lower mobile termination rate fees, which could cause a decrease in our revenues from the mobile termination rate fees we are able to charge to SMP providers, and (D) relating to multimedia communication. For a detailed description of the regulations issued by ANATEL and their impact on our business, see “Item 4. Information on the Company—Business Overview—Regulation of the Brazilian Telecommunications Industry.”

The industry in which we conduct our business is continually changing and evolving technologically, which demands adequate changes in the regulatory environment.

The telecommunications industry is subject to rapid and significant technological changes. Our future success depends on our ability to anticipate and adapt in a timely manner to technological changes. We expect that new products and technologies will emerge and that existing products and technologies will be further developed.

The advent of new products and technologies could have a variety of consequences. These new products and technologies may reduce the price of our services by providing lower-cost alternatives, for instance over-the-top, or OTT, players (that provide voice and messages over IP), and creation of new digital services. New product and technologies may also be superior to, and render obsolete, the products and services we offer and the technologies we use, thus requiring investment in new technology.

Furthermore, such new technologies will demand changes in the regulatory environment challenging the government agencies and telecommunication companies. For example, companies that provide OTT services, that have some characteristics of the telecommunications service, are not subject to the same rules that a telecommunications operator, this gap can bring additional challenges to telecommunications operators. Currently, it is unclear what the level of regulation for this type of service will be.

Resolution No. 600, approved in November 2012, establishes relevant markets and asymmetric measures which were intended to stimulate the competition in such markets. We are subject to review by ANATEL to decide if we have a significant market power in a specific relevant market and, as a result, are subject to asymmetric measures. Both relevant markets and asymmetric measures will be evaluated every four years beginning in 2016 and the list of companies deemed to have significant market power will be reviewed every two years. Such asymmetric measures may have material adverse effect on our financial condition and results of operations.

In December 2016 and January 2017, ANATEL held a public consultation to discuss new parameters to regulate asymmetries in the telecommunications market. In contrast to the current model, ANATEL is proposing to regulate companies not based on their market power throughout the country, but according to the degree of competition present in each municipality.

Additionally, a new regulatory framework for the telecommunications sector is being considered by the Brazilian government. In this regard, legislators are considering the possibility of switching the STFC from the current concession regime to an authorization regime, as well as revisions to the reversibility of assets associated with a concession regime, in order to take account of ongoing technological convergence and changing market dynamics in the sector. Those measures would remove the current legal uncertainty imposed on concession holders and are expected to encourage a more efficient use of assets. The failure to implement any such changes to the regulatory infrastructure could adversely affect the operational and financial results of concession holders.

Changes to any of the above described regulations may have a material effect on our financial condition and results of operations.

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We are subject to certain risks related to conditions and obligations imposed by ANATEL for the use of the spectrum needed for the LTE services we offer.

In 2010, ANATEL required multichannel multipoint distribution service, or MMDS, companies, including us, to return a significant portion of the 2.5GHz spectrum we owned at that time. In addition, on June 12 and 13, 2012, ANATEL held a public auction for 273 lots of 4G, on the 2.5GHz to 2.69GHz frequencies. We acquired the “X” band, with a nationwide coverage, for R$1.05 billion. According to spectrum cap rules for bidding processes, we had to return the remaining portion of the 2.5GHz spectrum we previously owned to operate our MMDS services. In order to meet the coverage obligations and the schedule defined by ANATEL, we have made 4G services available to 516 cities in Brazil. To complete the coverage requirements, we will need to implement 4G coverage in 787 cities with between 30,000 and 100,000 residents by December 31, 2017.

To achieve these goals, Telefonica has deployed and continues to deploy 4G coverage in such municipalities and serves its customers through the use of its own network or by agreement of RAN-sharing approved by ANATEL. Verification of compliance with these targets will be made by the Agency under a supervisory.

The coverage commitments in cities with less than 30,000 inhabitants may be fulfilled with other frequency bands, according to the following schedule:

by December 31, 2017: 117 cities;

by December 31, 2018: another 117 cities; and

by December 31, 2019: 156 more cities.

In 2012, ANATEL auctioned a 450 MHz frequency lot tied to the 2.5 GHz band, to meet voice and data demand in remote rural areas. Under band “X,” which we acquired in the bidding process, we will be required to provide infrastructure in rural areas in the states of Alagoas, Ceará, Minas Gerais, Paraíba, Pernambuco, Piauí, Rio Grande do Norte, Sergipe, and countryside of São Paulo, for a total of 2,556 municipalities.

In 2016, ANATEL’s board of directors approved a request made by telecommunications companies to allow for coverage in those remote areas with other technologies, since there is no available ecosystem to use the 450 MHz frequency.

Regarding the 700 MHz spectrum, ANATEL has allocated the band for the provision of fixed, mobile and broadband services. On September 30, 2014, ANATEL held the public bidding for 18 blocks of 4G, on the 708 to 803 MHz frequencies. We acquired 20 MHz (10+10 MHz) with nationwide coverage, for R$1.92 billion, at the minimum price, plus R$904 million for the band cleaning (migration of broadcasters that currently occupy the band and interference management). According to the auction rules, the winning bidders will be responsible for financing and managing the band cleaning process and ANATEL has deducted the cleaning cost associated with two blocks for which no bids were made.

In January 2016, the Ministry of Communications published a new schedule for the Analog TV Switch Off, postponing the usage of the 700 MHz frequency for telecommunications in some major Brazilian cities. According to the new schedule, two cities were turned off in 2016: Rio Verde (GO) and Brasília (DF). Despite minor delays, the program implementation was considered successful. According to the schedule, analog TV services in 349 municipalities in 8 states (Bahia, Ceará, Espírito Santo, Goiás, Minas Gerais, São Paulo, Rio de Janeiro and Pernambuco) will be shut down in 2017, including the capitals of these states. The list of municipalities for 2018 has not yet been defined.

In December 2015, ANATEL auctioned the remaining spectrum lots in the 1800 MHz, 1900 MHz and 2500 MHz bands, where Telefônica acquired seven lots of 2.5 GHz frequency band for a total of R$185.4 million. These lots are associated to six different States, five of them in the capital cities of the States of São Paulo, Rio de Janeiro, Porto Alegre, Florianópolis, and Palmas and one in an interior city of the State of Mato Grosso do Sul. Such frequencies will be used for provision of mobile broadband service on 4G.

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The targets established by ANATEL for the fast-paced implementation of networks could be impacted by (1) our ability to obtain licenses for the construction of new sites at the speed necessary to achieve the coverage targets, (2) the capacity of our suppliers to deliver the equipment necessary for this expansion, which may increase the price of such equipment, and (3) lack of qualified resources to meet the expected implementation pace.

If we are not able to meet targets and obligations set forth in the bid documents, ANATEL may use our bank guarantees, we may be subject to fines and/or have our licenses to operate these frequencies revoked, negatively affecting our business and results of operations. Additionally, the inefficient use of any frequency may lead to the loss of the usage license.

Our sales could be suspended as a result of issues with the quality of our services.

ANATEL and other judiciary and administrative agencies have the authority to suspend our sales in an attempt to improve the overall quality of telecommunications services. Sales suspensions are generally applied to the services for which there have been complaints by consumers and the consumer protection agencies. When applied, the suspension is temporary and usually lifted once the company presents an improvement action plan. In July 2012 ANATEL suspended mobile service sales from three of our main competitors, Oi, Claro and Tim, as result of a considerable increase in consumer complaints. The suspensions lasted about 20 days and ANATEL requested that all telecommunications companies, including us, present an action and investment plan to improve the mobile network. Although our action plan was approved by ANATEL in September 2012, if a similar increase in customer complaints occurs in the future, we may face suspension of one or more of our services until a plan can be produced and approved by ANATEL, which may materially affect our business and results of operations.

Certain of our debt agreements contain financial covenants, and any default under such debt agreements may have a material adverse effect on our financial condition and cash flows.

Certain of our existing debt agreements contain restrictions and covenants and require the maintenance or satisfaction of specified financial ratios and tests. Failure to meet or satisfy any of these covenants, financial ratios or financial tests could result in an event of default under these agreements.

We are subject to environmental laws and regulations. Failure to comply with governmental laws and regulations could subject us to penalties that could have an adverse effect on our business.

Our operations and properties are subject to a variety of environmental laws and regulations governing, among other things, environmental licensing and registries, protection of flora and fauna, air emissions, waste management and remediation of contaminated areas, among others. Our failure to comply with present and future requirements, or the management of existing and identification of new contamination, could cause us to incur substantial costs, including cleanup costs, indemnification, compensation, fines, suspension of activities and other penalties, investments to upgrade our facilities or change our processes, or curtailment of operations. The identification of presently unidentified environmental conditions, more vigorous enforcement by regulatory agencies, enactment of more stringent laws and regulations or other unanticipated events may arise in the future and give rise to material environmental liabilities and related costs. The occurrence of any of the foregoing could have a material adverse effect on our business, results of operations and financial condition.

Companies in the telecommunication industry, including us, may be harmed by restrictions regarding the installation of new antennas for mobile services.

Currently, there are approximately 250 municipal laws in Brazil that limit the installation of new antennas for mobile service, which has been a barrier to the expansion of mobile networks. Those laws are meant to regulate issues related to zoning and the alleged effects of the radiation and radiofrequencies of the antennas. The federal law, that establishes new guidelines to create a consolidated plan for the installation of antennas was approved in 2015, however, it is still pending specific regulation. Despite the federal initiative, as long as the municipal laws remain unchanged, the risk of noncompliance with regulations and of having services of limited quality in certain areas continues to exist.

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Additional antenna installation is also limited as a result of concerns that radio frequency emissions from base stations may cause health problems. These concerns could have an adverse effect on the wireless communications industry and, possibly, expose wireless providers, including us, to litigation. Based on information from the World Health Organization, or WHO, we are not aware of any evidence in the latest medical research that conclusively establishes any relationship between radio frequency emissions of base stations and health concerns. However, perceived risks may delay expansion of our network if we experience problems in finding new sites, which in turn may delay expansion and may affect the quality of our services.

In May 2009, the Brazilian government published Law No. 11934/2009 that limits the exposure for fields with frequencies up to 300 GHz. The new law uses the exposure limits determined by the International Commission on Non-Ionizing Radiation Protection and recommended by the WHO. In addition, this law further restricts the installation of new antennas.

New laws may create additional transmission regulations, which in turn, could have an adverse effect on our business. Also, health concerns regarding the effects of radio frequency emissions may discourage the use of mobile telephones and may result in the adoption of new measures by governments or any other regulatory interventions, any of which could materially and adversely affect our business, results of operations and financial condition.

We face risks associated with litigation.

We are party to a number of lawsuits and other proceedings. An adverse outcome in, or any settlement of, these or other lawsuits could result in significant costs to us. In addition, our senior management may be required to devote substantial time to these lawsuits, which they could otherwise devote to our business. See “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings.”

Risks Relating to the Preferred Shares and the ADSs

Holders of our ADSs may face difficulties in serving process on or enforcing judgments against us and other persons.

We are organized under the laws of Brazil, and all of our executive officers and our independent public accountants reside or are based in Brazil. Also, six of our twelve directors reside or are based in Brazil. Substantially all of our assets and those of these other persons are located in Brazil. As a result, it may not be possible for holders of the ADSs to effect service of process upon us or these other persons within the United States or other jurisdictions outside Brazil or to enforce against us or these other persons judgments obtained in the United States or other jurisdictions outside Brazil. Because judgments of U.S. courts for civil liabilities based upon the U.S. federal securities laws may only be enforced in Brazil if certain conditions are met, holders may face greater difficulties in protecting their interests due to actions by us, our directors or executive officers than would shareholders of a U.S. corporation.

Holders of our preferred shares and ADSs generally do not have voting rights.

In accordance with Brazilian Corporate Law and our bylaws, holders of our preferred shares, and therefore of our ADSs, are not entitled to vote at meetings of our shareholders, except in limited circumstances set forth in “Item 10. Additional Information—B. Memorandum and Articles of Association.”

Holders of our preferred shares might be unable to exercise preemptive rights with respect to the preferred shares unless there is a current registration statement in effect which covers those rights or unless an exemption from registration applies.

Holders of our preferred shares will not be able to exercise the preemptive rights relating to the preferred shares underlying their ADSs unless a registration statement under the U.S. Securities Act of 1933, as amended, or the Securities Act, is effective with respect to the shares underlying those rights, or an exemption from the registration requirements of the Securities Act is available. We are not obligated to file a registration statement. Unless we file a registration statement or an exemption from registration applies, holders of our preferred shares may receive only the net proceeds from the sale of their preemptive rights by the depositary, or if the preemptive rights cannot be sold, they will lapse and they will not receive any value for them. For more information on the exercise of these rights, see “Item 10. Additional Information—B. Memorandum and Articles of Association—Description of Our Bylaws—Preemptive Rights.”

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An exchange of ADSs for preferred shares risks the loss of certain foreign currency remittance and Brazilian tax advantages.

Beginning on March 30, 2015, the different forms of foreign portfolio investments in Brazil, including investments via Depositary Receipts, have been regulated by CMN Resolution 4,373, of September 29, 2014 (or “Resolution No. 4,373”), which revoked the former rule (CMN Resolution 2,689, of January 26, 2000) that had been in effect for the previous 15 years. Resolution No. 4,373 provides for the issuance of Depositary Receipts in foreign markets in respect of shares of Brazilian issuers, and, pursuant to this regulation, the ADSs benefit from the certificate of foreign capital registration, which permits Citibank N.A., as depositary, to convert dividends and other distributions with respect to preferred shares into foreign currency, and to remit the proceeds abroad. Holders of ADSs who exchange their ADSs for preferred shares will then be entitled to rely on the depositary’s certificate of foreign capital registration for five business days from the date of exchange. Thereafter, they will not be able to remit non-Brazilian currency abroad unless they obtain their own certificate of foreign capital registration, or unless they qualify under CMN Resolution No. 4,373, which entitles certain investors to buy and sell shares on Brazilian stock exchanges without obtaining separate certificates of registration. CMN Resolution No. 4,373 replaced both CMN Resolution No. 1,927 and CMN Resolution No. 2,689 as of March 30, 2015. Further rules will be issued by CVM and by the Central Bank to regulate foreign investments in ADSs, including with regard to the exchange of ADSs for preferred shares and the remittance of funds arising from the sale of these preferred shares.

If holders of ADSs do not qualify under Resolution No. 4,373, they will generally be subject to less favorable tax treatment with respect to our preferred shares. There can be no assurance that the depositary’s certificate of registration or any certificate of foreign capital registration obtained by holders of ADSs will not be affected by future legislative or regulatory changes, or that additional Brazilian law restrictions applicable to their investment in the ADSs may not be imposed in the future.

Holders of our preferred shares will be subject to, and holders of our ADSs could be subject to, Brazilian income tax on capital gains from sales of preferred shares or ADSs.

Brazilian Law No. 10,833 provides that gains on the disposition of assets located in Brazil by nonresidents of Brazil, whether to other nonresidents or to Brazilian residents, will be subject to Brazilian taxation. The preferred shares are expected to be treated as assets located in Brazil for purposes of the law, and gains on the disposition of preferred shares, even by nonresidents of Brazil, are expected to be subject to Brazilian taxation.

Based on the fact that the ADSs are issued and registered abroad, we believe that gains on the disposition of ADSs made outside of Brazil by nonresidents of Brazil to another non-Brazilian resident would not be subject to Brazilian taxation, since they would not fall within the definition of assets located in Brazil for purposes of Law 10,833. However, considering the general and unclear scope of Law No. 10,833 and the absence of judicial/administrative court rulings in respect thereto, we cannot be assured that such an interpretation of this law will prevail in the courts of Brazil.

In case of any assessment by the Brazilian tax authorities, the gains arising from the disposal of ADSs made as of January 1, 2017 could be subject to capital gain tax in Brazil at (i) progressive rates ranging from 15% to 22.5% (for transactions executed after January 1, 2017) or at a flat rate of 15% (for transactions executed before January 1, 2017), or (ii) 25% if the non-Brazilian holder is located in a tax haven jurisdiction, whether the transaction was executed before or after January 1, 2017. See “Item 10. Additional Information—E. Taxation—Brazilian Tax Considerations.”

Certain Factors Relating to Our Controlling Shareholder

Our controlling shareholder has power over the direction of our business.

Telefónica S.A., or Telefónica, our controlling shareholder, and its affiliates currently own directly and indirectly approximately 94.47% of our voting shares and 73.58% of our total capital stock. See “Item 7. Major Shareholders and Related Party Transactions—A. Major Shareholders” and “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions.” As a result of its share ownership, Telefónica has the power to control us and our subsidiaries, including the power to elect our directors and officers and to determine the outcome of any action requiring shareholder approval, including corporate reorganizations and the timing and payment of our dividends. Given this degree of control over our company, circumstances could arise under which the interests of Telefónica could be deemed to be in conflict with the interests of our other shareholders.

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ITEM 4.

INFORMATION ON THE COMPANY

History and Development of the Company

General

We were incorporated on May 22, 1998, as a corporation (sociedade anônima) organized under the laws of the Federative Republic of Brazil, as a result of the restructuring and privatization of Telecomunicações Brasileiras S.A. and its operating subsidiaries, or the Telebrás System, which monopolized the provision of public telecommunications services in virtually all areas of Brazil prior to 1998. We were incorporated under the name Telesp Participações S.A. and after subsequent reorganizations we were named Telecomunicações de São Paulo S.A. – TELESP. After our merger with Vivo Participações in October 2011, we changed our corporate name to Telefônica Brasil S.A.

On September 18, 2014, we entered into a stock purchase agreement with Vivendi S.A. to acquire all of the shares of GVT Participações S.A., or GVT, the controlling shareholder of Global Village Telecom S.A., or Operating GVT, which was approved by our board of directors on the same date.

According to Brazilian Law, the transaction must be approved by both ANATEL and CADE. On December 22, 2014, ANATEL approved the transaction and imposed certain obligations, that include (1) the maintenance of current GVT services and plans within the same geographic scope in which GVT previously operated, requiring, in addition, that the successor company expand its operations to at least ten new municipalities within three years beginning on January 26, 2015; and (2) the waiver of the STFC license held by GVT within 18 months of ANATEL’s decisions, since the same economic group cannot hold more than one STFC license in the same geographic area. Telefônica has satisfied both obligations.

On March 25, 2015, CADE provisionally approved the GVT acquisition, subject to a series of obligations imposed to prevent any undesired concentration effects of the merger. Such obligations require that we:

Maintain, for at least three years, the current geographical coverage for STFC, SCM and SeAC services;

Maintain, for at least three years, the current average broadband speed for GVT’s customers on a nationwide basis. The reference as of December, 2014 is 15.1 Mbps;

Maintain, for at least three years, the current average broadband speed for GVT’s customers in São Paulo. The reference as of December, 2014 is 18.25 Mbps; and

Do not exchange, directly or indirectly, classified information, strategic or competitively sensitive information with any other company or between management and representative responsible for subsidiaries of Vivendi Group, Telefónica Group and Telecom Italia Group related to its operations in the Brazilian market.

In November 2015, ANATEL consented to our corporate reorganization involving Telefônica Brasil S.A., GVT Participações S.A. and its subsidiaries . The approval was subject to certain conditions such as the end of overlap licenses of STFC, SCM and SeAC within 18 months and the obligation to present a list of all assets from the companies incorporated in our STFC (Sector 31, Region III) concession area, confirming the absence of reversible assets burdened judicially (by means of a negative certificate), or in case of attachment, present the appropriate requests for replacement.

On March 14, 2016, the corporate reorganization was approved by our Board of Directors, and was completed on April 1, 2016, after the approval by an extraordinary shareholders meeting of the relevant companies

We are registered with the CVM as a publicly held company and our stock is traded on the BM&FBOVESPA under the symbol “VIVT3” (formerly “TLPP3”) for common shares and “VIVT4” (formerly “TLPP4”) for preferred shares. We are also registered with the SEC in the United States and our ADSs are traded on the NYSE, under the symbol “VIV” (formerly “TSP”). Our headquarters are located at Avenida Engenheiro Luis Carlos Berrini, 1376, 04571-936, São Paulo, SP, Brazil. Our telephone number is 55-11-3430-3687 and our website is www.telefonica.com.br/ir. The information on our website is not part of this annual report on Form 20-F.

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As of December 31, 2016, we had 569,354,053 outstanding common shares (excluding treasury shares), with no par value per share, and 1,119,340,367 outstanding preferred shares (excluding treasury shares), with no par value per share. Our shareholders’ equity was in the amount of R$69.2 billion as presented in our audited financial statements prepared in accordance with IFRS.

Historical Background

Corporate Restructuring Involving Telefônica Brasil and Vivo Participações

On July 28, 2010, our controlling shareholder, Telefónica, reached an initial agreement with Portugal Telecom for the acquisition of 50% of the capital stock of Brasilcel, N.V., or Brasilcel. As a result of this transaction, Telefónica held 100% of the capital stock of Brasilcel. At that time, Brasilcel held approximately 60% of the capital stock of Vivo Participações. On December 21, 2010, Brasilcel was merged into Telefónica.

Due to the acquisition of control of Vivo Participações, on February 16, 2011, Telefónica, through its subsidiary SP Telecomunicações Ltda., or SP Telecom, launched a public tender offer for the common shares of Vivo Participações (the only shares with voting rights) held by minority shareholders. As a result of the public tender offer, on March 18, 2011, SPTelecom acquired 10,634,722 common shares of Vivo Participações, representing 2.66% of its shares, resulting in the Telefónica group’s ownership of 62.1% of Vivo Participações.

On December 27, 2010, the boards of directors of Vivo Participações and Telefônica Brasil approved the terms and conditions of a corporate restructuring, which provided for the merger of shares issued by Vivo Participações into Telefônica Brasil. The corporate restructuring was approved by ANATEL on March 24, 2011, and on April 27, 2011, the shareholders of Vivo Participações and Telefônica Brasil approved the merger of shares issued by Vivo Participações into Telefônica. On June 14, 2011, the board of directors of both companies approved a second corporate restructuring, pursuant to which Vivo Participações became our wholly owned subsidiary. The terms and conditions of the second corporate restructuring were approved unanimously by the shareholders of both companies on October 3, 2011. Vivo Participações was merged into us, and the holders of the merged shares of Vivo Participações received new shares in the company.

In addition to the concentration of the equity ownership mentioned above, the purpose of the corporate restructuring was to simplify the organizational structure of the companies, both of which were publicly held, so as to: (i) focus all authorizations for the rendering of SMP services (originally held by Vivo Participações and Vivo), and (ii) simplify the current corporate structure, eliminating the structure of Vivo Participações, which due to the concentration of commitments, had become a holding company.

Moreover, the corporate restructuring provided for the rationalization of the cost structure of the two companies and facilitated the integration of the businesses and the generation of synergies, thus positively impacting both companies. Due to the merger of Vivo Participações into us, our capital was increased by R$31.2 billion, reflecting the economic value of the shares issued as a result of the merger. The merger did not change the identity of the controlling shareholders of the companies.

Additionally, as a consequence of this merger, on July 6, 2011, Vivo Participações filed a statement with the SEC in order to cancel the registration of its American Depositary Shares, or ADS, program since all of its ADSs were converted into ADSs of Telefônica Brasil. The SEC approved the deregistration on July 7, 2011.

A third stage of the corporate restructuring was approved by ANATEL on August 16, 2011. On October 3, 2011, our shareholders approved the merger of Vivo Participações into us and Telefônica Brasil absorbed Vivo Participações’ equity, extinguishing Vivo Participações, which further simplified and rationalized our cost structures. On the same date, we changed our name from Telecomunicações de São Paulo S.A. – TELESP to Telefônica Brasil S.A., to reflect our nationwide operations. On October 18, 2011, ANATEL approved transfer of the authorization for the provision of SMP services in the state of Minas Gerais from Vivo Participações to Vivo.

As a result of this name change, the ticker symbols for our shares were also changed as of October 6, 2011 (inclusive), from TLPP3, for the common shares, and TLPP4, for the preferred shares, to VIVT3 and VIVT4, respectively, with the subsequent change of our trading name to TELEF BRAZIL. Our ticker symbol for the ADRs on the NYSE was changed to VIV, from TSP.

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Telefónica and Telecom Italia Agreement

The Italian company TELCO S.p.A. had a 22.4% interest with voting rights in Telecom Italia, and is its major shareholder. Telecom Italia holds an indirect interest in TIM Participações S.A., or TIM, a Brazilian telecommunications company. None of Telefónica, Telefônica Brasil or any other affiliate of Telefónica is involved with or has decision-making powers over TIM’s operations in Brazil, although Telefónica does hold an indirect interest with respect to TIM’s operations in Brazil. They are also legally and contractually forbidden from exercising any voting rights in TIM’s operations in Brazil. TIM and Telefônica Brasil compete in all markets in which they operate in Brazil and maintain usual and customary contractual relations with one another as well as with the other players in the telecommunications industry (many of which are regulated and reviewed by ANATEL), and notice is given to ANATEL and CADE, when required, concerning the commitments assumed pursuant to these contracts so as to ensure total independence of their operations.

On September 24, 2013, Telefónica entered into a shareholders’ agreement with the other shareholders of TELCO S.p.A. whereby Telefónica subscribed and paid for shares (without voting rights) of TELCO S.p.A. in the amount of €324 million. As a result of this capital increase, the share capital of Telefónica with voting rights in TELCO S.p.A. remained unchanged at 46.18%, although its ownership interest increased to 66%. Thus, the governance of TELCO S.p.A., as well as the obligations of Telefónica to abstain from participating in or influencing the decisions that impact the industries where they both operate, remained unchanged.

On January 1, 2014, Italian shareholders of TELCO S.p.A. granted Telefónica an option to purchase all of their shares in TELCO S.p.A. The ability to exercise this call option was subject to approvals from the applicable antitrust authorities and telecommunications regulatory agencies as applicable (including in Brazil and Argentina). The call option was available since January 1, 2014 and remained available during the shareholders’ agreement mentioned above was in effect, except (i) during the period between January 15 and February 15, 2015 and (ii) during certain periods in the event that the Italian shareholders of TELCO S.p.A. requested TELCO S.p.A.’s spin-off.

On December 4, 2013, CADE announced its decision to approve, subject to the limitations described below, the acquisition, by Telefónica, of the total interest held by Portugal Telecom in Brasilcel, which previously controlled Vivo Participações. The transaction had previously been approved by ANATEL and its completion (requiring no prior approval from CADE at the time) took place immediately after approval from ANATEL, on September 27, 2010. Pursuant to CADE’s decision of December 4, 2013, Telefônica was required to (1) obtain a new shareholder and share control over Vivo Participações with Telefónica, under the same conditions applied to Portugal Telecom when it held an interest in Brasilcel or (2) Telefónica should cease to have, either directly or indirectly, equity interest in TIM.

Additionally, on December 4, 2013, CADE announced its decision to impose a R$15 million fine on Telefónica for violating the intent and purpose of the agreement executed by and between Telefónica and CADE (as a requirement to approve the initial purchase transaction of Telecom Italia in 2007), due to the subscription and payment, by Telefónica, of non-voting shares of TELCO S.p.A. in the context of its recent capital increase. This decision also required that Telefónica would dispose of its non-voting shares held in TELCO S.p.A. The deadlines for compliance with the conditions and obligations imposed by CADE in both decisions were classified as confidential by CADE.

In order to strengthen its firm commitment to the obligations previously assumed by Telefónica to not interfere with decisions that affect Telecom Italia and, consequently, TIM Brasil, Telecom Italia’s business in Brazil, Telefónica pointed out, in a material communication, that Mr. César Alierta Izuel and Mr. Julio Linares López had decided to resign with immediate effect, from the position of Directors at Telecom Italia. Additionally, Mr. Julio Linares López decided to resign, with immediate effect, from his position on the list presented by TELCO S.p.A. for potential reelection to the board of directors of Telecom Italia.

Likewise, Telefónica, notwithstanding the rights defined in the TELCO S.p.A. shareholders’ agreement, stated in a material communication that it decided not to exercise its right to appoint or nominate directors of Telecom Italia.

On June 16, 2014, TELCO, S.p.A.’s Italian shareholders exercised their right to a spin-off, in accordance with the shareholders’ agreement. The implementation of the spin-off was approved by the shareholders on July 9, 2014 and was subject to approval from ANATEL and CADE. When approved by ANATEL and CADE, the spin-off would consist of the shares held by Telecom Italia being spun-off to four new companies, each of which would be wholly owned by one of TELCO, S.p.A.’s shareholders and each of which would hold shares of Telecom Italia, S.p.A. proportional to their holding in TELCO, S.p.A.

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As a result of the spin-off, Telefónica S.A. would indirectly hold 14.77% of Telecom Italia S.p.A. of which 8.3% would be exchanged with Vivendi as consideration in the GVT acquisition and 6.47% would be tied to debentures issued by Telefónica S.A. in July 2014 convertible into shares of Telecom Italia upon maturity.

On December 22, 2014, ANATEL authorized the spin-off of TELCO, S.p.A. conditional on the suspension of all control rights of Telefónica S.A. in Telecom Italia, S.p.A. and its subsidiaries. In addition, ANATEL authorized the GVT acquisition, subject to certain regulatory obligations. On March 25, 2015, CADE approved the spin-off of TELCO S.p.A. and the GVT acquisition, subject to certain regulatory obligations. Such obligations are in accordance with the transaction and are already being fulfilled.

On April 7, 2015, ANATEL approved the swap transaction to exchange 12% of our common shares and 0.7% of our preferred shares owned by Vivendi for 8.3% Telecom Italia’s common shares with voting rights, previously held by Telefónica, S.A..

On July 29, 2015, Telefónica, S.A. entered into an agreement with Vivendi, S.A. through which Telefónica, S.A. committed to transfer its treasury shares representing approximately 0.95% of its capital stock in exchange for Telefônica Brasil S.A. preferred shares (received by Vivendi, S.A. in the GVT acquisition) representing approximately 3.5% of our capital stock. Pursuant to this agreement, Vivendi, S.A. has committed to, among other obligations: (i) refrain from selling the Telefónica shares during specified periods (lock up), and (ii) comply with certain restrictions that, in case of sale, and once the lock up periods have lapsed, would ensure an orderly sale of such shares.

On July 30, 2015, Vivendi S.A. announced that after the closing of the New York Stock Exchange on July 30, 2015, it sold 67.9 million preferred shares of Telefônica Brasil S.A. (representing 4.0% of our capital stock).

As a result of the above, Telefónica no longer held, directly or indirectly, any economic interest in TELCO on December 31, 2015.

Restructuring Involving the Subsidiaries of Telefônica Brasil

On March 15, 2012, our board of directors approved a corporate restructuring of our wholly owned subsidiaries to align the services provided by each such subsidiary and to concentrate all telecommunication services in one company. The restructuring was finalized on July 1, 2013.

The restructuring was implemented by means of a spin-off and mergers involving only our wholly owned subsidiaries, A. TELECOM S.A., or A. TELECOM, Telefonica Data S.A., or TData, Telefônica Sistema de Televisão S.A. and Vivo. The mergers did not result in an increase in our capital stock or in the issuance of new shares by us, and the corporate restructuring did not give rise to a change in the equity interests held by our shareholders. As a result of the restructuring, value added services and innovative services provided by several wholly owned subsidiaries of the company were consolidated under TData and other telecommunications services were consolidated under Telefônica Brasil, which, as a final step to the corporate restructuring, merged these subsidiaries.

Since the completion of the merger, all services which are exclusively telecommunications services have been provided by us, Telefônica Brasil. Other services, including value added services, have been performed by our wholly owned subsidiary, TData. We were required to separate our services into separate companies because the telecommunications laws in Brazil and our concession agreement require that we only perform telecommunications services. ANATEL approved the corporate restructuring in May 2013.

Acquisition of GVT

On September 18, 2014, we entered into a stock purchase agreement with Vivendi and certain of its controlled companies, or collectively, Vivendi, and with GVTPar, Telefónica, S.A. and Operating GVT, pursuant to which we agreed to purchase all of the shares of GVTPar, the controlling shareholder of Operating GVT. This acquisition was approved by our board of directors on September 18, 2014.

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As consideration for the acquisition, we agreed to pay a portion of the price in cash and a portion in kind, in the form of our common and preferred shares, as follows: (1) €4,663,000,000 to be paid in cash on the closing date, as adjusted pursuant to the stock purchase agreement, and (2) our common and preferred shares amounting to 12% of our total share capital following the capital increase contemplated in the stock purchase agreement and the merger of shares of GVTPar, which must be in the same proportion as our existing common shares and preferred shares. The total consideration was paid after the conclusion of (A) a capital increase, the proceeds of which were used to pay the cash consideration described in (1) above, and (B) the merger of shares of GVTPar into us.

On December 22, 2014, ANATEL approved the transaction and imposed certain obligations, which include (1) the maintenance of current GVT services and plans within the same geographic scope in which GVT operates today, requiring, in addition, that the successor company expand its operations to at least ten new municipalities within three years beginning on January 26, 2015; and (2) the waiver of the FSTS license held by GVT within 18 months of ANATEL’s decisions, because regulations establish that the same economic group cannot hold more than one FSTS license in the same geographic area. We understand that obligations imposed do not compromise the terms of the GVT acquisition or its value.

On March, 25 2015 CADE’s administrative tribunal approved the transaction on the basis of certain confidential commitments offered by us and Vivendi S.A. The commitments include the execution of two merger control agreements: the first between CADE and us and the second between CADE and Vivendi S.A.

On March 25, 2015, our board of directors approved the public offering of shares, including shares in the form of ADSs, pursuant to a capital increase in the amount of R$15,812,000,038.03, through issuance of 121,711,240 common shares, at a price of R$38.47 and 236,803,588 preferred shares, at a price of R$47.00 as well as an additional 6,282,660 preferred shares pursuant to the exercise of the over-allotment option.

On May 28, 2015, our shareholders approved the ratification of the Stock Purchase Agreement and Other Covenants, entered into by the Company, as Buyer, and Vivendi S.A. and its subsidiaries, Société d’Investissements et de Gestion 108 SAS and Société d’Investissements et de Gestion 72 S.A., as Sellers, whereby all the shares issued by GVTPar, the controlling shareholder of Global Village Telecom S.A., were acquired by us.

Therefore, as provided for in the stock purchase agreement, we paid a portion of the GVT acquisition price in cash, receiving shares of GVTPar and GVT Operator, and another portion in shares, to FrHolding108 as a result of the merger of GVTPar’s shares into us, representing 12% of our capital stock after the merger.

After the merger and as a result of the acquisition, our corporate structure is as follows:

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On June 24, 2015, the transaction for the exchange of shares between Telefónica and Société d’Investissements et de Gestion 108 SAS, a company controlled by Vivendi S.A. was completed, through which FrHolding108 transferred to Telefónica 76,656,559 shares representing 4.5% of our capital stock, including 68,597,306 common shares representing 12% of such class of shares and 8,059,253 preferred shares representing 0.72% such class of shares, in exchange for 1,110,000,000 shares representing 8.2% of the common shares of Telecom Italia, S.p.A., previously held by Telco TE, S.p.A., a subsidiary of Telefónica.

On July 29, 2015, Vivendi S.A. sold 67.9 million preferred shares, representing 4% of our capital stock. On the same day, Telefónica S.A. announced that it entered into an agreement with Vivendi’s subsidiary Société d’Investissements et de Gestion 108 SAS, through which Telefónica committed to deliver 46.0 million of its treasury shares, representing 0.95% of its share capital, in exchange for 58.4 million preferred shares of Telefonica Brasil, S.A., (received by Société d’Investissements et de Gestion 108 SAS. in the context of the acquisition of GVT Participaçoes, S.A.). On September 16, 2015, the exchange of shares was concluded. Consequently, Telefónica S.A.’s interest in the Company was increased by 5.2% in relation to the total preferred shares of the Company, and by 3.5% in relation to the total capital stock of the Company. Conversely, SIG108 shareholding interest in the Company was reduced by the same proportion. Therefore, from that date on, SIG108 does not hold any interest at the Company.

On March 14, 2016, our board of directors approved a corporate restructuring in order to simplify our organizational structure. In the previous corporate structure, GVT Participações S.A. (“GVTPart”) was 100% owned by Telefonica Brasil, as shown below:

On the date of the merger, GVT was split and its net assets were transferred to GVTPart and to POP. The portion of the spun-off net assets of GVT concerning the goods, rights and obligations related to telecommunications activities were transferred to GVTPart and the remaining portion, concerning the assets, rights and obligations related to the other activities of non-telecommunications were transferred to POP. GVTPart was subsequently merged into Telefônica Brasil, resulting in the following corporate structure:

The corporate restructuring did not result in a capital increase or change in ownership of the Company’s shareholders and was ratified by an extraordinary shareholders’ meeting on April 1, 2016.

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Acquisition of Telefônica Transporte e Logística Ltda. (TGLOG) by TData

On October, 28, 2015, TData, as buyer, and Telefónica Gestión de Servicios Compartidos España S.A., as seller, entered into a Stock Purchase agreement that resulted in the acquisition of Telefônica Transporte e Logística Ltda., a company headquartered in Brazil which provides Logistics services.

Capital Expenditures

Year Ended December 31, 2016

In 2016, we invested R$8,189.1 million, a 6.8% increase over the amount we invested in 2015, primarily due to the cost of acquiring the remains of the 2,500MHz 4G spectrum (R$185 million) and also because GVT’s capital expenditures from January 1, 2015 to April 30, 2015, which totaled R$582.9 million, were not consolidated in our 2015 financial statements. Investments in projects were strongly focused on network (which accounted for 84% of investments in 2016, excluding licenses) and included expenditures on items such as radio access network (Node-Bs, eNode-Bs and WCDMA carriers), transmission backhaul and backbone, FTTH and copper network. The investments helped sustain our commercial and revenue growth while maintaining the quality of the services provided and are also designed to prepare us for medium-term growth.

To meet the needs of an increasingly data driven and connected society, significant investments were made to support the strong growth of data usage in our residential fiber, mobile 3G/4G and dedicated corporate networks. We continue to invest in expanding our national data transmission backbone to meet the increase in data traffic throughout Brazil.

The following table sets forth our capital expenditures for each year in the three-year period ended December 31, 2016.

	Year ended December 31,
Telefônica Brasil	2016		2015		2014
	(in millions of reais)
Network		6,743.9		6,557.6		5,517.0
Technology / Information Systems		929.5		870.3		590.4
Others(1)		515.6		239.6		3,033.0
Total capital expenditures		8,189.1		7,667.5		9,140.4

(1)

Consists primarily of handset sales made to corporate customers for the length of their contracts, furniture and fixtures, office equipment and store layouts and spectrum licensing costs. The licensing costs are R$2,770 million in 2014 and R$0.1 million in 2015 related to the acquisition of the new 700MHz frequency spectrum; also R$185 million in 2016 related to the acquisition of the remains of 2,500 MHz spectrum for 4G usage.

Year Ended December 31, 2015

In 2015, considering the consolidation effect of GVT from May 1, 2015, we invested R$7,667.5 million, a 16% decrease over the amount we invested in 2014, primarily due to the cost of acquiring the new 700 MHz frequency spectrum, in an amount of R$2,770 million. However, the consolidation of GVT’s investment partially compensated for the decrease in investments with spectrum licenses (20% increase in capital expenditures, excluding licenses). Investments in projects were strongly focused on network (which accounted for 86% of investments in 2015, excluding licenses) and included expenditures on items such as radio access network (Node-Bs, eNode-Bs and WCDMA carriers), transmission backhaul and backbone, FTTH and copper network. The investments helped sustain our commercial and revenue growth while maintaining the quality of the services provided and are also designed to prepare us for medium-term growth.

Year Ended December 31, 2014

In 2014, we invested R$9,140.4 million, a 52% increase over the amount we invested in 2013, primarily due to the cost of acquiring the new 700 MHz frequency spectrum, in an amount of R$2,770 million; however, we also increased the capital expenditures for projects (14% in capital expenditures, excluding licenses).

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Business Overview

We are the leading mobile telecommunications company in Brazil (30.2% market share as of December 31, 2016, based on accesses), with a particularly strong position in postpaid mobile services (42.1% market share as of December 31, 2016, based on accesses). We are also the leading fixed telecommunications company in the state of São Paulo where we began our business as a fixed telephone service provider pursuant to our concession agreement. In the same period, we reached almost 51% of market share in ultra-fast broadband accesses with speeds higher than 34 Mbps in the state of São Paulo.

According to ANATEL’s customer service performance index, we are and have been the highest-quality mobile operator in Brazil. Our Vivo brand, under which we market our mobile services, is among the most recognized brands in Brazil. The quality of our services and strength of our brand recognition enable us to, on average, achieve higher prices relative to our competition and, as a result, generally earn higher margins. As of December 31, 2016, our average revenue per mobile user, or ARPU, of R$28.6 represented a significant premium relative to the market average of R$16.1 (considering the average Mobile ARPU of Claro, TIM and Oi for the third quarter of 2016). In 2016, we captured 38.0% of the net additions of 6.1 million in the postpaid mobile segment. We offer our clients a complete portfolio of products, including mobile and fixed voice, mobile data, fixed broadband, ultra-fast broadband, or UBB (based on our Fiber to the Home, or FTTH and Fiber to the Curb, or FTTC infrastructure), Pay TV, information technology and digital services (such as entertainment, cloud and financial services). We also have one of the most extensive distribution networks of the sector, where our clients can obtain certain services, such as purchasing credit for prepaid phones.

We seek to continue to increase our operating margins by focusing on developing and growing our product offerings so that they comprise an integrated portfolio of higher-margin services. As part of this strategy, we acquired GVT in 2015, a high-growth telecommunications company in Brazil that offers high-speed broadband, fixed telephone and Pay TV services to high income customers across its target market, primarily located outside the state of São Paulo.

Our Operations and Services

Our operations consist of:

local and long distance fixed telephone services;

mobile services, including value-added services;

data services, including broadband services and mobile data services;

Pay TV services through DTH (a satellite technology), IPTV and cable;

network services, including rental of facilities, as well as other services;

wholesale services, including interconnection;

digital services;

services designed specifically for corporate customers;

the sale of wireless devices and accessories.

Fixed Voice Services

Our fixed line services portfolio includes local, domestic long-distance and international long-distance calls provided both on the public and private regime.

Local Service

Fixed local services include activation, monthly subscription, public telephones and measured services. Measured services include all calls that originate and terminate within the same area code within our concession region, which we refer to as local calls.

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Intraregional, Interregional and International Long-Distance Services

Intraregional long-distance services consist of all calls that originate in one local area or municipality and terminate in another local area or municipality within our concession region. Interregional long-distance services consist of state-to-state calls within Brazil and international long-distance services consist of calls between a phone line in Brazil and a phone line outside Brazil. We were the first telecommunications company to be granted the authorization to develop local, intraregional, interregional and international services throughout Brazil, including outside our concession area.

Mobile Services

According to data regarding market share published by ANATEL, we are among the leading providers of mobile telecommunications services in Brazil.

Our mobile portfolio includes voice and broadband internet access through 3G and 4G as well as value-added services, including voice mail, voice mail translation in speech-to-text, caller identification, voice minutes in unlimited bundles to other mobile phones of postpaid customers, ring tones, and innovative services such as multi-media backup, cloud based services to save texts, entertainment and music apps, advertising platforms, among others. All these services can be bought directly by the client at Vivo Service Stores (“Lojas de Serviços Vivo”).

We also offer wireless roaming services through agreements with local mobile service providers throughout Brazil and other countries, allowing our subscribers to make and receive calls while outside of our concession areas. We provide reciprocal roaming rights to the customers of the mobile service providers with which we have such agreements.

Data Services

We provide fixed broadband through xDSL technologies, coaxial cable and fiber (FTTH – fiber-to-the-home and FTTC – fiber-to-the-curb), with speeds ranging from 1Mbps to 300Mbps.

In 2016, we covered 100% of the municipalities in our concession area in the state of São Paulo, reaching more than 7.2 million fixed broadband customers, and we expanded our national fiber network to reach more than 17 million homes.

In 2010, we began offering the “Banda Larga Popular,” an initiative of the government of the state of São Paulo to provide broadband at affordable prices to the low-income population. This product currently has a top speed of 2Mbps.

Through the GVT acquisition in 2015, we were able to further expand our data services by providing high speed broadband to high income customers across our target markets. GVT’s last mile architecture was based on FTTC technology, with broadband commercial speeds of up to 300 mbps. GVT provided services that were complementary to our own, with limited overlap with the services we already provided. Such complementary services included fiber broadband to locations in the state of São Paulo (outside of the city of São Paulo, where we already have a large presence) and nationwide.

In mobile broadband, we use a variety of technologies to provide wireless internet services to our customers. Our 3G network is currently available nationwide. In addition, we offer the HSPA+ technology, commercially known as 3G Plus. This technology allows customers with compatible terminals (including handsets) to reach up to three times the speed of traditional 3G. In December 2016, we covered 3,652 municipalities with our 3G network, reaching 89.7% of Brazil’s population. We also offer the 4G LTE technology which, by the end of 2016, was available in 516 municipalities, reaching 60.2% of Brazil’s population.

In 2014, Vivo conducted a systematic change to its offering of data plans under the SMP network, blocking data usage after consumption of the total contracted volume. This change, which was initially applicable to customers using SMP services under the prepaid billing model, was implemented in order to enhance the user experience for this type of connection. In 2015, we began implementing the new data plan system under the SMP network for customers using the service under the post-paid billing model. With this new model, Vivo strengthened its guarantee that consumers can monitor their data consumption at any time through the client relationship portal, known as “My Vivo” or through the “My Vivo” app.

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Pay TV Services

We began offering subscription-based television, or “Pay TV,” services via DTH (“direct to home,” a special type of service that uses satellites for the direct distribution of television and audio signals to subscribers) on August 12, 2007. We currently provide Pay TV services by means of DTH and IPTV (a type of service that offers video broadcast through the use of IP protocol) technologies and as of December 31, 2016, had 1.7 million Pay TV customers, including more than 253 thousand IPTV customers. We currently offer DTH nationwide and IPTV and cable in the metropolitan area of the city of São Paulo.

Network Services

Our network management technology ensures comprehensive management and supervision of all our network processes and network performance for our wholesale clients. We have two Network Management Centers, one located in São Paulo (with a remote team in Minas Gerais) and another located in Curitiba. These centers monitor all regions of the country, but each has a different function.

The Network Management Center in São Paulo monitors the critical network operational parameters of the countrywide transmission backbone, IP networks, broadband networks, core networks and services platforms. The remote team in Minas Gerais monitors the critical operational parameters of the radio access network, infrastructure and online services performance. The Network Management Center in Curitiba monitors the critical operational parameters of the countrywide transmission backbone, network interconnection and IPTV/DTH networks. These centers are able to identify abnormalities in both our network and in third-party networks, using failure and signaling monitoring systems. In addition, quality and service standards are constantly monitored. The Network Management Centers are integrated with maintenance and operations teams that maintain and operate cellular network elements, as well as cellular infrastructure and transmission, in addition to the radio network elements and computing bases, service platforms and communications backbones.

Our network provides for continuity of service to our customers in the event of network interruptions. We have developed contingency plans for potential catastrophes in our switchboard centers, power supply interruptions and security breaches.

We continuously aim to consolidate our network and increase its offerings, to deliver the best possible service to our customers and to meet their expectations. Some of the improvements we have made in recent years include advancements in the migration of time-division multiplex switches to next generation network switches, which offer new digital services to our clients and reduce our maintenance costs, including improvements in levels of security, power supply, battery and air conditioning infrastructure. The most significant implementation of technology has been a project to exchange optical cabinets, used for offering voice and data services without broadband internet, for Multi-Service Access Nodes, which allows us to offer broadband service to a large number of clients who did not previously have this service.

Network and Facilities

We provide industrial exploration of dedicated lines (Exploração Industrial de Linha Dedicada), or EILD, pursuant to our concession agreement and our authorization agreements. The EILD consists of the rental of dedicated circuits and clear channel protocols for the provision of services to third parties.

In addition, we are able to offer a complete portfolio of wholesale products, including L2L, IP, ETHERNET, MPLS and GPON. All of these products are used to meet the demands of other network operators and regional internet providers. The circuits are requested with different service level agreements, and we are required to provide the facilities with contingency routes, sites and equipment to improve the service against points of failure. In 2017, we expect to meet demand for more than 3Gbps of bandwidth in special circuits.

Our network consists of an access layer that connects our clients through our copper or optical networks, which are connected to voice and data centers. These centers are interconnected locally or remotely through transmission equipment connected predominantly with fiber optics and occasionally through a microwave network, which together form a network layer that enables connectivity between the various central aggregate service platforms as well as interconnection with other carriers. Our network strategy is based on the expansion of the fiber optic access network to allow greater coverage and broadband services for our customers, as well as to develop an integrated multiservice network and multimedia applications. As a telecommunication service provider, we do not manufacture equipment for the construction of our networks and facilities. We buy the equipment from qualified suppliers in Brazil and abroad and through this equipment we implement our networks and facilities through which we supply our services.

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Wholesale Services (including Interconnection)

We have continuously adapted and expanded our network topology aiming to develop new business opportunities throughout Brazil by offering services to other telecommunications companies. The result has been a significant increase in the number of providers that use our wholesale services.

As part of our wholesale services, we provide interconnection services to users of other network providers. We earn revenue from any call that originates from another mobile or fixed-line service provider network connecting to one of our customers. We charge the service provider from whose network the call originates an interconnection fee for every minute that our network is used in connection with the call. See “—Operating Agreements—Interconnection Agreements.”

At the end of 2016, we had 312 local and long-distance interconnection agreements and 115 agreements for provision of local traffic and long-distance.

The interconnection is a link between compatible telecommunications networks which permits that a fixed or mobile service user of one network can adequately communicate with the users of a network from another provider.

All providers of telecommunication services (fixed or mobile) are required to provide interconnection upon request to any other telecommunication collective service provider. The conditions for interconnection agreements may be freely negotiated among the parties. The agreements are required to be formalized by contract, whose effectiveness depends on ANATEL’s approval. If any given agreement is contrary to the principles of free competition or conflicts with other regulations, ANATEL may reject it. If the parties cannot reach an agreement on the terms of interconnection, including the interconnection fee, ANATEL may determine those terms and conditions by arbitration.

Digital Services (including Value Added Services)

We continued to make strides in 2016 in the process of becoming a digital telecommunications company in areas such as financial services, machine-to-machine operations, e-health solutions, security, education, insurance, entertainment and mobile advertising. In entertainment, for example, we have over 10 million clients, served by a wide portfolio of products directed towards the B2C segment, such as Studio+, the first global premium video series offer for mobile screens, and WatchMusic, a streaming music video service with unlimited access to live shows and original performances from thousands of artists from Brazil and from the rest of the world. In addition, in mobile advertising we have launched a new platform called Vivo Ads through which clients who exceed their data plans and try to use the browser are redirected to a captive portal where they have the option to watch a video ad from a third-party to receive free internet to browse. These internet rewards are acquired from us by the third-party companies who want their video ad to be displayed in our platform. In 8 months of operation, Vivo Ads has distributed over 200 Terabytes in internet rewards.

Corporate

We offer our corporate clients comprehensive telecommunications solutions and IT support designed to address specific needs and requirements of companies operating in all types of industries (retail, manufacturing, services, financial institutions, government, etc.).

Our clients are assisted by our highly qualified professionals who are capable of meeting the specific needs of each company with voice, data, broadband and computer services solutions, including hardware and software (for example, anti-virus software). We work to consistently achieve greater quality and efficiency in our services and increase our level of competitiveness in the market.

Sale of Devices and Accessories

In addition, we sell handsets and accessories at our physical stores, to customers who purchase our digital services. We sell only GSM and WCDMA devices such as handsets, smartphones, broadband USB modems and devices that are certified to be compatible with our network and service. We have special offers on smartphones, USB modems and other data devices for customers of bundled packages. Our current device suppliers are Motorola, LG, Samsung, Sony, Alcatel, Apple, D-Link, ZTE, Harman (JBL), Alfacomex (SanDisk, Ultimate Ears and Geonav) and Comesp (SanDisk).

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Rates, Taxes and Billing

Rates

We generate revenue from (i) activation and monthly subscription charges, (ii) usage charges, which include measured service charges, (iii) interconnection fees that we charge to other telecommunications service providers, and (iv) other additional services. Rates for all telecommunications services are subject to extensive regulation by ANATEL. We set forth below the different methods used for calculating our rates.

Local Rates

Our concession agreement sets forth three mandatory plans for local fixed service, and allows us to design alternative pricing plans. Customers have a choice among three plans that we are required to offer or any other alternative plan that we may choose to offer. ANATEL must be informed of any alternative plan and notified of its implementation. The three main mandatory plans are:

Local Basic Plan: for clients that make mostly short-duration calls (up to three minutes), during regular hours;

Mandatory Alternative Service Plan (Plano Alternativo de Serviços de Oferta Obrigatória or PASOO): for clients that make mostly long-duration calls (above three minutes), during regular hours and/or that use the line for dial-up service to the internet; and

Individual Special Class Access (Acesso Individual Classe Especial or AICE): a plan created specifically for families enrolled in the Brazilian government’s social program.

The following table outlines the basic billing requirements and gross rates for the Local Basic Plan and the Mandatory Alternative Plan as of the date of this annual report:

Characteristics of Plan	Local Basic Plan	Mandatory Alternative Service Plan
Monthly Basic Assignment
Allowance (minutes included in the residential assignment)	200 minutes	400 minutes
Commercial Assignment Allowance (minutes included in the commercial assignment)	150 minutes	360 minutes
Local Call Charges
Regular Hours
Completing the call (minutes deducted from the allotment)	–	4 minutes
Completing the call after the terms of the allotment Sector 31	–	R$0.17545
Local Minutes–charges in excess use of the allotment Sector 31	R$0.11440	R$0.04385
Minimum time billing	30 seconds	–
Reduced Hours
Charge per answered call (minutes deducted from allotment)	2 minutes	4 minutes
Charge per answered call after the allotted duration Sector 31	R$0.22375	R$0.17545

As of the date of this annual report, the subscription to the AICE plan costs R$10.87 (including taxes) and allows for 90 minutes of local fixed-line calls per month. Any additional fixed or mobile calls may be made only if the customer purchases prepaid credits. The prices of mobile and long-distance calls are determined pursuant to a standard plan.

We may offer alternative plans with any pricing structure. However, we must notify ANATEL of any alternative plan before the publication and implementation of any such plan.

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Our concession agreement also sets forth criteria for annual fee adjustments for all of our plans for local fixed service. We derive a substantial portion of our revenue from services subject to this price adjustment. The method of price adjustment is an annual price index correction applied by ANATEL to our local and long-distance fees that reflects the inflation index for the period and a productivity factor, which is calculated based on a compensation index established by ANATEL to share earnings from fixed charge services with their users. Currently, the inflation index used by ANATEL is the IST, which reflects variations in telecommunications companies’ costs and expenses. ANATEL has consistently complied with the fee range set by the concession agreements.

Long-Distance Rates

Rates for domestic long-distance calls are computed on the basis of the time of day, day of the week, duration and distance of the call, and also may vary depending on whether special services, including operator assistance, are used. We have several options of domestic long-distance calling plans for consumers using our carrier dial code, or Code 15. Customers of any local and long-distance operator may use Code 15 when dialing long-distance and will benefit from our rates. To readjust the long-distance local rates, ANATEL applies an annual price index correction that reflects inflation.

We also offer international long-distance rates, which are also available to all users using Code 15. International long-distance call charges are computed on the basis of the time of day, day of the week, duration and destination of the call, and also may vary depending on whether special services are used or not, including operator assistance. Our rates for international services are not subject to regulation and are not required to follow the annual rate adjustment described above for other services. Therefore, we are free to negotiate our fees for international calls based on the international telecommunications market, where our main competitor is Embratel.

We have developed alternative rate plans for our residential and corporate customers with respect to long-distance calls.

Mobile Services Rates

With respect to our Local Basic Plan, as described above, and certain roaming charges incurred in connection with alternative service plans, our authorizations provide for a mechanism to set and adjust rates on an annual basis. The maximum rate is calculated as the current rate plus the rate of inflation. The maximum rate is revised annually and the rate of inflation is measured by the IGP-DI index. The maximum rate is applicable to all service plans; however, mobile operators are able to freely set the maximum rates for alternative service plans (other than with respect to certain roaming charges).

The initial price cap agreed by ANATEL and us in our authorizations was based on the previously existing or bidding prices, and has been adjusted annually on the basis of a formula contained in our authorizations. The 2017 adjustment was approved in February 2017 and established the tariffs of R$0.20981 for regular hours and R$0.14686 for reduced hours.

Other telecommunications companies that interconnect with and use our network must pay certain fees, primarily an interconnection fee. The interconnection fee is a flat fee charged per minute of use that directly affects the mobile services rates. Since 2005, ANATEL has permitted free negotiations for mobile interconnection fees, or MTR.

In December 2013, ANATEL established the reference values for MTR for 2014 and 2015. In July 2014, ANATEL established values for the years 2016, 2017, 2018 and 2019. The table below shows the ranges for these reference values:

Year	Reduction in %	MTR in reais
2014	25	0.22164 – 0.25126
2015	33	0.14776 – 0.16751
2016	37	0.09317 – 0.11218
2017	47	0.04928 – 0.06816
2018	47	0.02606 – 0.04141
2019	50	0.01379 – 0.02517

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Interconnection Fees

We are paid interconnection fees by any fixed-line or mobile service provider that either originates or terminates a call within our network. We also pay interconnection fees to other service providers when we use their network to place or receive a call. The interconnection agreements are freely negotiated among the service providers, subject to a price cap and in compliance with the regulations established by ANATEL, which includes not only the interconnection basic costs including commercial, technical and legal aspects, but also the traffic capacity and interconnection infrastructure that must be made available to requesting parties. If a service provider offers to any party an interconnection fee below the price cap, it must offer the same fee to any other requesting party on a non-discriminatory basis. If the parties cannot reach an agreement on the terms of interconnection, including the interconnection fee, ANATEL can establish the terms of the interconnection. For additional information about interconnection fees, see “—Regulation of the Brazilian Telecommunications Industry—Obligations of Telecommunications Companies—Interconnection Fees.”

Data Services Rates

We receive revenue from charges for data transmission, which includes our fixed broadband, dedicated analog and digital lines for privately leased circuits to corporations and others services. Data transmission rates are not regulated by ANATEL, except for EILD. Multimedia services operators are able to freely set the rates for alternative service plans.

TV Rates

Pay TV rates are not regulated. Service providers are able to freely set the rates for alternative service plans.

Taxes

The cost of telecommunications services to each customer includes a variety of taxes. The main tax is a state value-added tax, the Imposto sobre Circulação de Mercadorias e Serviços, or ICMS, which the Brazilian states impose at rates ranging from 7% to 35% on certain revenues from the sale of goods and services, including telecommunication services.

Other taxes include: (1) Federal Social Contributions (Contribuição para o Programa de Integração Social), or PIS, and Social Security Financing Contributions (Contribuição para o Financiamento da Seguridade Social), or COFINS; (2) Fund for Universal Access to Telecommunications Services (Fundo de Universalização dos Serviços de Telecomunicações), or FUST; (3) the Telecommunications Technological Development Fund (Fundo para o Desenvolvimento Tecnológico das Telecomunicações), or FUNTTEL; and (4) Fund for Telecommunications Regulation (Fundo de Fiscalização das Telecomunicações), or FISTEL.

Billing

We send each contract customer a monthly bill covering all of the services provided during the previous monthly period. Pursuant to Brazilian law, telephone service providers are required to offer their customers the choice of at least six different monthly payment dates.

We have a billing and collection system with respect to local, national and international long-distance voice, subscriptions, broadband, data, IT services, outsourcing, television and third-party services. For invoice payments, we have agreements with various banks. These agreements include options for customers to select their preferred payment type: direct debit, payment to a bank, Internet and other collection agencies (including lottery-playing facilities, drugstores and supermarkets). We aim to avoid losses in the implementation of new processes and the roll-out of new products through the monitoring of billing, collection and recovery controls. The billing process is audited by the Brazilian Association of Technical Standards (Associação Brasileira de Normas Técnicas), or ABNT. These practices are closely monitored by our revenue assurance team, which measures every risk of revenue loss detected along the billing and collection chain. These risks are managed to minimize revenue losses.

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Co-billing

In accordance with Brazilian telecommunications regulations, we use a billing method called “co-billing” for both fixed and mobile services. This method allows billing from other phone service providers to be included within our own invoice. Our customers can receive and subsequently pay all of their bills (including the fees for the use of services of another telephone service provider) on our invoice. To allow for this method of billing, we provide billing and collection services to other phone service companies. We have co-billing agreements with national and international long-distance phone service providers. Similarly, we use the same method of co-billing to bill our services to customers of other fixed and mobile providers. This service is charged to the long-distance operator, by means of a call record described in the invoice.

For customers who use our long-distance services through operators that have no joint billing agreement with us, we use direct billing through the national registry of clients.

Value Added Services

Value added services such as entertainment, information and online interactivity services are available to mobile prepaid as well as postpaid customers through agreements with content suppliers. These agreements are based on a revenue-sharing model.

Third-party Services

We incorporate third party services in our billing, collection and transfer process. These services are later passed on to the third party contractor.

Collection

Our collection policies with respect to customers in default follow ANATEL regulations, as well as those of Serviços de Telecomunicações, or RACO, and the Foundation for Consumer Protection and Defense (Fundação de Proteção e Defesa do Consumidor), or PROCON. For mobile, fixed and Pay TV customers, as a general rule, if payment is more than 15 days overdue, service can be partially suspended by blocking out-going calls that generate costs to the customer. If payment is more than 30 days overdue after this partial suspension, the service can be fully suspended, disabling all services (out-going and incoming calls), until payment is received. We offer an installment payment plan for clients with overdue balances. However, if accounts are not paid after 30 days following the total suspension, the contract can be cancelled and reported to credit protection agencies.

The collection process for customers in default involves several steps, from an internal interactive voice response, SMS contact, email contact, followed by a late payment notice, and finally reporting customer information to an external credit bureau. Concurrently with our internal process, delinquent customers are also contacted by collection agencies. Customer risk profile, overdue debt and other quality issues are used to increase strategy efficiency and maximize debt recovery efforts. Amounts overdue by over 105 days, except for accounts receivables from interconnection fees and government and corporate customers (there is a specific rule for those exceptions), are considered provisions for doubtful accounts. In accordance with Brazilian regulations, bad debt write-offs are permitted for late payments of zero to R$5,000 if they are over 180 days late or R$5,001 to R$30,000 if they are over 365 days late. Late payments of over R$30,001 that are open for more than 365 days require the commencement of a lawsuit. This rule is applied for outstanding debt through October 8, 2014; after this period, amount ranges change as follows: zero to R$15,000 if they are over 180 days late or R$15,001 to R$100,000 if they are over 365 days late. Lawsuits are demanded for debts over R$100,000 open for more than 365 days.

In the year ended December 31, 2016, the monthly average of partial suspensions, for mobile and fixed services, was 4.1 million lines and the monthly average of total suspensions was 700,821 lines. For Pay TV services, the monthly average of partial and total suspension was 167,124 terminals and 36,430 terminals, respectively. Provisions for doubtful accounts in the year ended December 31, 2016 were 2.1% of the total gross revenue.

Our Markets of Operation

Our concession agreement allows us to operate in the state of São Paulo, except for a small region that is still subject to an earlier concession. In addition, we offer fixed telephone, data and Pay TV services throughout Brazil pursuant to licenses and authorization. We also operate mobile voice and broadband services throughout Brazil, under the mobile service (SMP) authorization.

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The following table sets forth population, gross domestic product, or GDP, and per capita income statistics for each state in our service regions at the dates and for the years indicated:

	Last Available IBGE Data from 2014 (1)
Area	Pop.(million)	Percent of Brazil’s pop.	GDP (R$ million)	Percent of Brazil’s GDP	*Per capita income (reais)*
São Paulo State	44.0	21.7%	1,858,196	32.2%	42,198
Rio de Janeiro State	16.5	8.1%	671,077	11.6%	40,767
Minas Gerais State	20.7	10.2%	516,634	8.9%	24,917
Rio Grande do Sul State	11.2	5.5%	357,816	6.2%	31,927
Paraná State	11.1	5.5%	348,084	6.0%	31,411
Santa Catarina State	6.7	3.3%	242,553	4.2%	36,056
Federal District	2.9	1.4%	197,432	3.4%	69,217
Bahia State	15.1	7.5%	223,930	3.9%	14,804
Goiás State	6.5	3.2%	165,015	2.9%	25,297
Pernambuco State	9.3	4.6%	155,143	2.7%	16,722
Espírito Santo State	3.9	1.9%	128,784	2.2%	33,149
Pará State	8.1	4.0%	124,585	2.2%	15,372
Ceará State	8.8	4.4%	126,054	2.2%	14,255
Mato Grosso State	3.2	1.6%	101,235	1.8%	31,397
Amazonas State	3.9	1.9%	86,669	1.5%	22,373
Maranhão State	6.9	3.4%	76,842	1.3%	11,216
Mato Grosso do Sul State	2.6	1.3%	78,950	1.4%	30,138
Rio Grande do Norte State	3.4	1.7%	54,023	0.9%	15,849
Paraíba State	3.9	1.9%	52,936	0.9%	13,422
Alagoas State	3.3	1.6%	40,975	0.7%	12,335
Rondônia State	1.7	0.9%	34,031	0.6%	19,463
Sergipe State	2.2	1.1%	37,472	0.6%	16,883
Piauí State	3.2	1.6%	37,723	0.7%	11,808
Tocantins State	1.5	0.7%	26,189	0.5%	17,496
Amapá State	751.0	0.4%	13,400	0.2%	17,845
Acre State	790.0	0.4%	13,459	0.2%	17,034
Roraima State	497.0	0.2%	9,744	0.2%	19,608
Total	202.8	100.0%	5,778,953	100.0%	28,477⁽²⁾

(1)

According to IBGE data (2014) – subject to revision.

(2)

Average per capita income for Brazil, weighted by percentage of population represented by each state.

Seasonality

Our business and results of operations are not materially affected by seasonal fluctuations in the consumption of our services.

Marketing and Sales

Our commercial distribution network (marketed under the Vivo brand), as of December 31, 2016, consisted of 295 own sales outlets throughout Brazil. In addition, we also have approximately 12,000 sales outlets run by authorized dealers (including exclusive dealers and retail channels), maintaining a solid capillarity strategy that contributed to our leadership position in Brazilian telecommunications market.

In 2016, we had approximately 600,000 points of sale where prepaid mobile service customers could purchase credits. Prepaid phones can be credited remotely or by purchasing cards containing credits. Credits may also be purchased through credit and debit cards, call centers, Vivo PDV (M2M using a cell phone for transferring the credit), personal recharge (using the phone itself to recharge credits), as well as certain certified internet websites.

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We bring our solutions to our clients through the following physical sales channels:

Vivo stores: targeting individual clients and located in strategic points, our own stores provide a highly trained team built to guarantee the best sales experience for the customer. Innovation is a core focus of this channel. As a result, most stores also offer self-service terminals for value added services and purchases of pre-paid credit. We also offer special treatment for premium clients with scheduled appointments via the internet to assure that they are not required to wait in line. In addition, to improve customer experience, we launched a new concept store at JK Iguatemi Shopping and renovated strategic stores.

Exclusive dealers: this channel is composed of select companies that have been certified to provide our full product portfolio. These dealers comprise a wide distribution network throughout the country. Although the channel offers the entire product portfolio, its focus is on the postpaid product. We also renovate certain strategic stores to provide a better purchase experience to the customer, to ensure an experience that is consistent with our own stores.

Retail channel: our retail channel emphasizes prepaid credit and data services, working closely with our main retail partners in Brazil. This channel utilizes a sales incentive program that focuses on sales of our postpaid product Controle and is tied directly to the performance of our retail partners’ salesforce, improving our relationship with retailers and eliminating the need to use our own sales promoters in this channel.

Distribution channel: the broadest and most complex sales channel across our markets, this channel allows our prepaid customers to purchase service credits. In order to be as close as possible to potential and existing customers, this channel comprises authorized agents, lottery stores, post offices, bank branches and small retailers, such as pharmacies, newspaper stands, bookstores, stationery shops, bakeries, gas stations, bars and restaurants.

Door-to-door sales: aimed at approaching corporate and individual clients that our other channels cannot reach, we use niche physical channels, such as door-to-door sales of services by outsourced small companies and our own team of consultants. We focus mostly on voice products, as well as our postpaid Controle plans.

We also offer our services through digital channels, which are transforming our salesforce model, making transactions more efficient and promoting the integration of all points of sale. In 2016, e-commerce sales in our mobile segment grew 245% compared to 2015. Meanwhile, in fixed segment annual leads reached 51% during this year. The continuous improvement in e-commerce user experience was the most remarkable achievement, which contributes to our client’s digital experience and promotes Vivo’s digital presence and brand awareness.

Vivo’s digital strategic self-service channel “Meu Vivo” also contributed to positive performance in digital channel: downloads reached 144% higher than previous year. Unique users in the app had an annual growth by 188%.

Vivo Guru – a support environment for devices setup –, Fórum Vivo – collaborative environment where clients help each other – and virtual assistant Vivi are other digital channels available to our clients. Altogether, they reached 80% growth in total accesses.

Expanding our digital frontiers, in November 2016, in order to diversify our contacts channels, the Company launched a virtual assistant, Vivi, in the Company’s Facebook page. Through this functionality clients can check credit balances, generate second billing and get acquainted to our mobile voice and data plans using instant messaging – Facebook Messenger. The Company is the first telecommunications company to create this channel for the platform in Brazil.

In order to explore all the digital strategic initiatives mentioned above and Internet’s businesses potential, the Company made special offers and promotions during Black Friday/Black November in Brazil, which reinforces Vivo’s digital maturity. Sales went up to 223% during 2016 compared to the same period in 2015.

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Customer Service

The year of 2016 was marked by the reevaluation of the existing operating frameworks and identification of our best practices in order to define the most suitable model to increase efficiency and customer satisfaction. In recent months, various work fronts were established. Regarding customer service, our initiatives have been structured to leverage customers’ online experience, transform the customer care model and increase perceived quality in interactions. We continued to work on integrating the systems used in the operation, defining processes and business rules and internalizing operations considered fundamental for transforming the customer experience in all channels and points of contact.

Seeking to maintain our leadership position, we worked to expand digital channels, standardize and integrate them, seeking to provide a unique and relevant multichannel experience for customers. Our customer care mobile app reached more than 40 million contacts in December 2016. We worked on the refinement of the assertiveness and scope of the Virtual Assistant Vivi, which today is already capable of answering more than 90% of the queries by means of artificial intelligence. We advanced in the humanization of our Customer Relationship Center’s electronic service, in a personalized way and with intelligent dialogue, streamlining the understanding of the request. In this process, we were able to provide answers to customers through the electronic service at levels of 70% in certain segments, shortening the path through a more convenient experience. We also developed our services through social networks, increasing the volume of interactions with a concomitant reduction in response time, and invested efforts in the simplification and robotization of calls in the foregoing channels.

In 2016, we implemented a new model of hiring of call center attendants with a repeated incentive to good performance, based entirely on quality goals, which led to an improvement of our operational indicators. We perceived a reduction in the contact rate in all segments, increased availability of agents, and increased the autonomy of representatives of the call centers to solve the customers’ requisitions in the first contact. Telefônica Brasil also reduced 14% of the absolute volume of complaints in the ranking released by Fundação PROCON-SP Capital when compared to 2015, reaching a 7% reduction in the nationwide ranking. All of these results, associated with the Customer Satisfaction Survey, demonstrate that we are on the right path, converting these interactions into a positive experience with the brand.

In 2017, Telefônica Brasil maintains the strategy of enriching content and increasing the functionalities available in each of the channels, seeking integration among them, so that a client can choose how to interact with us with a high quality experience, regardless of which channel he or she selects. We will continue to accelerate the digitalization of the customer care, providing more agility, autonomy, standardization and convenience, which are decisive factors for the perception of quality.

Technology

In order to offer a greater variety of integrated services, we have incorporated a series of new technologies in our voice and data networks.

We remain focused on the evolution and convergence of the mobile and fixed networks based on All-IP IMS technology, encouraging technological advancement and offering new services to our customers. The voice network is being prepared to initiate migrations of mobile subscribers 2G and 3G to Voice over LTE, or VoLTE, as well as fixed subscribers to VoIP.

Voice network is being modernized with the use of new generation technology that improves redundancy, reliability and capacity. In addition, we have already started the implementation of VoLTE technology that will allow us to offer voice services over LTE access instead of CS Fallback, or CSFB, which we currently use. As a result, we expect a faster call completion comparing with CSFB. We expect to improve the voice communication experience, offering voice service with HD quality that is native for VoLTE technology. We also have already started to implement Voice over FTTH technology that will allow us to offer voice services over FTTH access instead of voice over copper currently used. As a benefit, we expect to have cost savings for equipment, lines, manpower and maintenance. We also expect to offer new voice services. In order for that to be possible, a new Core infrastructure has already been installed in Vivo networks: the IMS Core, an ALL-IP framework that uses the IP protocol as the main protocol for the network.

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We have equipped the network to support traffic bursts of enterprise inbound and outbound call center services, such as contact center and outbound dialing, by developing and implementing high-capacity and scalability core elements.

As more services migrate to IP, our IP backbone has become a strategic asset to support customer demands and increase revenues. The migration of sensitive and demanding services such as voice and television to IP has also increased the demand for higher quality broadband networks and is further augmented by growing products like cloud services and video on demand. At the same time, the expansion of fiber to customer homes strongly increases bandwidth demands over the networks. As a result, three main drivers have surfaced as critical to our business: availability, performance and cost effectiveness.

To reach these goals, which may appear to conflict with each other, it is essential to optimize network resources and find synergy multipliers. The first step is to integrate Vivo’s and GVT’s IP Backbones, simplifying our network and avoiding redundant infrastructure. As we have done in the mobile and fixed integration, we have designed a robust architecture, using two distinct backbones to provide public and private services using multi-protocol networks infrastructures, to guarantee service reliability to our clients and the deployment has already begun.

To cope with greater traffic, core network capacity has been expanded, introducing more 100-gigabyte Ethernet interfaces and reducing aggregate layers, resulting in a simpler yet more scalable network. Moreover, by absorbing other existing networks obtained by means of earlier acquisitions into both backbones, we have been able to simplify the network and reduce operational costs.

We further optimized costs by sharing access networks with other Brazilian operators, in which IP backbones played a key role in connecting and transporting traffic among different operators’ networks, reducing the need for mobile sites expansion.

Nonetheless, robust and reliable networks are not enough to meet customers’ expectations. As content gains importance in the data world, quality of experience becomes a key concept to improve revenue without compromising costs. In 2016, by greatly expanding the use of caching solutions throughout the network, we have made content locally available to our customers, not only reducing transport costs but also strongly improving user experience without increasing access investments.

Finally, as the Internet address numbers in Brazil were exhausted in 2014 and our own resources are reaching critical levels, we have seen strong growth in the next version of the IP protocol, the IPv6. Not only is this important to guarantee full connectivity to our clients but also to support sales and keep expanding our customer base.

With regards to the local area network, or LAN, as there is an increase in IP services, we have aimed to create a design that can absorb an exponential port growth for services without increasing operational costs. The result was the adoption of a new network implementation, using top of rack, or TOR, and end of row, or EOR, architecture. The technology reduces the amount of equipment on site and drastically decreases the use of cables, by placing small switches inside server racks, where cables are kept confined. From the rack to the site’s core switches, only one pair of fiber is sufficient. The result is a significant savings in operating expenditures, as well as space, energy and air conditioning, despite the significant increase of network ports on site. Recently, the deployment of Fabric technology, which helps avoid LAN interruptions, increases the reliability of service in our local networks without losing flexibility and quick service deployment to customers. In 2016, we maintained the strategy of implementing the TOR and EOR framework with Fabric technology, providing more reliable, efficient and scalable network infrastructure on sites that still had and standard Ethernet structure. Link Aggregation technology is still being used to optimize network ports. In 2016 we implemented Fabric technology on 27 sites.

In 2016, we implemented the Cache framework to reduce bandwidth consumption in the IP backbone by locally storing content from partners such as Google, Netflix, Akamai and Facebook. With this we can optimize network resources, improving quality of service and user experience. The Cache framework has been implemented in 27 sites.

During the course of 2014, we saw a variety of targets and natures of attacks with regards to cyber security, with special attention to the mobile terminal, where we already offer a comprehensive suite of applications for mobile security. On the network side, besides tightening our perimeter security, we have focused on automation. Periodic tasks such as analyzing attacks notifications, auditing firewalls rules and evaluating security elements performance were the main areas subject to automation, allowing security professionals to focus on problems that are more complex. In addition, those actions improve network performance, extending the lifespan and reducing costs related to the network. In 2016, we implemented a platform to avoid DNS querying malicious domains which could overload DNS servers.

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We offer the IPTV service through the FTTH network using a platform that is well recognized in the world (Global Video Platform). This platform consists of Pay TV with video broadcasting offered through the IP protocol. Several features were added in the platform, such as the inclusion of Instant Channel Change (ICC), Picture in Picture (PiP), Live Pause, applications (Social Networks, Weather, Health, Multi-view, News, Kids and others) providing a better user experience. Additional services, such as pay-per-view and VoD, are also available.

The IPTV platform also offers games, interaction and connectivity services through third party content, as well as OTT, content for the broadband users, through the applications developed for smart TVs, smart phones with Google’s Android and Apple’s iOS, and STBs and PCs. A new service, OTT Live, will deliver broadcast channels to those devices.

In 2016, the Open Platform Program was launched seeking improvement for local operation, reducing operational costs and infrastructure investment. It consists of several global partners, developing modules in partnership with Telefonica and connecting into the exiting Global Video Platform. Our local team is customizing the middleware for Set-Top-Box, creating one standard version which brings better time-to-market for new developments and product releases, as well as future convergence between IPTV and DTH platforms. For the year of 2017, we intend to launch the IPTV service based on the Open Platform and will continue to expand all the services to other cities in the state of São Paulo and looking for other cities in Brazil as the FTTH network expands.

We also offer digital television service via satellite (DTH) to the subscribers that receive broadcast/PPV content through a Ku band antenna and standard Set Top Box (with Smart Card), also available with a Personal Video Record (PVR) service with 4K technology. The customer has additional services through IP when connecting the Set-top-box into broadband service, offering VoD and interactive applications. After four years, we expect to use one satellite and one Middleware solution consolidating in a single platform.

Our development plan contemplates the use of the most advanced technology available, focusing on integration with the internet and an increase in the number of multimedia transmission services, with an emphasis on DSL, FTTH (GPON), NGN, DWDM, ROADM and relays technologies of TV over IP protocol (IPTV), satellite (DTH), and the continuous evolution of TV services.

We currently offer HSPA+ technology, commercially known as 3G Plus, across 100% of our WCDMA coverage, allowing customers that have compatible terminals to achieve up to three times more than traditional 3G rate. Since 2013, we offer the LTE system in spectrum (2600 MHz). At the end of 2016, 516 Brazilian cities had 4G availability.

Since 2015, we started to develop the network sharing in 4G with Oi and TIM. At the end of 2016, 83 Brazilian cities had radio base stations shared, and in 86 cities we provided new 4G coverage with RAN Sharing using infrastructure from TIM or Oi .The strategy of Radio Access Network Shared allow us to fulfill part of the ANATEL’s requirements due the LTE spectrum acquisition.

In 2016, we also successfully provided coverage and capacity in areas catering to the Olympics, such as airports, tourist areas, shopping centers and some Olympic venues.

In 2016, we started to offer new frequencies to LTE (700MHz and 1800MHz), with goal to improve the coverage and capacity. At the end of 2016 we had 10 sites with LTE 700MHz and 709 sites with LTE 1800MHz.

Fraud Detection and Prevention

During 2016, we continued our work in combating the two main types of fraud, as follows:

Subscription fraud: is a type of fraud that occurs when the issuance of one or more accesses are granted without the consent of the real “holder” of identification documents with the main objective of evading payment. We had an increase of 15% in subscription fraud-related losses, from R$32.9 million in 2015 to R$37.9 million in 2016. The main cause of this increase was the larger coverage area in 2016. However, the review of certain detection processes and improvement of the controls used in monitoring fraud events during the year allowed us to capture more fraudulent cases relatively to the expansion of our network.

Identity Fraud: also known as “social engineering”, identity fraud takes place through call centers or dealers, where a caller who has access to information belonging to our existing clients reaches out to our call centers and makes unauthorized alterations and activations. We did not have any losses related to Identity Fraud for financial accounts of expenses, representing 100% of effectiveness in 2016. The main reason for this result was the identification of cases in a shorter period of time.

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Operating Agreements

Interconnection Agreements

The terms of our interconnection agreements include provisions with respect to the number of connection points and traffic signals. See “—Regulation of the Brazilian Telecommunications Industry—Obligations of Telecommunications Companies.”

We believe that we have adequate interconnection agreements with fixed-line operators necessary to provide our services and that we have all the necessary interconnection agreements with long-distance carriers.

Roaming Agreements

We provide international GSM roaming in over 200 destinations worldwide by means of over 500 roaming agreements with local service providers.

Network Sharing Agreement

In 2014, Telefônica Brasil announced that a networking sharing agreement with Nextel was signed to provide mobile services coverage (voice, data and SMS) through our 2G and 3G network to 67 area codes. The contract has a term of five years, with a minimum payment of R$1.0 billion for the whole period, as follows: (i) R$44.3 million in the first year; (ii) R$132.1 million in the second year; (iii) R$237.1 million in the third year; (iv) R$263.0 million in the fourth year and (v) R$361.5 million in the fifth year. Term and payments are subject to the fulfillment of the contractual obligations assumed by the parties.

ANATEL approved the agreement and the execution of the operation in March 2014. The network sharing has been fully operational since July 31, 2014, when the Parties had executed the Notice of Network Full Availability.

In 2016, both parties decided to extend the agreement throughout the national territory. CADE approved the extension in July 2016 and ANATEL in August 2016. ANATEL’s approval was conditioned to the effective commercialization of SMP service in the locations subject of Nextel obligations. The agreement will be revised by the regulator in two years and could be terminated depending on the parties’ compliance with related obligations. Nextel has appealed on the conditions mentioned above, which currently are under review.

In March 2015, Claro and Telefônica have entered into a RAN Sharing agreement in order to provide telecommunication coverage in rural areas in Brazil, which was approved by CADE and ANATEL.

In December 2015, Telefônica, Oi and TIM have entered into a RAN Sharing agreement in order to provide mobile services coverage (voice, data and SMS) through the 4G network and comply with coverage commitments assumed by the operators. The agreement was approved by CADE and ANATEL.

In August 2016, ANATEL approved the agreement between Telefônica and TIM to share of electronic equipment and mobile sites for the fulfilment of the obligations acquired with 450 MHz auction. The approval of the agreement, however, does not exempt the providers from fulfilling their obligations, nor from the coverage of the entire area. In case the agreement is ended before the expected deadline, each provider must meet its coverage commitments with its own network, under penalty of extinction of the authorizations for use of radio frequencies.

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Competition

In 2016, competition remained strong in the Brazilian telecommunications market. By November 2016 Brazil reached nearly 336 million accesses of fixed and mobile phone, pay TV, broadband fixed and mobile according to Telebrasil and Teleco.

In the first half of the year, Vivo and GVT merger was operationally completed. We started to act commercially integrated throughout the country and released a new positioning campaign "Viva Tudo", presenting the company as a digital partner of the people, offering all the connections with quality in a single company: fixed and mobile services, broadband, pay TV, applications, besides digital services.

We face intense competition in all businesses we operate, primarily from other mobile service providers and fixed services operators. Most of these competitors are part of large, national or multinational groups and, therefore, have access to capital, new technologies and other benefits.

In the mobile market we continued in the lead with a 30.2% market share as of December 2016. The 4G technology continued to expand. In December 2016, there were 60.1 million 4G lines. We remain the leaders in such technology with a 35.7% market share, according to ANATEL.

We also lead mobile market share, measured in terms of the number of mobile accesses in 11 States: Acre, Amazonas, Amapá, Espirito Santo, Minas Gerais, Mato Grosso, Mato Grosso do Sul, Roraima, Rio Grande do Sul, Sergipe and São Paulo. TIM Celular or TIM, a Brazilian telephone company and subsidiary of Telecom Italia lead the mobile market in six states: Alagoas, Ceará, Pará, Paraná, Rio Grande do Norte and Santa Catarina. Oi leads mobile services in three states: Maranhão, Paraiba and Pernambuco. Claro Telecom Participações or Claro is a mobile operator controlled by a Mexican company, America Movil Group, and leads mobile service in seven states: Bahia, Distrito Federal, Goiás, Piauí, Rio de Janeiro, Rondônia and Tocantins.

Our main competitors in fixed telecommunications services are: America Móvil (which includes NET, Claro and Embratel), TIM (which offers broadband services under the TIM Live brand) and SKY (currently controlled by AT&T). Furthermore, in the fixed broadband market there are more than 3 thousand small regional providers that, in recent years, have been expanding their market shares with their local operations.

In 2016, Claro, Embratel and NET introduced a new institutional campaign showing themselves as a single company, even though maintaining different brands. The concept was to highlight the synergy of operations and to strengthen convergent services.

Oi is stronger in the fixed services outside the state of São Paulo and remains focused on the convergence strategy of fixed and mobile services. Oi filed for bankruptcy protection in June 2016 with R$65 billion in debt, making it the largest bankruptcy filing in Brazilian history.

Other competitors highlighted by their growth in 2016 were: TIM Live, with approximately 326 thousand fixed broadband customers (ANATEL, December 2016) and SKY, that usually provides satellite Pay TV services, from low to high price packages to its customers, has significantly expanded its broadband operations through LTE TDD 4G technology (long term evolution-division duplex time). In December 2016, according to ANATEL, SKY registered 5.2 million customers in Pay TV and 310 thousand broadband customers.

Regulation of the Brazilian Telecommunications Industry

Our business, including the services we provide and the rates we charge, is materially affected by comprehensive regulation under the General Telecommunications Law and various administrative rules thereunder. We operate under a concession agreement that authorizes us to provide specified services and subjects us to certain obligations, according to the General Universal Service Targets Plan (Plano Geral de Metas de Universalização), or PGMU, and the General Quality Targets Plan (Plano Geral de Metas de Qualidade), or PGMQ.

ANATEL is the regulatory agency established by the General Telecommunications Law, and is administratively and financially independent from the Brazilian government. Any proposed regulation by ANATEL is subject to a period of public comment and, occasionally, public hearings, and its decisions may be challenged in Brazilian courts.

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Concessions and Authorizations

In accordance with the General Telecommunications Law concessions are licenses to provide telecommunications services that are granted under the public regime, while authorizations are licenses to provide telecommunications services granted under the private regime.

Companies that provide services under the public regime, known as the concessionaires, are subject to certain obligations as to quality of service, continuity of service, universality of service, network expansion and modernization.

A concession may only be granted pursuant to a public bidding process. As a result, regulatory provisions are included in the relevant concession agreements and the concessionaire is subject to public service principles of continuity, changeability and equal treatment of customers. In addition, ANATEL is authorized to direct and control the provision of services, to apply penalties and to declare the expiration of the concession and the return of assets from the concessionaire to the government authority upon termination of the concession. Another distinctive feature of public concessions is the right of the concessionaire to maintain certain economic and financial standards, which are calculated based on the rules set forth in our concession agreement and was designed based on a price cap model. The concession is granted for a fixed period of time and is generally renewable only once.

The companies that operate concessions under the public regime are Telefônica Brasil, Oi, CTBC Telecom, Sercomtel and Embratel (Embratel for domestic and international long distance service). These companies provide fixed-line telecommunications services in Brazil that include local, intraregional, interregional and international long-distance services. All other telecommunications service providers, including the other companies authorized to provide fixed-line services in our concession region, operate pursuant to authorizations under the private regime.

Companies that provide services under the private regime, known as authorized companies, are generally not subject to the same requirements regarding continuity or universality of service; however, they may be subject to certain network expansion and quality of service requirements that are obligations set forth in their authorizations. Authorizations are granted for an indeterminate period of time. Under an authorization, the government does not guarantee to the authorized company an economic-financial equilibrium, as is the case under concessions.

An authorization is a license granted by ANATEL under the private regime, which may or may not be granted pursuant to a public bidding process, to the extent that the authorized company complies with the objective and subjective conditions deemed necessary for the rendering of the relevant type of telecommunication service in the private regime.

The General Telecommunications Law delegates to ANATEL the power to authorize private regime companies to provide local and intraregional long-distance services in each of the three fixed-line regions and to provide intraregional, interregional and international long-distance services throughout Brazil. ANATEL has already granted authorizations for companies to operate in Region III, our concession region. ANATEL has also granted other authorizations for companies to operate in other fixed-line regions and authorizations to provide intraregional, interregional and international long-distance services throughout Brazil competing with Embratel, which operates under a long-distance fixed-line concession.

Concessionaires, including us, can also offer other telecommunications services in the private regime, which primarily include data transmission services, mobile services and Pay TV.

Obligations of Telecommunications Companies

Pursuant to the concessions and authorizations, we and other telecommunications service providers are subject to obligations concerning quality of service, network expansion and modernization. Telecommunication concessionaires are also subject to a set of special restrictions regarding the services they may offer, which are listed in the General Grants Plan (Plano Geral de Outorgas), or PGO, and special obligations regarding network expansion and modernization contained in the PGMQ.

In 2001, a presidential decree published with the PGO increased the flexibility of telecommunications provider groups as fixed line concessionaires by allowing such providers to provide services in up to two of the three regions established by the PGO. Before this decree, telecommunications provider groups holding fixed-line concessions could offer fixed line services in only one region under the public regime.

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In 2008, another presidential decree allowed concessionaries to operate outside their concession areas and unified sectors 31, 32 and 34. Thus, region III was comprised of sectors 31 and 33.

In December 2016, ANATEL held a public consultation relating to the new rules of the PGO. In the proposed text, there is an exclusive chapter aimed at verifying the migration of fixed telephony concessions for authorizations, in accordance with the new regulatory framework being considered. The new regulation should be subject to extensive discussion in 2017 and its effects should only come after the approval of the new framework.

Any breach of telecommunications legislation or of any obligation set forth in concessions and authorizations may result in a fine of up to R$50 million.

Our main operations are regulated as follows:

Fixed line voice services (local and long distance) under concession agreement in the state of São Paulo and under authorization agreement in rest of the Brazilian territory. The concession was granted in 1998 by the Brazilian Government and renewed in December 2005 for 20 more years and authorizes us to provide fixed-line telecommunications services in the state of São Paulo, except for a small area (Sector 33) and to place and manage public telephones in our concession area. We also provide fixed-wireless services throughout our concession area. The authorization was granted in 2001 by the Brazilian Government for the whole Brazilian territory;

Mobile voice and broadband services, in all 26 states and the Federal District, under the personal mobile service (Serviço Móvel Pessoal), or SMP authorization. We operate under various SMP authorizations, each for a term varying according to the related authorization;

Multimedia communication services, such as audio, data, voice and other sounds, images, texts and other information throughout Brazil. We operate under a nationwide SCM authorization, valid for an indefinite term;

Pay TV service, throughout all regions of Brazil under the conditioned public service (Serviço de Acesso Condicionado), or SeAC authorization. We operate under SeAC authorizations, which are valid for indefinite terms; and

Wholesale services, such as interconnection, governed by the interconnection agreements discussed under “—Operating Agreements—Interconnection Agreements,” industrial dedicated line (Exploração Industrial de Linha Dedicada), or EILD, which are regulated by ANATEL Resolution No. 590, dated May 15, 2012 and Mobile Virtual Network Operator, or MVNO agreements.

We set forth below details of the concession, authorizations, licenses and regulations that regulate our operations.

Fixed Services

Our Concession Agreement

We are authorized to provide fixed line services to render local and domestic long-distance calls originating in Region III, which comprises the state of São Paulo, except for Sector 33, established in the PGO.

The current concession agreement is valid through December 31, 2025 and was renewed in 2006 and 2011. According to Resolution No. 559, two additional revision periods were defined (2015 and 2020), and due to the government discussion on a new regulatory framework for the telecommunications, the 2015 review was postponed by ANATEL. The current date for the publication of the revised concession agreement is February 28, 2017.

Other regulations have been adopted to revise certain aspects of our concession. On June 30, 2011, ANATEL determined the new basis of calculation of the biannual concession fees. Every two years, during the new 20-year period of our concession, we are required to pay a renewal fee, which amounts to 2% of the total revenue in the previous year, calculated based on the revenues and social contribution of fixed line basic and alternative plans. The most recent payment of this biennial fee was made on April 30, 2015, based on 2014 revenue. The next payment is scheduled for 2017 based on 2016 revenue. See Note 1 to our Consolidated Financial Statements.

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In addition, the Brazilian government published Decree No. 7,512 which proposed the General Plan for the Universalization of Fixed Telephone Services under the Public Regime (Plano Geral de Metas para a Universalização do Serviço Telefônico Fixo Comutado Prestado no Regime Publico), or PGMU III. It set forth new targets for public pay phones (Telefone de Uso Público) availability in rural and low-income areas and targets related to low-income fixed line services (Acesso Individual Classe Especial), or AICE.

On June 27, 2014, tied to the public consultation for the new concession agreements, ANATEL held a public consultation for the PGMU. Since the publication of the new concession agreement has been postponed until February, 28, 2017, the new version of PGMU was also delayed.

Pursuant to our concession agreements, all assets owned by us which are indispensable to the provision of the services described in such agreements are considered “reversible assets”. According to a recent interpretation by ANATEL of the current regulation, these assets will be automatically returned to ANATEL upon the expiration of the concession agreements, according to the regulation in force at that time and would not be available to creditors in the event of insolvency, bankruptcy or similar events. With discussions relating to a new regulatory framework under way, this rule could no longer exist in light of the possibility of transforming concessions into authorizations.

On April 8, 2008, we entered into an amendment to the concession agreement to substitute the obligation to install telecommunications service posts with an obligation to roll out broadband network infrastructure throughout the municipalities serviced by such concessionaires. This amendment could be extended with the approval of the counterparties of the new regulatory framework.

On October 23, 2012, ANATEL published Resolution No. 598, which addresses population density, setting deadlines to meet access requests and benchmarks for use of the public telephone plant and the establishment of a list of agencies that can request access to its location, review of deadline for proposing service plans and the establishment of universal obligations disclosure.

Currently, the Brazilian legislature is discussing a new regulatory framework for telecommunications that is expected to affect our concession agreements. After a long debate on the bill of law that defines the new framework in both houses of congress, on January 31, 2017, the Federal Senate approved the bill and forwarded it for approval by the president. The new regulatory framework contains several changes to the existing regime, which primarily include, among others, the immediate replacement of the current concession-based regime for an authorization-based regime, changes in the standards for the use of frequencies and Brazilian orbital position, as well as terms relating to the transfer of reversible assets to telecommunication companies in exchange for investments in the fixed broadband infrastructure by such companies.

However, opposition parties filed a petition with the Supreme Court asking the judges to analyze the legality of the approval of the bill since their legislative appeal was not considered and the proposed bill was not discussed and voted on in a plenary session of congress. The Supreme Court determined that the bill should be returned to the Senate and that the opposition parties’ appeal seeking further debate regarding the bill should be reconsidered. The president has abided the decision of the Court and the draft bill is currently on the Senate pending further debate.

For information about regulations affecting rates we are able to charge under our concession agreements, see “—Rates, Taxes and Billing.”

Obligations and Restrictions on concessionaires to provide fixed line service under the public regime

We and other concessionaires are subject to the General Universal Service Targets Plan (Plano Geral de Metas de Universalização), or PGMU, and the General Quality Targets Plan (Plano Geral de Metas de Qualidade), or PGMQ, each of which respectively requires that concessionaires undertake certain network expansion activities with respect to our fixed-line services and meet specified quality of service targets. The timing for network expansion and benchmarks for quality of service are revised by ANATEL from time to time. If any given concessionaire does not fulfill its obligations under the PGMU and the PGMQ, ANATEL may impose various monetary penalties and such concessionaire may lose its license if ANATEL determines that it will be unable to provide basic services under the two General Plans.

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Concessionaires are also subject to certain restrictions on alliances, joint ventures, mergers and acquisitions, including:

a prohibition on holding more than 20% of the voting shares in any other concessionaire, unless previously approved by ANATEL, according to ANATEL Resolution No. 101; and

a prohibition on concessionaires to provide similar services through related companies.

Fixed line service under the private regime

In 2002, we began providing local and interregional services in Regions I and II and Sector 33 of Region III, and international long-distance services in Regions I, II and III, which constitute regions in Brazil that are outside of our public regime concession area.

Public Telephone Regulation

On June 30, 2014, ANATEL published the new Public Telephone Regulation. Among the new rules, it opened up the possibility of advertising on the public telephones and the possibility of alternative payment modalities.

In 2016, ANATEL extinguished the Standard for the Certification and Homologation of the Inductive Card. Instead, a list of Technical Requirements for Telecommunications Products was issued.

Mobile Services

In October 2016, ANATEL approved new spectrum use regulations, which facilitates access to radio frequencies and generates efficiency in its use, due to the simplification of procedures and necessary documentation. The regulation also alters spectrum pricing, rules for extending use authorization and new rules for frequency use on a secondary basis prior to primary use.

Mobile Service Licenses (SMP)

Our authorizations to provide mobile services throughout Brazil consist of two licenses—one to provide mobile telecommunications services, and another to use the respective frequency spectrum for a period of 15 years. The frequency license is renewable for an additional 15-year period upon payment of 2% of net operating revenues over usage charges in the region described above, every two years for the duration of the extension period. In the 15th year, the Company will pay 1% of the aforementioned amount.

In order to transfer our services to SMP, we were required to comply with several technical and operational conditions, including, among other things, the adoption of a carrier selection code for long-distance calls originating from our network.

Our renewed SMP authorizations include the right to provide mobile services for an unlimited period of time but restrict the right to use the spectrum according to the schedules listed in the old authorizations. The table below sets forth our current SMP authorizations, their locations, band and spectrums, date of issuance or renewal and date of expiration:

Authorization	800 MHz	900 MHz	1800 MHz	2100 MHz (3)
Rio de Janeiro	Band A November 2020	Extension 1 April 2023	Extensions 9&10 April 2023	Band J April 2023
Espírito Santo	Band A November 2023	Extension 1 April 2023	Extensions 9&10 April 2023	Band J April 2023
Amazonas, Roraima, Amapá, Pará and Maranhão	Band B November 2028	Extension 2 April 2023	Extensions 7, 9&10 April 2023	Band J April 2023
Minas Gerais (except for “Triângulo Mineiro” region)	Band A April 2023	Extension 2 April 2023	Extensions 11&14 April 2023	Band J April 2023

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Authorization	800 MHz	900 MHz	1800 MHz	2100 MHz (3)
Minas Gerais (“Triângulo Mineiro” region)	—	Band E April 2020	Band E April 2020	Band J April 2023
Bahia	Band A June 2023	Extension 1 April 2023	Extensions 9&10 April 2023	Band J April 2023
Sergipe	Band A December 2023	Extension 1 April 2023	Extensions 9&10 April 2023	Band J April 2023
Alagoas, Ceará, Paraíba, Pernambuco, Piauí and Rio Grande do Norte	—	—	Band E April 2023 Extensions 9&10 April 2023	Band J April 2023
Paraná (except for Londrina and Tamarana) and Santa Catarina	Band B April 2028	Extension 1 April 2023	Band M April 2023	Band J April 2023
Paraná - Londrina and Tamarana	Band B April 2028	—	Band M April 2023 Extension 10 April 2023	Band J April 2023
Rio Grande do Sul (except for Pelotas, Morro Redondo, Capão do Leão and Turuçu)	Band A December 2022	Extension 1 April 2023	Band M April 2023	Band J April 2023
Rio Grande do Sul (Pelotas, Morro Redondo, Capão do Leão and Turuçu)	—	—	Bands D&M April 2023	Band J April 2023
Federal District	Band A July 2021	Extension 1 April 2023	Band M April 2023	Band J April 2023
Goiás and Tocantins	Band A October 2023	Extension 1 April 2023	Band M April 2023	Band J April 2023
Goiás (Buriti Alegre, Cachoeira Dourada, Inaciolândia, Itumbiara, Paranaiguara and São Simão)	—	—	Extensions 7 to 10 April 2023 Band M April 2023	Band J April 2023
Mato Grosso	Band A March 2024	Extension 1 April 2023	Band M April 2023	Band J April 2023
Mato Grosso do Sul (except for Paranaíba)	Band A September 2024	Extension 1 April 2023	Band M April 2023	Band J April 2023
Mato Grosso do Sul (Paranaíba)	—	—	Extensions 7, 9&10 April 2023 Band M April 2023	Band J April 2023

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Authorization	800 MHz	900 MHz	1800 MHz	2100 MHz (3)
Rondônia	Band A July 2024	Extension 1 April 2023	Band M - April/23	Band J April 2023
Acre	Band A July 2024	Extension 1 April 2023	Band M April 2023	Band J April 2023
São Paulo	Band A August 2023	—	Extensions 9&10 April 2023	Band J April 2023
São Paulo (Ribeirão Preto, Guatapará and Bonfim Paulista)	Band A January 2024	—	Extensions 5, 9&10 April 2023	Band J April 2023
São Paulo (Franca region)	Band A August 2023	—	Extensions 5, 9&10 April 2023	Band J April 2023
São Paulo (Altinópolis, Aramina, Batatais, Brodosqui, Buritizal, Cajuru, Cássia dos Coqueiros, Colômbia, Franca, Guaíra, Guará, Ipuã, Ituverava, Jardinópolis, Miguelópolis, Morro Agudo, Nuporanga, Orlândia, Ribeirão Corrente, Sales de Oliveira, Santa Cruz da Esperança, Santo Antônio da Alegria and São Joaquim da Barra)	—	—	Extensions 9&10 April 2023	Band J April 2023

In 2013, we changed the terms of our authorization regarding Band “L” (1.9 GHz) in certain locations, adapting their blocks of frequencies to 2.1 GHz and aligning them with the band “J” (3G) which provides a more efficient use of the spectrum. The alignment has not occurred in the following areas: Northeast, with the exception of Bahia and Sergipe; Pelotas, Morro Redondo, Capão do Leão and Turuçu, in Rio Grande do Sul; Buriti Alegre, Cachoeira Dourada, Inaciolândia, Itumbiara, Paranaiguara and São Simão, in Goiás; and Paranaíba in Mato Grosso do Sul. This change is foreseen in the bidding document No 001/2007. We do not have band “G” in the northeast region and in Londrina and Tamarana, Paraná.

On June 12 and 13, 2012, ANATEL held a public auction for 273 lots of 4G, on the 2.5GHz to 2.69GHz frequencies. We acquired the “X” band, with a nationwide coverage, for R$1.05 billion. According to spectrum cap rules for bidding processes, we had to return the remaining portion of the 2.5GHz spectrum we previously owned to operate our MMDS services.

In order to meet the coverage obligations and the schedule defined by ANATEL, we have made 4G services available to 516 cities in Brazil. To complete the coverage requirements, we will need to implement 4G coverage in 787 cities with between 30,000 and 100,000 residents by December 31, 2017.

Telefonica has deployed, and continues to deploy 4G coverage in the municipalities and serves its customers through the use of its own network or by agreement of RAN-sharing approved by ANATEL. Verification of compliance with these targets will be made by ANATEL.

The coverage in cities with less than 30,000 inhabitants may be fulfilled with other frequency bands, according to the following schedule:

by December 31, 2017: 117 cities;

by December 31, 2018: another 117 cities; and

by December 31, 2019: 156 more cities.

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ANATEL auctioned a 450 MHz frequency lot that is tied to the 2.5 GHz band, to meet voice and data demand in remote rural areas. Under band “X,” which we acquired in the bidding process, we will be required to provide infrastructure in rural areas in the states of Alagoas, Ceará, Minas Gerais, Paraíba, Pernambuco, Piauí, Rio Grande do Norte, Sergipe, and countryside of São Paulo, for a total of 2,556 municipalities. The expiration date for this band is October 2027, with an automatic renewal option.

In 2016, the ANATEL board of directors approved a request made by telecommunications companies to allow for coverage in those remote areas with other technologies, since there is no available ecosystem to use the 450 MHz frequency.

In December 2015, ANATEL and CADE approved the agreement between Telefônica Brasil, TIM and Oi for the construction, implementation and mutual assignment of network tools for supporting the Personal Mobile Service (voice and broadband) in the 2.5 GHz band, in order to make compliance with the scope of commitments between 2015 and 2017 and the expansion of 4G coverage, considering municipalities with a population over 30 thousand inhabitants. The operation involves the search for more efficiency of resources application of rationality and presenting a solution to the urban planning and environmental restrictions on the deployment of the new radio base stations (cell sites).

ANATEL did not accept, however, the proposed agreement to do the RAN Sharing in conurbations, since interference was detected. The agency has decided that until a technological solution is found against this interference, there can be no sharing in these cities.

Regarding the 700 MHz spectrum, ANATEL has allocated the band for the provision of fixed, mobile and broadband services. On September 30, 2014, ANATEL held the public bidding of 4G, on the 708 to 803 MHz frequencies.

We acquired 20 MHz (10+10 MHz) with nationwide coverage, for R$1.92 billion, at the minimum price, plus R$904 million for the band cleaning (migration of broadcasters that currently occupy the band and interference management). The expiration date for this band is in December 2029, with an automatic renewal option.

According to the auction rules, the winning bidders will be responsible for financing and managing the band cleaning process.

In January 2016, the Ministry of Communications published a new schedule for Analog TV Switch Off, postponing the use of 700 MHz frequency for telecommunications in some Brazilian big cities. According to the new schedule just two cities should be turned off in 2016, Rio Verde (GO) and Brasilia (DF). Despite minor delays, the cleaning was considered successful. Following the schedule in 2017, there will be 349 municipalities in 8 Brazilian states (Bahia, Ceará, Espírito Santo, Goiás, Minas Gerais, São Paulo, Rio de Janeiro and Pernambuco) to be turned off. The capitals of these states are on the list. The list of municipalities for 2018 will be defined in a specific ordinance.

In December 2015, ANATEL auctioned the remaining spectrum lots in the 1800 MHz, 1900 MHz and 2500 MHz bands, where Telefônica acquired seven lots of 2.5 GHz frequency band offering a total of R$ 185.4 million. These lots are associated to six different States, five of them in the capital cities of the States of São Paulo, Rio de Janeiro, Porto Alegre, Florianópolis, and Palmas and one in an interior city of the State of Mato Grosso do Sul. Such frequencies will be used for provision of mobile broadband service on 4G.

Mobile Services Obligations

The mobile service authorizations of Telefônica Brasil involve obligations, established by ANATEL, to meet quality of service standards relating to the system’s ability to make and receive calls, call failure rates, the network’s capacity to handle peak periods, failed interconnection of calls and customer complaints.

To restructure the process of assessing the quality of mobile service, with the inclusion of new processes and measurement of new indicators to check the quality of mobile broadband and the quality perceived by the user, and the modernization of existing indicators, ANATEL approved the Regulation for the Management of Quality of Provision of Personal Mobile Service (Regulamento de Gestão da Qualidade da Prestação de Serviço Móvel Pessoal), or SMP-RGQ.

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The SMP-RGQ provides for the assessment of the network connection and their respective data transmission rate, assessing aspects of availability, stability and connection speed for the data network. In addition, the rule established the formation of a Quality Measurement Process Deployment Group (Grupo de Implantação de Processos de Aferição da Qualidade), or GIPAQ, which is responsible for implementing the processes on the quality indicators for the “Instant Transmission Rate Guarantee “and “Average Transmission Rate Guarantee.”

The methodology and procedures regarding the collection of data connection indicators has been defined by a group composed of providers, ANATEL and the entity responsible for the measurement of the rate of data transmission indicators (Entidade Aferidora da Qualidade), or EAQ, which shall be responsible for implementing these processes and which has been hired by the mobile operators, as a group, starting with February 29, 2012. All costs associated with implementing the new procedures for measuring quality are borne by the providers of SMP services.

Initially, targets were defined by at least 60% of the speed hired by users and 20% of the instant speed. In November 2013 and November 2014, ANATEL raised the target values to 80% of speed hired by users and 40% of the instant speed, according to the definitions of the Resolution 575/2011.

In July 2012, ANATEL suspended the sale and activation of the mobile lines of three major Brazilian operators. We were not affected by this measure. Since then, ANATEL has requested the submission of an Action Plan for Quality Improvement of the Mobile Telephone from operators. We had our plan approved on September 10, 2012. The measurement results of the indicators defined on the PMQ were published in August 2012 and are under an ongoing monitoring process set forth by ANATEL.

Multimedia Communication Services (SCM)

Our multimedia services include broadband and wireless internet services as well as fiber UBB services.

Authorization to Provide Multimedia Services

On January 29, 2003, ANATEL granted our multimedia communication license nationwide, allowing A. TELECOM S.A. (formerly Assist Telefónica), our wholly owned subsidiary at that time, to provide voice and data services through points-of-presence (POPs), which are comprised of private telecommunications networks and circuits. In addition to A. TELECOM S.A., ANATEL granted multimedia communication licenses to T-Data (formerly T-Empresas) and Emergia.

As a result of our merger with Vivo S.A. and pursuant to the concession agreement, we are not able to provide services other than telecommunications. Consequently, we submitted a request to ANATEL for the cancellation of T-Data’s multimedia communication license and the unification of our multimedia communication licenses under Telefônica Brasil. On September 3, 2014, ANATEL granted Telefônica Brasil a nationwide multimedia communication license.

Obligation to provide fixed broadband access

As a telecommunications concessionaire, we have the obligation to provide free Internet access to public schools in our concession area during the term of the agreement (until 2025). The number of schools for which we should provide broadband is determined by the National Education Ministry school census. Currently our obligations include 10,660 schools, of which 10,054 were met.

Pay TV services

Authorization to provide Pay TV Services – SeAC

On March 14, 2007, ANATEL granted A. TELECOM S.A. authorization to provide services of Pay TV via satellite (Direct to Home – DTH). DTH is one of the special types of subscription TV services that utilize satellites for the direct distribution of television and audio signals for subscribers. The launching of the commercial transaction occurred on August 12, 2007.

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On October 31, 2007, the board of ANATEL concluded its regulatory review of the agreement between us and Grupo Abril, which included a special license that allows us to offer Pay TV and broadband services. In November 2012, ANATEL approved the adoption of service licenses for subscription television by the Telefónica group to the conditional access service.

Following the merger of Telefônica Brasil S.A. and Vivo S.A., the company requested the adjustment of the Multimedia Multipoint Distribution Service (MMDS), the Pay TV via satellite Direct to Home – DTH, and the Cable TV service licenses, to the SeAC single license. On January 25, 2013, it was issued by ANATEL.

Regulations for Pay TV Services– SeAC

On September 12, 2011, the Brazilian Congress adopted Law 12,485/2011 as a result of Bill 116, which establishes a new legal framework for audiovisual communication with restricted access. This law opens the Pay TV market by enabling telecom operators to offer audiovisual content to subscribers through their networks, creating a new service called Pay TV Services (Serviço de Acesso Condicionado), or SeAC. The absence of restrictions on foreign capital to be invested in Pay TV providers, as well as the elimination of restrictions for the provision of other telecommunications services through fixed line concession, allow us to provide Pay TV services, as well as other telecommunication services previously limited under the General Telecommunications Law.

Pursuant to Law 12,485/2011, the Pay TV service has replaced current cable subscription TV services, subscription TV, MMDS and DTH, giving power to ANATEL to regulate the Pay TV service. As a result of this law, ANATEL introduced in December 2011 the proposed regulations for Pay TV services through Public Consultation No. 65/2011, including license grants, installation and licensing of stations and mandatory distribution programming channels. The Public Consultation was finalized on February 2, 2012 and resulted in Resolution No. 581, issued by ANATEL on March 28, 2012, as well as the new Authorization Terms of the SeAC.

Law No. 12,485/2011 also established an annual payment to Condecine (Contribuição para o Desenvolvimento da Indústria Cinematográfica) to be made by providers of telecommunication services and amended Law No. 5,070/1966 by revising the amount due as Inspection Fee (Taxa de Fiscalização de Funcionamento) for telecommunication stations from 45% to 33% of the Installation Fee (Taxa de Fiscalização de Instalação). The amount due to Condecine is approximately 12% of the Installation Fee for telecommunication services and must be paid yearly by March 31 of each year.

As a result of Law No. 12,485/2011, the National Cinema Agency (Agência Nacional do Cinema), or ANCINE issued one public consultation by the end of 2011 and one public consultation in 2012 to regulate the registration of economic agents. In 2013, we had our licenses adapted to the new regulation and was recognized as an economic agent by ANCINE. In 2014, ANCINE recognized Telefônica Brasil S.A. as a Pay TV content packer.

In March 2016, ANATEL published a Public Consultation to change the regulation for Pay TV access services (SeAC). The proposal brought new rules for the isonomic treatment of open channels, transfer of grants, for the transfer of control between pay-TV companies, and the obligation to load channel accessibility resources, among other aspects. The new regulation may be finalized in 2017.

Interconnection Fees

In accordance with ANATEL regulations, we must charge fees to the other telecommunications service providers based on the following:

Fee for the use of our local fixed service network (TU-RL) - we charge local service providers an interconnection fee for every minute used in connection with a call that either originates or terminates within our local network, with the exception of calls between other providers of local fixed service, for which a fee is not charged;

Fee for the use of our fixed service long-distance network (TU-RIU) - we charge long distance service providers an interconnection fee on a per-minute basis only when the interconnection access to our long-distance network is in use;

Fee for the use of mobile network (MTR) – we charge mobile service providers an interconnection fee on a per-minute basis only when the interconnection access to our mobile network is in use;

Fee for the use of leased lines by another service provider (EILD). We also lease transmission lines, certain infrastructure and other equipment to other providers of telecommunications services.

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Fixed Service

In July 2005, ANATEL published new rules regarding interconnection. The main changes are: (i) an obligation to have a public offering of interconnection for all services, besides interconnections fees between providers of fixed and mobile telephone services; (ii) an offer of interconnections for Internet backbone providers; (iii) establishment of criteria for the treatment of fraudulent calls; and (iv) reduction of service times for interconnection requests.

In 2006, we completed the implementation of the interconnection with the mobile service providers in regions with heavier traffic, assuring the proper billing for such calls. This movement reduced the interconnection costs.

In 2007, ANATEL published a new version of Fixed Network Compensation Regulation that changed the rules to determine the interconnection fees. Local and long distance rates that were set at all times became variable according to the rules of public service tariffs. A 20% increase was applied to tariffs of mobile service operators without significant market power in their regions.

On May 7, 2012 Resolution No. 588/12 was published. It determined that:

A maximum of two minutes of interconnection should be paid for the use of the local network on reduced hours.

The reduction of interconnection fees from domestic and international long distance calls by 30% of the value of the local fixed service network interconnection fee (TU-RL) and the reduction of 25% and 20% by December 2012 of the value of the long distance network interconnection tariffs (TU-RIU).

The remuneration between networks will not occur until this traffic imbalance is greater than 75% compared to 25%

The partial Bill & Keep by December 31, 2013 and full Bill & Keep by December 31, 2014.

On July 1, 2014, ANATEL established gradual decreases in fixed service network interconnection fees, or TU-RL, based on a cost model for the years 2016, 2017, 2018 and 2019, as described under “Item 3. Key Information—D. Risk Factors—Risks Relating to the Brazilian Telecommunications Industry and Us—Our results of operations may be negatively affected by the application of the Fixed Commuted Telephone Service (Serviço de Telefonia Fixa Comutada), or STFC, rules relating to fixed telephone service and the Personal Mobile Service (Serviço Móvel Pessoal), or SMP, rules relating to mobile services.”

In December 2016, ANATEL held a public consultation to discuss a new interconnection regulation (RGI). The new document aims to solve the large amount of disputes in the agreements for voice and data traffic among companies. ANATEL has proposed that in cases of default the cut in the provision of interconnection could be done without the regulator’s authorization. In addition, the new document aim to establish a list of prohibited practices in interconnection relationships and to make the interconnection technology neutral. The new rules should be published during 2017.

Mobile service

In November 2009, ANATEL unified the licenses of all mobile operators, resulting in the consolidation of interconnection fees, reducing the number of fees for the use of mobile network from 2 to 1.

On December 2, 2013, Act no. 7,272 was published, establishing the MTR reference values for providers determined to be a Significant Market Power (PMS), which became effective on February 24, 2014. On August 28, 2014, Act no. 7,310 was published, replacing the reference values previously set out in Act no. 7,272.

On July 1, 2014, ANATEL established gradual decreases in mobile interconnection fees, or MTR, based on a cost model for the years 2016, 2017, 2018 and 2019, as described in “Item 3. Key Information—D. Risk Factors—Risks Relating to the Brazilian Telecommunications Industry and Us—Our results of operations may be negatively affected by the application of the Fixed Commuted Telephone Service (Serviço de Telefonia Fixa Comutada), or STFC, rules relating to fixed telephone service and the Personal Mobile Service (Serviço Móvel Pessoal), or SMP, rules relating to mobile services.”

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In addition, the General Competition Plan (“Plano Geral de Metas de Competição – PGMC) determined that the relationship among PMS and non-PMS providers in the mobile network, the interconnection fee should be paid only when the traffic out of a network in a given direction is greater than 80% of the total traffic exchanged until February 23, 2015; 60% of the total traffic exchanged from February 24, 2015 to February 23, 2016. And from February 24, 2016, the MTR will be owed to the mobile service provider when its network is used to originate or terminate calls (full billing). However, in February 2015, after promoting a Public Consultation, ANATEL modified the rules regarding the interconnection fee to be paid of the outbound traffic:

Up to February 23, 2015: 80% / 20%

From February 24, 2015 to February 23, 2016: 75% / 25%

From February 24, 2016 to February 23, 2017: 65% / 35%

From February 24, 2017 to February 23, 2018: 55% / 45%

From February 24, 2018 to February 23, 2019: 50% / 50%

From February 24, 2019: Full Billing.

Notwithstanding, TIM and Claro have filled a lawsuit to suspend the modification of the rules concerning the tariff reduction on the fixed-mobile introduced by Resolution 649. This lawsuit remains under way.

TU-RL and TU-RIU

On May 18, 2014, the proposed standards were approved for setting maximum values of fixed interconnection fees and for the values of mobile interconnection, based on Cost Models. In addition, values for fixed and mobile interconnection were published through the acts: No. 6210 for TU-RL and TU-RIU and No. 6211 for MTR.

For fixed and mobile termination fees, the decision of ANATEL established values for 2018 based on a bottom-up cost model. For 2016 and 2017 intermediate values have been adopted.

EILD

On May 18, 2014, ANATEL approved the proposed standard for setting maximum values of Industrial Dedicated Line (EILD), based on Cost Models. Values for EILD were published through Act No. 6212, which contains a single reference table which will be valid from 2016 until 2020. In addition, the general competition plan requires companies with significant market power to present a public offer every six months informing standard commercial conditions, which is subject to approval by ANATEL.

Mobile Virtual Network Operator (MVNO)

In 2001, ANATEL approved rules for companies to be licensed as MVNOs. In 2016, ANATEL authorized MVNO companies to be affiliates of certain other network operators.

We have signed agreements with companies authorized to operate as an MVNO in Brazil.

Internet and Related Services in Brazil

In Brazil, Internet service providers, or ISPs, are deemed to be suppliers of value-added services and not telecommunications service providers. ANATEL requires SCM operators to act as carriers of third-party internet service providers.

Exemptions for telecommunications infrastructure

In connection with “Plano Brasil Maior,” a policy instituted to promote the Brazilian technology industry and foreign trade, the Brazilian Government established the special tax regime for the taxation of national broadband plans (Regime Especial de Tributação para o Plano Nacional de Banda Larga). This regime provides tax exemptions for telecommunications companies for broadband network expansions.

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Another initiative set forth by “Plano Brasil Maior” and approved by the government on May 5, 2014, established exemptions for machine-to-machine services. It sets reductions on both rates that compose Telecommunications Inspections Fund (FISTEL). The Installation Inspection Rate (TFI), which is charged for each enabled chipset, decreased from R$26.83 in 2013 to R$5.68 in 2014. The Operations Inspection Rate (TFF), paid every year for each chipset held by a Brazilian operator, decreased from R$12.40 in 2013 to R$1.89 in 2014.

On January 14, 2015, the Ministry of Communications published a decree that reduces national technology requirement in RePNBL. Some requirements were reviewed in mobile and electrical networks, in order to accelerate projects and attract more investments.

June 30, 2015 was the deadline for submission of projects covered by RePNBL. 1,167 projects were approved, totaling investments of R$15.1 billion, reaching 3,699 cities in all Brazilian states. We had 143 projects authorized, totaling approximately R$4.3 billion.

Civil Rights Framework for Internet

On April 23, 2014, at the opening of NetMundial, former President Dilma Rousseff approved the Civil Rights Framework for Internet, which was enacted as Law 12,965/2014. The final text has highlighted Net Neutrality, guarantying equality of treatment for packages. Moreover, it preserves the business model of Brazilian broadband that offers packages with different speeds. Certain parts of the law went into effect on June 23, 2014 and others depend on further regulation to be valid.

After three public consultations (CGI.br, Ministry of Justice and ANATEL), the Brazilian government published Decree 8,711 that regulates aspects of the civil internet framework. It prohibits service and application providers from discriminating between data packets- i.e. it establishes certain net neutrality rules. It also establishes mechanisms to protect the data stored by service and application providers, as well as the circumstances in which such data can be obtained by the public administration, by judicial determination.

Personal Data Protection

In June 2016, the Brazilian House of Representatives put into consultation a draft of law regarding the Personal Data Protection. The text of this law was based on the European Union’s Directives on Data Protection, and as such, imposes restrictive rules on the express consent to process personal data, international data transfer, processing of sensitive data, among others. The public consultation ended in July 2016 and now the contributions are under review. The House of Representatives expect to have a draft bill to be voted in 2017.

Resolutions Published

A series of new regulations, published by ANATEL as well as other regulatory bodies in Brazil, became effective in 2016. The most relevant among these regulations were:

Resolution No. 662: Amends Annex III and art. 39 of the Regulation for the Certification of Telecommunications Products, approved by Resolution No. 242 of November 30, 2000.

Resolution No. 667: Approves the conditions to the measurement of the satisfaction level of costumer’s perceived quality about the telecommunication services.

Resolution No. 670: Repeals the Regulation for Inductive Card Certification, approved by Resolution 471, of July 5, 2007.

Resolution N° 671: Approves the Regulation for Radio Spectrum Use and amends the Regulation for Public Price Charge for the Right to Use of Radio Frequencies and the Regulations for the Application of Administrative Sanctions.

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Public Consultations Published

In 2016, ANATEL announced a series of public consultations. The most relevant among these public consultations were:

Public Consultation No. 2: Proposal for a Public Consultation to amend the Regulation on the Conditions of Use of Frequencies in the 800 MHz, 900 MHz, 1,800 MHz, 1,900 MHz and 2,100 MHz bands, approved by Resolution 454, of December 11, 2006, and amended by Resolution no. 562, of February 9, 2011.

Public Consultation No. 3: Proposal for amendment of the Regulation of the Conditional Access Service (SeAC) approved by Resolution 581, of March 26, 2012, and amended by Resolution 618, of July 24, 2013.

Public Consultation No. 4: Proposal for revocation of the Regulation for Certification and Homologation of Inductive Card, approved by Resolution 471, of July 5, 2007.

Public Consultation No. 14: Proposal for a Regulation on the Evaluation of Human Exposure to Electrical, Magnetic and Electromagnetic Fields Associated with the Operation of Radio Communication Stations

Public Consultation No. 16: Proposal for Regulation of Availability of Telecommunications Services

Public Consultation No. 26: Proposal for Regulation on Infrastructure Sharing to Support the Provision of Telecommunications Services and revocation of Resolution No. 274, of September 5, 2001

Public Consultation No. 30: Proposal for assessment of technical requirements for assessing the technical compliance of inductive cards.

Public Consultation No. 33: Proposal for Revision of the methodology to calculate the productivity factor applied to tariff adjustment of the STFC.

Public Consultation No. 33: Proposal for General Regulations of Accessibility in the Collective Interest Telecommunication Services.

Public Consultation No. 34: Proposal for Revocation of the technical standards and regulations for certification of telecommunications products.

Public Consultation No. 35: Proposal for revision of the General Competition Plan, issued by Resolution n° 600/2012.

Public Consultation No. 36: Proposal for revision of the General Interconnection Regulation, issued by Resolution n° 410/2015.

Public Consultation No. 37: Proposal for Regulation for homologation of reference tariffs for wholesale products and amendments of the General Competition Plan, issued by Resolution n° 600/2012.

Public Consultation No. 40: Proposal to change the term in clause 3.2 of the concession agreement, aiming to modify the deadline for publishing the new terms for the period 2016-2020.

Other Regulatory Matters

TAC

On October 27, 2016, ANATEL’s Board of Directors approved a Conduct Adjustment Term (TAC) for the Company, subject to the approval of the Court of Auditors of the Union (TCU). This TAC aims to settle certain fines currently imposed by ANATEL as long as the Company commits to invest in certain specific projects. Among these projects, the Company will need to make investments to improve the quality of services provided and provide fixed broadband access through FTTH to 100 municipalities in and outside the State of São Paulo over a 4-year period.

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Fixed Broadband Cap

In April 2016, discussions on the adoption of the fixed broadband cap model gained prominence the in Brazilian media. Entities representing consumers and government agencies reacted to the strategy of some telecommunications companies, including Vivo, which foresaw the service limitation due to the depletion consumption of the cap.

In response to civil society yearning, ANATEL published an order prohibiting telecommunication companies to implement speed limitation or suspension of the fixed broadband service due to full consumption of the cap, until measures were taken to provide the customer with information and tools to control consumption.

In November 2016, ANATEL published on its website a questionnaire about the fixed broadband cap model. The consultation will be open to any citizen to respond. At the same time, this same questionnaire will be sent to a list of 150 specialized entities, including universities, courts, consumer protection bodies, operators (including Telefonica) and former agency counselors.

This consultation does not replace public hearings that will be held by ANATEL or change in advance the decision adopted by to suspend the fixed broadband cap commercialization.

Regulation for Reference Offers of Wholesale Products Approval

ANATEL launched, in December 2016, a Public Consultation for the Regulation that set price reference for the wholesale products. The proposal aims to determine that ANATEL’s Cost Model should be the only source of information for the validation of these prices.

It is common, however, new relevant markets are created in response to significant changes in technological and competitive conditions. In such cases, there is a safeguard to allow alternative sources of information to temporarily reference and validate these prices, until the cost model is duly.

Telefonica and GVT Merger

In January 2016, ANATEL published the Act 50,169, authorizing the merger of GVT into Telefônica under certain conditions that should be fulfilled within 18 months: return of one of the SCM licenses, the sale or transfer of the licenses of SeAC and fixed telephony (national long distance, international and local) of GVT, and the presentation of the list of all assets legally encumbered by the incorporated companies in the State of São Paulo and also the consolidated list of reversible assets of the Company. In addition, the act establishes that fixed-line users in São Paulo will have a tariff reduction that will be calculated by ANATEL.

Productivity Factor

In November 2016, ANATEL approved a Public Consultation on the new methodology for calculating the Productivity Factor (X Factor) of fixed telephony service. The proposal suggested that the calculation should be made annually, rather than every five years per prior regulations, take into account the company’s historical data, rather than future projections, that the X factor should be calculated by the concessionaire, and that SCM (broadband) revenues and costs should no longer be considered.

Certification of telecom products

ANATEL has launched, in December 2016, a public consultation to revoke 36 rules to certificate telecommunications products. The Agency aims to make the updating process of technical references more simple and efficient in order to keep up with technological developments. The repeal of the rules will occur 120 days after the final approval of the measure.

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Accessibility Regulation

In May 2016, ANATEL Board of Directors has approved the Resolution No. 667. It brings the General Accessibility Regulation (RGA), with the objective of ensuring access to telecommunications services and equipment for people with hearing, visual, motor and cognitive disabilities on equal terms with other people.

The new rules foresee the expansion of functionalities and facilities in the equipment used for telecommunications and the implementation of improvements in the service of the providers, both remotely and in person. A comparative ranking will be created among the providers, according to the accessibility actions promoted by them, with the purpose of encouraging improvements in the service to disabled users.

C. Organizational Structure

On December 31, 2016, 94.31% of our voting shares were controlled by three major shareholders: SP Telecomunicações Participações Ltda. with 51.46%, Telefónica S.A. with 34.67% and Telefônica Latinoamérica Holding, S.L. with 8.18%. Telefônica Latinoamérica Holding, S.L., or Telefônica Latinoamérica, is the controlling shareholder of SP Telecomunicações S.A., or SP Telecomunicações. Telefónica Latinoamérica is a wholly owned subsidiary of Telefónica S.A.. Therefore, Telefónica S.A. was the beneficial owner of 94.47% of our voting shares, as Telefónica Chile S.A., holder of 0.14% of our voting shares, is also a wholly owned subsidiary of Telefónica S.A.. See “Item 7. Major Shareholders and Related Party Transactions—A. Major Shareholders.”

Our current general corporate and shareholder structure is as follows:

Significant Subsidiaries

Our subsidiaries are Telefonica Data S.A., or TData, and POP Internet Ltda., or POP, both wholly owned subsidiaries headquartered in Brazil.

Associated Companies

Aliança Atlântica Holding B.V. (Aliança): Headquartered in Amsterdam, Netherlands, this entity is 50% owned by Telefônica Brasil and holds proceeds generated from the sale of its Portugal Telecom shares in June 2010. For more information, see “Item 4. Information On The Company—A. History and Development of the Company—Historical Background—Corporate Restructuring Involving Telefônica Brasil and Vivo Participações.”

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Companhia AIX de Participações (AIX): Headquartered in Brazil, this entity is 50% owned by Telefônica Brasil and holds a 93% equity interest in the Refibra consortium, which was formed to finalize a network of underground fiber pipelines in Brazil in order to make them commercially viable.

Companhia ACT de Participações (ACT): Headquartered in Brazil, this entity is 50% owned by Telefônica Brasil and holds a 2% equity interest in the Refibra consortium.

With the implementation of IFRS 11 Joint Arrangements in January 1, 2013, our investments in these entities were accounted for retroactively using the equity method.

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

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

The following information is disclosed pursuant to Section 13(r). None of these activities involved U.S. affiliates of Telefónica or the Company.

Roaming Agreements

Various subsidiaries of our controlling shareholder, Telefónica, have entered into roaming agreements with Iranian telecommunication companies, certain of which are or may be owned or controlled by the government of Iran. Pursuant to such roaming agreements these subsidiaries’ customers are able to roam in the particular Iranian network (outbound roaming) and customers of such Iranian operators are able to roam in the network of Telefónica’s relevant subsidiary (inbound roaming). For outbound roaming, these subsidiaries pay the relevant Iranian operator roaming fees for use of its network by our customers, and for inbound roaming the Iranian operator pays the relevant subsidiary roaming fees for use of our network by its customers.

We have a roaming agreement with MTN Irancell. We recorded 5.39 euros in revenues under this agreement in 2016. In addition, as part of the Telefónica group, we adhere to the roaming agreements with Telefónica’s subsidiaries described below.

Telefónica’s subsidiaries were party to the following roaming agreements with Iranian telecommunication companies in 2016:

(1)

Telefónica Móviles España (“TME”), Telefónica’s Spanish directly wholly-owned subsidiary, has respective roaming agreements with (i) Mobile Telecommunication Company of Iran (“MTCI”), (ii) MTN Irancell (“Irancell”), (iii) Taliya (“Taliya”) and (iv) Telecommunications Kish Co. (“TKC”). During 2016, TME recorded the following revenues related to these roaming agreements: (i) 105,261.99 euros from MTCI, (ii) 8,690.70 euros from Irancell, (iii) none from Taliya and (iv) none from TKC.

TME also holds Roaming Hub through its 55% directly-owned subsidiary, Link2One, a.e.i.e. (“L2O”). L2O provides a roaming hub service to Irancell enabling the latter to maintain a relationship with other members of the hub. Some members of the hub are also entities of the Telefónica Group. Under this roaming hub service, for 2016, L2O has billed Irancell 172,707.82 euros.

(2)

Telefónica Germany GmbH & Co. OHG (“TG”), Telefónica’s German 63.22% indirectly-owned subsidiary, has respective roaming agreements with (i) MTCI and (ii) Irancell. During 2016, TG recorded revenues of (i) 380,001.54 euros from MTCI and (ii) 1,090.56 euros from Irancell.

(3)

Telefónica UK Ltd (“TUK”), Telefónica’s English directly wholly-owned subsidiary, has a roaming agreement with Irancell. TUK recorded 186.93 euros in roaming revenues under this agreement in 2016.

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(4)

Telefónica Argentina, S.A. and Telefónica Móviles Argentina, S.A. (together TA), Telefónica’s Argentinean directly wholly-owned subsidiaries, have a roaming agreement with Irancell. TA recorded 41.82 euros in roaming revenues under this agreement in 2016.

(5)

Pegaso Comunicaciones y Sistemas, S.A. de C.V. (“PCS”), Telefónica’s Mexican directly wholly-owned subsidiary, has a roaming agreement with Irancell. PCS recorded 1.61 euros in roaming revenues under this agreement in 2016.

The net profit recorded by Telefónica’s subsidiaries pursuant to these agreements did not exceed the related revenues recorded thereunder.

The purpose of all of these agreements is to provide the Telefónica group’s customers with coverage in areas where the group does not own networks. For that purpose, Telefónica’s subsidiaries intend to continue maintaining these agreements.

International Carrier Agreement with Iran

Telefónica de España has an international carrier agreement with Telecom Infrastructure Company of Iran, or TICI.

Pursuant to this agreement, both companies interconnect their networks to allow international exchange of telephone traffic. Telefónica de España recorded 16,023.82 euros in revenues under this agreement in 2016. The net profit recorded by Telefónica de España pursuant to this agreement did not exceed such revenues.

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

Property, Plant and Equipment

On December 31, 2016, we had fixed and mobile operations in 2,862 properties, 1,471 of which we own, of which 45 are administrative buildings. Besides that, we have entered into standard leasing agreements to rent the remaining properties, under which 73 administrative areas, 7 kiosks and 292 retail stores are leased.

Our main physical properties for providing fixed line telephone services involve the segments of switching (public switching telephone network, or PSTN), transmission (optic and wireless systems), data communication (multiplex devices, IP network), infrastructure (energy systems and air conditioning) and external network (fiber optic and metallic cables), which are distributed in many buildings throughout the state of São Paulo and in the main cities outside the state of São Paulo. Some of these buildings are also used for administrative and commercial operations.

Our main physical property for mobile services consists of transmission equipment, switching equipment, base stations, and other communication devices, such as voicemail, prepaid service, short message service, home location registers, signaling transfer point, packet data switching network and gateways. All switches, cellular sites, administrative buildings, administrative facilities, warehouses and stores are insured against damages for operation risks.

Pursuant to Brazilian legal procedures, liens have been attached to several properties pending the outcome of various legal proceedings to which we are a party. See “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings.” In addition, certain of our properties are still pending the applicable licenses and approvals from the local fire departments.

We are constantly making improvements to our facilities and network to meet customer demand and to improve the level of services we offer our clients.

On December 31, 2016, the net book value of our property, plant and equipment amounted R$31.9 billion (R$30.5 billion on December 31, 2015), which included reversible assets in the amount of R$8.8 billion.

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Environmental Matters

Brazilian Federal, State and Municipal legislation provide for the control and protection of the environment. These laws govern the appropriate use of natural resources, control of atmospheric emissions and noise, treatment of effluents, handling and final disposal of hazardous materials, amongst others.

Under these laws, certain environmental licenses must be secured prior to the construction, installation, expansion and operation of facilities that use natural resources or that may pollute the environment, including those related to installation and operation of radio/cell stations and antennas. According the stage of the project, the environmental licenses may be: (1) a preliminary license, which approves the location and design of the project and must be obtained in the early stages of the project or activity to certify its environmental feasibility; (2) an installation license, which authorizes the installation of the project or activity in accordance with the specifications set forth in approved plans, programs and projects; or (3) an operation license, which authorizes commencement of operations once the conditions for compliance with the preliminary and installation licenses are met, and may impose additional conditions applicable to the project’s operations.

Besides environmental licensing, other environmental regulations may affect our operations, such as, among other matters, regulations related to emissions into the air, soil and water, take-back systems, recycling and waste management, protection and preservation of fauna, flora and other features of the ecosystem, water use, interference with areas of cultural and historical relevance and with Conservation Units (UCs) or their surroundings, Permanent Preservation Areas (APPs) and contaminated areas.

Regarding the last subject matter, in accordance with the Environmental National Policy (Law No. 6,938/1981), the owner of a real estate property located in a contaminated area may be compelled by the relevant environmental agency to clean up the area, regardless of fault and the damage causes. Environmental authorities have been adopting an increasingly stringent position in connection with the handling of contaminated areas, including the creation of environmental standards to preserve the quality of land and underground water. Non-compliance with guidelines set by the relevant environmental and health authorities with respect to surveys and analyses of potentially contaminated areas or the exposure of persons to toxic fumes or residues may result in administrative and legal penalties for the developments and their management. We perform periodic environmental investigations to assess any possible liability with respect to contamination of soil.

We are subject to administrative review of our activities and corporations found to be in violation of these administrative environmental regulations can be fined up to R$50 million, have their operations suspended, be barred from entering into certain types of government contracts, be required to repair or provide indemnification in respect of any environmental damages they cause, be required to suspend tax benefits and incentives, among others.

In Brazil, violating environmental rules or regulations may result in civil, administrative or criminal liability. With respect to civil liability, Brazilian environmental laws adopt a standard of unlimited strict, several and joint liability in determining the obligation to remediate damages caused to the environment. In addition, Brazilian courts may pierce the corporate veil when and if it poses an obstacle to the full recovery of environmental damages.

We have a series of systems in place to protect our networks and operations from environmental damage.

Additionally, we have systems in place for the proper disposal of batteries and oil, in our construction operations and to address other environmental issues that may arise in the operation and maintenance of our properties. We also maintain the control of radio frequency energy levels transmitted by our antennas, in accordance with current legislation. The energy consumption of our network infrastructure is very high and as a result we have implemented energy efficient technologies in order to reduce consumption and meet greenhouse gas emission reduction targets. We have also invested in clean energy as the source of our energy consumption, reaching the amount of 23% currently consumed from this type of source.

Also, to comply with Brazilian Federal regulations, (National Waste Policy - Law 12,305/10), we were the first telecommunications company in Brazil to offer collection points at all of our stores for old mobile phones, accessories and batteries, where customers and other individuals can dispose of their used equipment. We properly dispose of these hazardous materials. Lastly, we have implemented an environmentally friendly data center, which includes intelligent air conditioning, water reuse, bicycles and bike racks, water taps with flow control and dual flush discharge, among other measures.

Moreover, we must emphasize that we perform periodic environmental investigations to assess any possible liability with respect to contamination of soil and groundwater. Currently, we are executing remediation measures in the following units located at the Municipality of São Paulo: (i) Brigadeiro Galvão; (ii) Fausto Ferraz; (iii) Justino de Maio; (iv) Jaguaré; (v) Junqueira Freira; (vi) General Osório; (vii) Conde de Itu; (viii) Livramento; and (ix) Michigan.

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ITEM 4A.

UNRESOLVED STAFF COMMENTS

None.

ITEM 5.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

Operating Results

The following discussion should be read in conjunction with our consolidated financial statements and accompanying notes and other information appearing elsewhere in this annual report and in conjunction with the financial information included under “Item 3. Key Information—A. Selected Financial Data.” We prepared our consolidated financial statements included in this annual report in accordance with IFRS.

Overview

Our results of operations are principally affected by the following key factors.

Brazilian Economic Environment

The Brazilian economy has experienced varying rates of growth this decade. According to market data, the Brazilian GDP decreased by approximately 3.5% in 2016 compared to another decrease of 3.8% in 2015.

Consumer prices, as measured by the IPCA, increased 6.3 % in 2016. Accordingly, growth in consumer prices stood below the upper limit of two percentage points above the inflation target established by the Central Bank of 4.5%. In 2014 and 2015, the increases in IPCA were 6.4% and 10.7%, respectively. Inflation, as measured by the Brazilian general price index (Índice Geral de Preços - Disponibilidade Interna), or the IGP-DI, calculated by the FGV, which includes wholesale, retail and home-building prices, increased 3.8% and 10.7% in 2014 and 2015, respectively. In 2016, the IGP-DI increased 7.2%.

As inflation rates measured by IPCA stood below the upper limit of the inflation target, which means a decrease of 4.4 percentage points from the number of 2015, the Central Bank decreased the basic interest rate (Sistema Especial de Liquidação e de Custódia), or SELIC rate, to 13.75% by the end of 2016, from 14.25% as of the end of 2015.

Brazil closed 2016 with a trade balance surplus of US$47.7 billion, an improvement in relation to the surplus of US$19.7 billion at the end of 2015. Exports decreased 3.1%, registering US$185.2 billion, while imports decreased 19.8%, to US$137.5 billion. Foreign Direct Investments inflows into the country have increased, reaching US$79 billion, compared to US$74.5 billion in 2015. Portfolio investments have registered negative net flows of US$20 billion in 2016, in comparison to positive flows of US$18.2 billion in 2015. As a result of this performance of external accounts, international reserves at the end of 2016 were US$372.2 billion, an increase of US$3.5 billion compared to December 31, 2015.

Despite some improvements, some areas of the economy deteriorated, as is the case of the primary fiscal deficit. The fiscal result this year was another deficit, of 2.5% of the GDP, compared to 1.9% in 2015’s result. In 2015, the deterioration of public finances led to the loss of investment grade by two agencies and by one more agency in 2016. However, risk indexes have lowered. The J.P. Morgan Emerging Markets Bond Index Plus (EMBI + Brazil), which tracks total returns for traded external debt instruments in emerging markets, reached 328 basis points by the end of 2016, up from 523 basis points at the end of 2015 and 325 basis points at the end of 2014. Other factors, such as lower political uncertainties and the approval of fiscal reforms, contributed to diminish the EMBI.

As a consequence, the real appreciated against the U.S. dollar in 2015 by 16.5%. The exchange rate on December 31, 2016 was R$3.2591 per US$1.00, from R$3.9048 per US$1.00 on December 31, 2015.

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Our business is directly affected by the external environment and the Brazilian economy. Lower volatility of the Brazilian real against the U.S. dollar contributes to the maintenance of the purchasing power of Brazilian consumers and, preventing a negative impact on the ability of our customers to pay for our telecommunications services. However, if the Brazilian economy stays for a prolonged period in this recessive scenario, then demand for some telecommunications services is likely to decline.

Impact of Inflation on Our Results of Operations

Before 2006, the fees we charged our customers were periodically adjusted by ANATEL based on the inflation rates measured by the IGP-DI.

Starting in 2006, telephone fees were indexed to the IST, which is a basket of Brazilian indexes that reflect the telecommunications sector’s operating costs. Such indexing reduced inconsistencies between revenue and costs in our industry and therefore reduced the adverse effects of inflation on our business. The IST for the twelve-month period ending December 2016 was 6.2% according to the most recent data published by ANATEL.

The table below shows the Brazilian general price inflation (according to the IGP-DI, IPCA and the IST) for the years ended December 31, 2012 through 2016:

	Inflation Rate (%) as Measured by IGP-DI(1)		Inflation Rate (%) as Measured by IPCA(2)		Inflation Rate (%) as Measured by IST(3)
December 31, 2016		7.2		6.3		6.0
December 31, 2015		10.7		10.7		11.1
December 31, 2014		3.8		6.4		5.9
December 31, 2013		5.5		5.9		5.0
December 31, 2012		8.1		5.8		4.9

(1)

Source: IGP-DI, as published by the FGV.

(2)

Source: IPCA, as published by the IBGE.

(3)

Source: IST, as published by the Agência Nacional de Telecomunicações.

Discussion of Critical Accounting Estimates and Policies

The preparation of the financial statements included in this annual report in accordance with IFRS involves certain assumptions and estimates that affect the amounts presented for revenue, expenses, assets and liabilities and disclosures of contingent liabilities in the notes to the financial statements. Therefore, the uncertainty relating to these assumptions and estimates could lead to results that require a significant adjustment to the accounting value of assets or liabilities affected in future periods. Although we review these estimates and assumptions in the ordinary course of business, the presentation of our financial condition and results of operations often requires our management to make judgments regarding the effects on our financial condition and results of operations of matters that are inherently uncertain. Actual results may differ from those estimated under different variables, assumptions or conditions. For a summary of significant accounting policies and methods used in the preparation of those financial statements, see Note 3 to our Consolidated Financial Statements. The areas involving a higher degree of judgment or complexity are described below.

Accounting for long-lived assets

Property, plant and equipment and intangible assets, other than goodwill, are recorded at acquisition cost. Property, plant and equipment and intangible assets with definite useful lives are depreciated or amortized on a straight-line basis over their estimated useful lives. Intangible assets with indefinite useful lives, including goodwill, are not amortized, but are instead, subject to an impairment test on a yearly basis and whenever there is an indication that such assets may be impaired.

Accounting for long-lived assets and intangible assets involves the use of estimates for determining the fair value at their acquisition dates, particularly for assets acquired in business combinations and for determining the useful lives over which they are to be depreciated or amortized as well as their residual value. Useful lives are assessed annually and changed when necessary to reflect current evaluation on the remaining lives in light of technological change, network investment plans, prospective utilization and physical condition of the assets concerned.

The carrying values and useful lives applied to the principal categories of property, plant and equipment, and intangibles, are disclosed in Notes 13 and 14 to our consolidated financial statements.

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Impairment of nonfinancial assets, including goodwill

An impairment loss exists when the accounting value of an asset or cash-generating unit exceeds its recoverable amount, which is the higher between the fair value less selling costs and the value in use. The estimated fair value less selling costs is based on the information available from transactions involving the sale of similar assets or the market price less additional costs regarding the disposition of such asset. The value in use is based on the model of discounted cash flow. Cash flows are derived from the budget and do not include activities of reorganization for which the company has not yet been committed or significant future investments that will improve the group of assets of the cash-generating unit subject to the test. The recoverable amount is sensitive to the discount rate used in the method of discounted cash flows as well as to the projected future cash flow and the expected future growth rate used for the purposes of determining terminal value. Furthermore, additional factors, such as technological obsolescence, the suspension of certain services and other circumstantial changes are taken into account.

The carrying value of goodwill and the key assumptions used in performing the annual impairment assessment are disclosed in Notes 3(i) and 14 to our consolidated financial statements.

Provisions for tax, labor, civil and regulatory proceedings

We record provisions for tax, labor, civil and regulatory claims where an outflow of resources is considered probable and a reasonable estimate can be made of the likely outcome. The assessment of the likelihood of loss includes assessing the available evidence, the hierarchy of laws, the available jurisprudence, the most recent court decisions and its materiality in the legal system as well as the evaluation of the case by external counsels. Provisions are reviewed and adjusted to take into account changes in circumstances such as the applicable prescriptive period, results from tax inspections or additional exposure identified based on newly issued court decisions. A significant change in these circumstances or assumptions could result in a corresponding increase or decrease the amount of our provisions.

Additional information on provisions for tax, labor, civil and regulatory proceedings is disclosed in Notes 3(p) and 19 to our consolidated financial statements.

Pension and other post-retirement benefit plan

The cost of defined benefit retirement plans and other post-employment medical care benefits and the present value of pension and other postretirement obligations are determined using actuarial valuation methods. The actuarial valuation methods involve the use of assumptions about discount rates, expected future salary increases, mortality rates, health care costs trend rates and future increases in retirement benefits and pensions. The obligation of a defined benefit is highly sensitive to changes in these assumptions. All assumptions are reviewed at each year-end. The mortality rate is based on mortality tables available in the country. Future increases in wages and retirement benefits and pensions are based on expected future inflation for Brazil. The assumptions reflect historical experience and our judgment regarding future expectations.

The value of our net pension obligation on December 31, 2016, the key financial assumption used to measure the obligation as well as the sensitivity of our pension liability on December 31, 2016 and of the income statement charge in 2014, 2015 and 2016 to changes in these assumptions, is disclosed in Note 32 to our consolidated financial statements.

Fair value of financial instruments

When the fair value of financial assets and liabilities presented on the balance sheet cannot be obtained in active markets, it is determined using valuation techniques, including the method of discounted cash flow. The data obtained for the use of these methods are based as much on the information prevailing in the market as possible. However, when it is not feasible to obtain such information in the market, a certain assumption level is required to establish the fair value. The assumption includes consideration of the data that was used, such as the liquidity risk, credit risk and volatility. Changes in the assumptions regarding these factors could affect the presented fair value of financial instruments.

Additional information on fair value of financial instruments is disclosed in Notes 3(k) and (l) and 33 to our consolidated financial statements.

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Taxes

There may be uncertainties regarding the interpretation of complex tax regulations and the amount and timing of future taxable income. We record provisions based on reasonable estimates for potential disagreement with tax authorities from the jurisdictions in which we operate. The value of these provisions is based on several factors such as experience from previous tax audits and different interpretations of tax regulations by the taxable entity and the competent tax authority in charge. Such differences of interpretation may arise in a wide variety of subjects, depending on the prevailing conditions in the domicile of the company. As a result, we may be required to pay more than our provisions or to recover less than the related judicial assets recognized.

We evaluate the recoverability of deferred tax assets based on estimates of future results. This recoverability ultimately depends on our ability to generate taxable profits over the period in which the temporary difference is deductible. The analysis considers the reversal period of deferred tax liabilities, as well as estimates of profits from operations, based on updated internal projections reflecting the latest trends.

Determining the proper valuation of the tax items depends on several factors, including an estimate of the period and the realization of the deferred tax asset and the expected date of payments of these taxes. The actual flow of receipt and payment of income tax could differ from estimates made by us, as a result of changes in tax laws or of unexpected future transactions that may impact tax balances.

Additional information on taxes is disclosed in Notes 3(q), 8 and 17 to our consolidated financial statements.

Revenue recognition

Customer Loyalty Program

We have a customer loyalty program that allows customers to accumulate points when generating traffic from the use of our mobile services. The accrued points may be exchanged for handsets or services, provided the customer has a minimum stipulated balance of points. The consideration received is allocated to the cost of handsets or services and the related points earned based on the relative fair value. The fair value of the points is calculated by dividing the discount value granted as a result of the customer loyalty program by the amount of points needed to carry out the redemption. The fair value accrued on the balances of generated points is deferred and recognized as income upon redemption of points.

For determining the quantity of points to be recognized, we apply statistical techniques, which take into consideration assumptions such as estimated redemption rates, expiration dates, cancellation of points and other factors. These estimates are subject to variations and uncertainties due to changes in the redemption behavior of the customers.

A change in the assumptions regarding these factors could affect the estimated fair value of the points under the customer loyalty program and it could affect the apportionment of revenue among the elements and, as a result, revenues in future years.

Multiple-element arrangements

Bundled offers that combine different elements are assessed to determine whether it is necessary to separate the different identifiable components and apply the corresponding revenue recognition policy to each element. Total package revenue is allocated among the identified elements based on their respective fair values.

Determining fair values for each identified element requires estimates that are complex due to the nature of the business.

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Changes in estimates of fair values could affect the apportionment of revenue among the elements and, as a result, revenues in future years.

Additional information on revenue recognition is disclosed in Note 3(u) to our consolidated financial statements.

Sources of Revenue

The breakdown of our gross operating revenue is presented net of discounts granted. In addition, we categorize our revenue according to the following groups:

Fixed and mobile telephone services

Includes revenues from fixed and mobile telephone, principally:

Local: includes the sum of revenues from monthly subscription fees, installation fees, local services, public telephones and fixed-to-mobile revenues;

Domestic long-distance: includes the sum of fixed-to-mobile revenues and domestic long distance calls and domestic long-distance calls placed on public telephones;

International long-distance: includes the sum of revenues from international long distance calls and international long-distance placed on public telephones; and

Usage charges: include measured service charges for calls, monthly fee and other similar charges.

Data Transmission and value added services

Wholesale: includes the sum of infrastructure rental revenues; and

Value Added Services: Vivo Call Sound, Vivo Online Security, List Assistance, E-Health messages, and P2A Interactivity Services (Kantoo, Vivo Futebol, Vivo Nutrição, Vivo Play and Mailbox); and

Data Transmission: Fixed and mobile data including FTTH, xDSL, cable on the fixed side and 3G and 4G on the mobile side.

Interconnection fees

Interconnection fees are amounts we charge other cellular and fixed-line service providers for the use of our network.

Pay TV

Includes TV services through satellite, cable or IPTV technology.

Sale of goods and equipment

The sale of wireless devices and accessories.

Other Services

Other services include integrated solution services offered to residential and corporate clients, such as Internet access, private network connectivity and leasing of computer equipment; and

Other telecommunications services such as extended service, detects, voice mail and cellular blocker, among others.

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Results of Operations

The following table sets forth certain components of our net income for each year ended December 31, 2016, December 31, 2015 and December 31, 2014 as well as the percentage change of each component. In 2015, we acquired 100% of shares of GVT Participações S.A. See Note 4 to our consolidated financial statements and “Item 4.A Historical Background—Acquisition of GVT.” for further information.

For the purposes of this section of the Form, GVT’s pro forma numbers used to supplement variance explanation were extracted from pro forma income statements disclosed in Note 35 of our consolidated financial statements, which assumes the acquisition of GVT had taken place on January 1, 2015.

	Year ended December 31,									Percent change			Percent change
	2016			2015			2014			2016-2015			2015-2014
	*(in millions of reais)*
Net operating revenue		42,508.4			40,286.8			35,000.0			5.5	%		15.1	%
Cost of services and goods		(20,823.0	)		(20,345.1	)		(17,222.7	)		2.3	%		18.1	%
Gross profit		21,685.4			19,941.7			17,777.3			8.7	%		12.2	%
Operating expenses:
Selling		(12,455.4	)		(12,005.5	)		(10,466.7	)		3.7	%		14.7	%
General and administrative		(2,793.3	)		(2,142.4	)		(1,803.9	)		30.4	%		18.8	%
Other operating expenses, net		(68.7	)		(554.2	)		(397.7	)		(87.6	%)		39.4	%
Total operating expenses, net		(15,317.4	)		(14,702.1	)		(12,668.3	)		4.2	%		16.1	%
Equity in earnings (losses) of associates		1.2			2.0			6.9			(40.0	%)		(71.0	%)
Operating income		6,369.2			5,241.6			5,115.9			21.5	%		2.5	%
Financial expenses, net		(1,234.5	)		(848.2	)		(362.0	)		45.5	%		134.3	%
Income before taxes		5,134.7			4,393.4			4,753.9			16.9	%		(7.6	%)
Income and social contribution taxes		(1,049.5	)		(973.2	)		182.7			7.8	%		(632.7	%)
Net income		4,085.2			3,420.2			4,936.6			19.4	%		(30.7	%)
Net income attributable to:
Controlling shareholding		4,085.2			3,420.2			4,936.6			19.4	%		(30.7	%)
Net income		4,085.2			3,420.2			4,936.6			19.4	%		(30.7	%)

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Results of Operations for the Year Ended December 31, 2016 Compared to the Year Ended December 31, 2015

Net Operating Revenue

Net operating revenue increased by 5.5% to R$42,508.4 million in 2016 from R$40,286.8 million in 2015, primarily because results for the first four months of 2015 do not include GVT, as the latter was consolidated into our financial statements as from May 1, 2015. If we considered as part of our results the effects of GVT’s pro forma consolidation since January 1, 2015, which totaled R$1,846.9 million, net operating revenue would have increased by 0.9% or R$374.7 million in 2016.

Gross Operating Revenue

Our gross operating revenue increased by 6.6% to R$65,006.7 million in 2016 from R$60,997.5 million in 2015, primarily because results for the first four months of 2015 do not include GVT, as the latter was consolidated into our financial statements as from May 1, 2015. If we considered as part of our results the effects of GVT’s pro forma consolidation since January 1, 2015, which totaled R$3,321.2 million, gross operating revenue would have increased by 1.1% or R$688.0 million in 2016, as a result of an increase in revenues from telecommunications services. The table and descriptions below set forth explanations for these variations:

	Year ended December 31,						Percent change
	2016			2015			2016-2015
	(in millions of reais)
Telecommunications services (a)		61,513.1			57,063.6			7.8	%
Sale of goods and equipment		3,493.6			3,933.9			(11.2	%)
Gross operating revenue		65,006.7			60,997.5			6.6	%
Value-added and other indirect taxes		(22,498.3	)		(20,710.7	)		8.6	%
Net operating revenues		42,508.4			40,286.8			5.5	%

(a)

It includes revenues from: telephone services; data transmission and value added services; interconnection fees charged; pay TV and other services.

Telecommunications services: Revenue from telecommunications services increased by R$4,449.5 million in 2016, or 7.8%, compared to 2015, primarily because results for the first four months of 2015 do not include GVT, as the latter was consolidated into our financial statements as from May 1, 2015. If we considered as part of our results the effects of GVT’s pro forma consolidation since January 1, 2015, which totaled R$3,321.2 million, telecommunications services revenue would have increased by 1.9% or R$1,128.3 million in 2016, as a result of (1) a double-digit increase in Data Transmission and Value Added Services Revenues from the successful upselling of mobile data bundles, strong migration to 4G and higher smartphone penetration within our customer base, and robust fixed broadband evolution, boosted by an increased migration from lower to ultra-broadband speeds; and (2) a double-digit increase of Pay TV Revenues from the improved proportion of IPTV accesses within our Pay TV customer base and selective strategy for the service, focused on increasing profitability. These factors were partially offset by decreasing Outgoing Voice and Interconnection Revenues, resulting from decreases in mobile and fixed termination rates mandated by ANATEL, which became effective in February 2016, as described in “Item 4. Information On The Company—B. Business Overview—Regulation of the Brazilian Telecommunications Industry—Mobile Services—Interconnection Fees—Mobile service.”

Sale of goods and equipment: Revenues from the sale of goods and equipment in 2016 decreased by R$440.3 million or 11.2% compared to 2015, primarily as a result of the decline in the overall number of handsets sold due to a new, value-driven, selective sales strategy adopted in 2016, which focused on selling handsets to higher-value customers.

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Cost of Services and Goods

Cost of services and goods increased by R$477.9 million, or 2.3%, to R$20,823.0 million in 2016 from R$20,345.1 million in 2015, primarily because results for the first four months of 2015 do not include GVT, as the latter was consolidated into our financial statements as from May 1, 2015. If we considered as part of our results the effects of GVT’s pro forma consolidation since January 1, 2015, which totaled R$938.8 million, cost of services and goods would have decreased by 2.2% or R$460.9 million in 2016. The table and descriptions below set forth explanations for these variations:

	Year ended December 31,						Percent change
	2016			2015			2016-2015
	(in millions of reais)
Cost of goods sold		(2,118.9	)		(2,597.1	)		(18.4	%)
Depreciation and amortization		(5,821.6	)		(5,269.6	)		10.5	%
Outside services and other		(5,794.9	)		(5,400.9	)		7.3	%
Interconnection fees		(1,924.1	)		(2,595.9	)		(25.9	%)
Rent, insurance, condominium fees, and leased lines		(2,326.1	)		(2,051.1	)		13.4	%
Personnel		(976.2	)		(813.6	)		20.0	%
Taxes, fees and contributions		(1,861.2	)		(1,616.9	)		15.1	%
Cost of services and goods		(20,823.0	)		(20,345.1	)		2.3	%

Cost of goods sold: Our cost of goods sold decreased by R$478.2 million, or 18.4%, to R$2,118.9 million in 2016 from R$2,597.1 million in 2015, primarily as a result of the decline in the overall number of handsets sold due to a new, value-driven, selective sales strategy adopted in 2016, which focused on selling handsets to higher-value customers.

Depreciation and amortization: Costs related to depreciation and amortization increased by R$552.0 million, or 10.5%, to R$5,821.6 million in 2016 from R$5,269.6 million in 2015, primarily because results for the first four months of 2015 do not include GVT, as the latter was consolidated into our financial statements as from May 1, 2015. If we considered as part of our results the effects of GVT’s pro forma consolidation since January 1, 2015, which totaled R$383.6 million, costs related to depreciation and amortization would have increased by 3.0% or R$168.4 million in 2016, as a result of the increase in fixed assets, reflecting the higher level of investments made by the Company, partially offset by the savings from extended useful lives of certain of our PP&E resulting from our annual review of the useful life estimate of fixed assets, which amounted to R$157 million.

Outside services and other: Costs related to outside services and other increased by R$394.0 million, or 7.3%, to R$5,794.9 million in 2016 from R$5,400.9 million in 2015, primarily because results for the first four months of 2015 do not include GVT, as the latter was consolidated into our financial statements as from May 1, 2015. If we considered as part of our results the effects of GVT’s pro forma consolidation since January 1, 2015, which totaled R$252.6 million, costs related to outside services and other would have increased by 2.4% or R$137.8 million in 2016, as a result of higher expenses with network maintenance and expansion, partially offset by lower expenses with electricity and insourcing of field services employees.

Interconnection fees: Costs related to interconnection fees decreased by R$671.8 million, or 25.9%, to R$1,924.1 million in 2016, from R$2,595.9 million in 2015, primarily as a result of the decreases in mobile and fixed termination rates mandated by ANATEL, which became effective in February 2016. If we considered as part of our results the effects of GVT’s pro forma consolidation since January 1, 2015, which totaled R$51.1 million, interconnection fees would have decreased by 27.3% or R$722.9 million in 2016, principally as a result of the decrease in regulatory rates.

Rent, insurance, condominium fees and leased lines: Costs related to rent, insurance, condominium fees and leased lines increased by R$275.0 million, or 13.4%, to R$2,326.1 million in 2016, from R$2,051.1 million in 2015, primarily because results for the first four months of 2015 do not include GVT, as the latter was consolidated into our financial statements as from May 1, 2015. If we considered as part of our results the effects of GVT’s pro forma consolidation since January 1, 2015, which totaled R$104.4 million, costs related to rent, insurance, condominium fees and leased lines would have increased by 7.9% or R$170.6 million in 2016, as a result of higher rental and leasing expenses in connection with sites where we install our antennas, due to the expansion in 4G coverage and focus on service quality.

Personnel: Personnel expenses increased by R$162.6 million, or 20.0%, to R$976.2 million in 2016 from R$813.6 million in 2015, primarily because results for the first four months of 2015 do not include GVT, as the latter was consolidated into our financial statements as from May 1, 2015. If we considered as part of our results the effects of GVT’s pro forma consolidation since January 1, 2015, which totaled R$110.4 million, personnel expenses would have increased by 5.6% or R$52.2 million in 2016, as a result of (1) the insourcing of field services and call center employees, aimed at improving the experience of higher-value customers and increasing productivity; and (2) the increase in salaries from collective bargaining agreements of 7.0% granted on September 2015 and 2016. These factors were partially offset by cost savings from corporate restructuring activities and cost-control measures implemented throughout the year.

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Taxes, fees and contributions: Taxes, fees and contributions increased by R$244.3 million, or 15.1%, to R$1,861.2 million in 2016, from R$1,616.9 million in 2015, primarily due to higher regulatory taxes. If we considered as part of our results the effects of GVT’s pro forma consolidation since January 1, 2015, which totaled R$33.1 million, taxes, fees and contributions would have increased by 12.8% or R$211.2 million in 2016.

Operating Expenses

Operating expenses increased by R$615.3 million, or 4.2%, to R$15,317.4 million in 2016, from R$14,702.1 million in 2015, primarily because results for the first four months of 2015 do not include GVT, as the latter was consolidated into our financial statements as from May 1, 2015. If we considered as part of our results the effects of GVT’s pro forma consolidation since January 1, 2015, which totaled R$564.7 million, operating expenses would have increased by 0.3% or R$50.6 million in 2016. The table and descriptions below set forth explanations for these variations:

	Year ended December 31,						Percent change
	2016			2015			2016-2015
	(in millions of reais)
Selling expenses		(12,455.4	)		(12,005.5	)		3.7	%
General and administrative expenses		(2,793.3	)		(2,142.4	)		30.4	%
Other net operating income (expense)		(68.7	)		(554.2	)		(87.6	%)
Total		(15,317.4	)		(14,702.1	)		4.2	%

Selling expenses: Our selling expenses increased by R$449.9 million, or 3.7%, to R$12,455.4 million in 2016 from R$12,005.5 million in 2015, primarily because results for the first four months of 2015 do not include GVT, as the latter was consolidated into our financial statements as from May 1, 2015. If we considered as part of our results the effects of GVT’s pro forma consolidation since January 1, 2015, which totaled R$407.7 million, selling expenses would have increased by 0.3% or R$42.2 million in 2016, as a result of (1) lower costs with commissions and sales promoters in retail stores; (2) lower expenses with publicity and marketing, due to the synergies generated with the unification of brands (Vivo and GVT) as of April 2016, eliminating communication redundancies; and (3) lower costs with call center services due to lower volume of calls driven by digitalization, simplification of offers and improved customer experience. These factors were partially offset by an annual increase in provisions for bad debt, driven by higher default levels in the B2B segment.

General and administrative expenses: Our general and administrative expenses increased by R$650.9 million, or 30.4%, to R$2,793.3 million in 2016, from R$2,142.4 million in 2015, primarily because results for the first four months of 2015 do not include GVT, as the latter was consolidated into our financial statements as from May 1, 2015. If we considered as part of our results the effects of GVT’s pro forma consolidation since January 1, 2015, which totaled R$154.1 million, general and administrative expenses would have increased by 21.6% or R$496.8 million in 2016, as a result of (1) higher expenses with IT development and integration, as part of the GVT consolidation process; and (2) higher expenses with commercial efficiency and real estate optimization.

Other net operating income (expense): Other net operating expenses decreased by R$485.5 million, or 87.6%, to R$68.7 million in 2016, from R$554.2 million in 2015. This decrease is a result of the gain on sale of 1,655 towers on March 31, 2016, totaling R$513.5 million.

Financial Expenses, Net

For the year ended December 31, 2016, net financial expenses reached R$1,234.5 million, increasing by R$386.3 million or 45.5% when compared to the period ended December 31, 2015, mainly due to the monetary indexation of contingencies, partially compensated by financial losses in 2015 related to the foreign exchange variation on GVT’s loans and financing denominated in foreign currency, whose result was negatively impacted by the appreciation of the Euro against the Real.

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Income and Social Contribution Taxes

We recorded an expense from income and social contribution taxes in the amount of R$1,049.5 million in 2016, compared to an expense of R$973.2 million in 2015. This variation was a result of higher income before income tax and social contribution.

The effective rate of income and social contribution taxes decreased to 20.4% in 2016 compared with 22.2% in 2015, primarily as a result of an increased distribution of interest on shareholders’ equity during 2016, which is deductible for income tax purposes.

Results of Operations for the Year Ended December 31, 2015 Compared to the Year Ended December 31, 2014

Net Operating Revenue

Net operating revenue increased by 15.1% to R$40,286.8 million in 2015 from R$35,000.0 million in 2014 mainly due to the consolidation effect of GVT from May 1, 2015, which totaled R$3,950.3 million. Excluding such effect, net operating revenue increased by 3.8% or R$1,336.5 million in 2015 to R$36,336.5 million.

Gross Operating Revenue

Our gross operating revenue increased by 16.0% to R$60,997.5 million in 2015 from R$52,602.9 million in 2014, primarily as a result of the consolidation effect of GVT from May 1, 2015, which totaled R$6,955.7 million. Excluding that effect, gross operating revenue increased 2.7% or R$1,438.9 million in 2015 to R$54,041.8 million, driven by increases in revenues from telecommunications services and sale of goods and equipment. The table and descriptions below set forth explanations for these variations:

	Year ended December 31,						Percent change
	2015			2014			2015-2014
	(in millions of reais)
Telecommunications services (a)		57,063.6			49,178.0			16.0	%
Sale of goods and equipment		3,933.9			3,424.9			14.9	%
Gross operating revenue		60,997.5			52,602.9			16.0	%
Value-added and other indirect taxes		(20,710.7	)		(17,602.9	)		17.7	%
Net operating revenues		40,286.8			35,000.0			15.1	%

(a)

Includes revenues from: telephone services; data transmission and value added services; interconnection fees charged; pay TV and other services.

Telecommunications services: Revenue from telecommunications services increased by R$7,885.6 million in 2015, or 16.0%, compared to 2014, primarily as a result of the consolidation effect of GVT from May 1, 2015, which totaled R$6,955.7 million. Excluding that effect, telecommunications services revenue increased by 1.9% or R$929.9 million in 2015, driven by (1) a double-digit increase in Data Transmission and Value Added Services Revenues from the successful sales of mobile data plans and packages and higher smartphone penetration within our customer base and (2) a double-digit increase of Pay TV Revenues from increases in our DTH and IPTV customer base and increased adoption of high definition television services, partially compensated by the decreasing Outgoing Voice and Interconnection Revenues, result of the 33% decrease in mobile termination rates mandated by ANATEL, which became effective in February 2015, as described in “Item 4. Information On The Company—B. Business Overview—Regulation of the Brazilian Telecommunications Industry—Mobile Services—Interconnection Fees—Mobile service”, were the main factors that contributed for the variation.

Sale of goods and equipment: Revenues from the sale of goods and equipment in 2015 increased by R$509.0 million or 14.9% compared to 2014, impacted by (1) the greater share of higher-value devices in the handset portfolio, and (2) the increase in prices due to the depreciation of the Real (R$) against the U.S. Dollar (US$).

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Cost of Services and Goods

Cost of services and goods increased by R$3,122.4 million, or 18.1%, to R$20,345.1 million in 2015 from R$17,222.7 million in 2014, mainly due to the consolidation effect of GVT from May 1, 2015, which totaled R$2,216.4 million. Excluding such effect, cost of services and goods increased by 5.3% or R$906.0 million in 2015 to R$18,128.7 million. The table and descriptions below set forth explanations for these variations:

	Year ended December 31,						Percent change
	2015			2014			2015-2014
	(in millions of reais)
Cost of goods sold		(2,597.1	)		(2,107.1	)		23.3	%
Depreciation and amortization		(5,269.6	)		(4,067.3	)		29.6	%
Outside services and other		(5,400.9	)		(4,074.1	)		32.6	%
Interconnection fees		(2,595.9	)		(3,176.3	)		(18.3	%)
Rent, insurance, condominium fees, and leased lines		(2,051.1	)		(1,556.4	)		31.8	%
Personnel		(813.6	)		(549.4	)		48.1	%
Taxes, fees and contributions		(1,616.9	)		(1,692.1	)		(4.4	%)
Cost of services and goods		(20,345.1	)		(17,222.7	)		18.1	%

Cost of goods sold: Our cost of goods sold increased by R$490.0 million, or 23.3%, to R$2,597.1 million in 2015 from R$2,107.1 million in 2014, impacted by (1) the greater share of higher-value devices in the handset portfolio, and (2) the increase in prices due to the depreciation of the Real (R$) against the U.S. Dollar (US$).

Depreciation and amortization: Costs related to depreciation and amortization increased by R$1,202.3 million, or 29.6%, to R$5,269.6 million in 2015 from R$4,067.3 million in 2014, primarily as a result of the consolidation effect of Telefônica and GVT as of May 1, 2015, which totaled R$841.1 million. Excluding that effect, depreciation and amortization increased by 8.9% or R$361.2 million, particularly influenced by (1) the acquisition of the 700MHz license in December 2014, and (2) to additions to fixed assets in the year.

Outside services and other: Costs related to outside services and other increased by R$1,326.8 million, or 32.6%, to R$5,400.9 million in 2015 from R$4,074.1 million in 2014, primarily as a result of the consolidation effect of Telefônica and GVT as of May 1, 2015, which totaled R$701.2 million. Excluding that effect, outside services and other increased by 15.4% or R$625.6 million, driven by (1) higher expenses with network maintenance and purchase of TV content, and (2) higher expenses with electricity, due to the increase in unit prices.

Interconnection fees: Costs related to interconnection fees decreased by R$580.4 million, or 18.3%, to R$2,595.9 million in 2015, from R$3,176.3 million in 2014, primarily as a result of the 33% decrease in mobile termination rates mandated by ANATEL, which became effective in February 2015. Excluding the consolidation effect of GVT from May 1, 2015, which totaled R$113.3 million, interconnection fees decreased by 21.8% or R$693.7 million.

Rent, insurance, condominium fees and leased lines: Costs related to rent, insurance, condominium fees and leased lines increased by R$494.7 million, or 31.8%, to R$2,051.1 million in 2015, from R$1,556.4 million in 2014, primarily as a result of the consolidation effect of GVT from May 1, 2015, which totaled R$220.3 million. Excluding that effect, rent, insurance, condominium fees and leased lines increased by 17.6% or R$274.4 million, impacted by higher rental and leasing expenses in connection with sites where we install our antennas, due to the expansion in 4G coverage and focus on service quality.

Personnel: Personnel expenses increased by R$264.2 million, or 48.1%, to R$813.6 million in 2015 from R$549.4 million in 2014, primarily as a result of the consolidation effect of GVT from May 1, 2015, which totaled R$280.8 million. Excluding that effect, personnel decreased by 3.0% or R$16.6 million, benefited by the organizational restructuring that took place throughout the year, partially offset by (1) the increase in salaries from collective bargaining agreement of 7.0% granted in January 2015 and (2) higher expenses with health insurance.

Taxes, fees and contributions: Taxes, fees and contributions decreased by R$75.2 million, or 4.4%, to R$1,616.9 million in 2015, from R$1,692.1 million in 2014, due to lower regulatory taxes. Excluding the consolidation effect of GVT from May 1, 2015, which totaled R$59.7 million, taxes, fees and contributions decreased by 8.0% or R$134.9 million.

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Operating Expenses

Operating expenses increased by R$2,033.8 million, or 16.1%, to R$14,702.1 million in 2015, from R$12,668.3 million in 2014, primarily as result of the consolidation effect of GVT from May 1, 2015, which totaled R$1,127.9 million. Excluding such effect, operating expenses increased by 7.2% or R$905.9 million in 2015 to R$13,574.2 million. The table and descriptions below set forth explanations for these variations:

	Year ended December 31,						Percent change
	2015			2014			2015-2014
	(in millions of reais)
Selling expenses		(12,005.5	)		(10,466.7	)		14.7	%
General and administrative expenses		(2,142.4	)		(1,803.9	)		18.8	%
Other net operating income (expense)		(554.2	)		(397.7	)		39.5	%
Total		(14,702.1	)		(12,668.3	)		16.1	%

Selling expenses: Our selling expenses increased by R$1,538.8 million, or 14.7%, to R$12,005.5 million in 2015 from R$10,466.7 million in 2014, primarily as a result of the consolidation effect of GVT from May 1, 2015, which totaled R$836.4 million. Excluding that effect, selling expenses increased by 6.7% or R$702.4 million, was influenced mostly by (1) higher commissioning expenses linked to the growth of the mobile subscriber base and the higher share of data, in addition to (2) higher publicity and marketing expenses.

General and administrative expenses: Our general and administrative expenses increased by R$338.5 million, or 18.8%, to R$2,142.4 million in 2015, from R$1,803.9 million in 2014, primarily as a result of the consolidation effect of GVT from May 1, 2015, which totaled R$231.2 million. Excluding that effect, general and administrative expenses increased by 5.9% or R$107.3 million, driven by higher expenses with third-party service contracts.

Other net operating income (expense): Other net operating expenses increased by R$156.5 million, or 39.5%, to R$554.2 million in 2015, from R$397.7 million in 2014. This increase is a result of the consolidation effect of GVT from May 1, 2015, which totaled R$60.3 million. Excluding that effect, other net operating income (expense) increased by 24.2% or R$96.2 million, mostly affected by the higher civil contingencies in the period.

Financial Expenses, Net

For the year ended December 31, 2015, net financial expenses reached R$848.2 million, increasing by R$486.2 million or 134.3% when compared to the period ended December 31, 2014, mainly due to higher average indebtedness in 2015, as a result of the consolidation effect of GVT from May 1, 2015. Such consolidation effect resulted in an additional R$ 461.8 million of net financial expenses, from May 1, 2015 to December 31, 2015. Excluding that effect, net financial expenses increased by 6.7% or R$24.4 million in 2015.

Income and Social Contribution Taxes

We recorded an expense from income and social contribution taxes in the amount of R$973.2 million in 2015, compared to an income of R$182.7 million in 2014. This variation was a result of Law No. 12,973, which became effective in 2014. Law No. 12,973 caused us to revise our tax basis of certain intangible assets resulting from business combinations, which resulted in a positive impact of R$1,196 million in 2014. For additional information, see “Item 10. Additional Information—E. Taxation—Brazilian Tax Considerations” and Note 28 to our consolidated financial statements.

The effective rate of income and social contribution taxes increased to 22.2% in 2015 compared with -3.8% in 2014, as 2014 result was impacted by the revisions described, apart from a higher distribution of interest on shareholders’ equity during 2014, which is deductible for purposes of calculating income and social contribution taxes based on income.

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Liquidity and Capital Resources

General

We fund our operations and capital expenditures primarily from operating cash flows, loans obtained from financial institutions or development banks, and debentures. As of December 31, 2016, we had R$5.1 billion in cash and cash equivalents. We do not have any material unused sources of liquidity.

Our principal cash requirements include:

the servicing of our indebtedness;

capital expenditures; and

the payment of dividends.

Our management believes that our sources of liquidity and capital resources, including working capital, are adequate for our present requirements.

Sources of Funds

Our cash flow from operations was R$11.4 billion in 2016, an increase of 15.6% compared to R$9.9 billion in 2015. The increase in cash flow from operations is a reflection of a significant increase in revenues from telecommunications services and revenues from Pay TV, partially offset by (1) an increase in costs of services and goods, due to higher personnel and taxes costs and (2) an increase in operating expenses, impacted by higher selling and general and administrative expenses. A portion of the increases mentioned above were related to the consolidation of GVT results for the full year in 2016 as compared to eight months in 2015.

Our cash flow from operations was R$9.9 billion in 2015, an increase of 5.1% compared to R$9.4 billion in 2014. The increase in cash flow from operations is a reflection of the consolidation effect of GVT from May 1, 2015. In addition to the effects of the GVT acquisition, (1) an increase in revenues from telecommunications services, due to higher Data Transmission and Value Added Services and Pay TV revenues, and (2) an increase in the sale of goods and equipment, partially offset by (1) an increase of costs of services and goods, due to higher personnel, network maintenance and rental and leasing expenses and (2) an increase in operating expenses, impacted by higher selling expenses, were drivers for the variation.

Uses of Funds

Our cash flow used in investing activities was R$6.9 billion in 2016 compared to R$14.6 billion in 2015. The decrease in cash flow used in investing activities of R$7.7 billion in 2016 compared to 2015 was primarily due to the acquisition of GVT in 2015 (R$8.5 billion, net of cash acquired from GVT).

Our cash flow used in investing activities was R$14.6 billion in 2015 compared to R$7.6 billion in 2014. The increase in cash flow used in investing activities of R$7.0 billion in 2015 compared to 2014 was primarily due to the GVT acquisition (R$8.5 billion, net of cash acquired from GVT).

Our cash flow used in financing activities recorded an outflow of R$4.8 billion in 2016 compared to an inflow of R$5.4 billion in 2015. The increase in cash flow used in financing activities of R$10.2 billion in 2016 compared to 2015 was due primarily to the R$16.1 billion capital increase performed by the Company in 2015, partially offset by a decrease in payment of loans and debentures in 2016 compared to 2015 (R$6.5 billion), along with decrease in dividends and interest on equity paid in 2016 compared to 2015 (R$712.3 million).

Our cash flow used in financing activities recorded an inflow of R$5.4 billion in 2015 compared to an outflow of R$3.6 billion in 2014. The decrease in cash flow used in financing activities of R$9.0 billion in 2015 compared to 2014 was due primarily to the R$16.1 billion capital increase performed by the Company in 2015, which was used principally to pay for the acquisition of GVT, partially offset by an increase in payment of dividends and interest on equity in 2015 compared to 2014 (R$1.2 billion), along with increased net payments of loans, financing and debentures (R$7.3 billion).

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Indebtedness

As of December 31, 2016, our total debt was as follows:

Debt	Currency	Annual interest rate payable	Maturity	Total amount outstanding (in millions of reais)
BNDES loans and financing	UR TJLP	TJLP + 0.0% to 4.08%	2023	2,130.4
BNDES loans and financing	R$	2.5% to 8.7%	2023	335.4
BNDES loans and financing	R$	SELIC D-2 + 2.32%	2023	342.0
BNDES	UMBND	ECM(1) + 2.38%	2019	362.1
BNB – Banco do Nordeste loans and financing	R$	7.0% to 10.0%	2022	42.3
Debentures 4th issue - Series 3	R$	IPCA + 4%	2019	37.3
Debentures 1st issue - Minas Comunica	R$	IPCA + 0.5%	2021	97.3
Debentures 3rd issue - Single Series	R$	100% of CDI + 0.75 spread	2017	2,086.8
Debentures 4th issue - Single Series	R$	100% of CDI + 0.68 spread	2018	1,332.9
Resolution 4131	US$	2.36% and Libor + 2.00%	2017	925.7
Finance Leases (2)	R$	-	2033	374.4
Contingent Consideration	R$	-	2025	414.7
Suppliers finance arrangements	R$	108% of CDI	2017	722.6
Total debt (3)				9,224.1
Current				4,663.6
Noncurrent				4,560.5

(1)

The Currency Basket Charge (Encargos da Cesta de Moedas), or ECM, is a rate disclosed by BNDES on a quarterly basis.

(2)

Our finance leases are related to towers and rooftops, IT equipment leases, infrastructure rent and other means of transmission.

(3)

Does not include the Company’s issuance on February 8, 2017 of R$2 billion aggregate principal amount of Debentures 5^th issue – Single Series maturing in 2022.

Interest and principal payments on our indebtedness as of December 31, 2016 due in 2017 and 2018 total R$4,663.3 million and R$2,309.7 million, respectively.

The agreements that govern the majority of our outstanding loans and financings contain certain standard restrictive covenants, including financial covenants. These agreements may provide for the acceleration of the full balance of our obligations in the event of any default. In general, these agreements are subject to acceleration of maturity upon: (i) the inclusion in our shareholders’ agreement, bylaws or articles of incorporation or those of the companies that control us of conditions leading to restrictions or loss of ability to pay financial obligations arising from these agreements ; (ii) a conviction or final judgment against us in connection with child labor, slave labor or a crime against the environment; or (iii) liquidation, dissolution, insolvency; voluntary bankruptcy, judicial or extrajudicial recovery to any creditor or class of creditors.

As of December 31, 2016, we were not in default of any of our obligations and therefore none of our liabilities were subject to acceleration.

Foreign Exchange and Interest Rate Exposure

We face foreign exchange risk due to our foreign currency-denominated indebtedness, accounts payable (including our capital expenditures, particularly equipment) and receivables in foreign currency. A real devaluation may increase our cost of debt and certain commitments in a foreign currency. Our revenue is earned in reais, and we have no material foreign currency-denominated assets, except income from hedging transactions, interconnection of international long-distance services and services rendered to customers outside Brazil. Equity investments in foreign companies also suffer effects with variations in the exchange rate.

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On December 31, 2016, 14% of our R$9.2 billion of financial indebtedness was denominated in U.S. dollars and UMBNDES. See Note 33 to the Consolidated Financial Statements. Devaluation of the real causes exchange losses on foreign currency-denominated indebtedness and commitments and exchange gain on foreign currency-denominated assets and corporate stakes in foreign companies.

We use derivative instruments to limit our exposure to exchange rate risk. Since September 1999, we have hedged all of our foreign currency-denominated bank debt using swaps and other derivative instruments. Since May 2010, the company began using net balance coverage, which is the hedging of net positions in foreign exchange exposures, or assets (issued invoices) minus liabilities (received invoices) for foreign exchange exposures, substantially reducing our risk to fluctuations in exchange rates. We could still continue to face exchange rate exposure with respect to our planned capital expenditures however, as a small part of our planned capital expenditures are denominated or indexed in foreign currencies (mostly U.S. dollars). We systematically monitor the amounts and time of exposure to exchange rate fluctuations and may hedge positions when deemed appropriate.

The largest part of our reais denominated debt originally pays interest as a percentage of the CDI or has been swapped to do so. The CDI – Certificate of Interbank Deposits (Certificado de Depósito Interbancário) is an index based upon the average rate of operations transacted among the banks within Brazil. With the CDI being a floating rate, we remain exposed to market risk. This exposure to the CDI is also present in long derivatives positions and financial investments, which are indexed to percentages of the CDI.

Capital Expenditures and Payment of Dividends

Our principal capital requirements are for capital expenditures and payments of dividends to shareholders. Capital expenditures consisted of additions to property, plant and equipment and additions to intangible assets, including licenses which totaled R$8.2 billion, R$7.7 billion and R$9.1 billion for the years ended December 31, 2016, 2015 and 2014, respectively. These expenditures relate primarily to the expansion of our network. We may seek financing for part of our capital expenditures and cash management assistance from the Brazilian government, in particular from BNDES, which is the main government financing agent in Brazil, as well as from the local or foreign capital markets or from local and foreign financial institutions. See “Item 4. Information on the Company—A. History and Development of the Company—Capital Expenditures.”

Pursuant to our bylaws and Brazilian Corporate Law, we are required to distribute a mandatory minimum dividend of 25% of “adjusted net income” (as defined below) in respect of each fiscal year to the extent earnings are available for distribution. Holders of preferred shares are assured priority in the reimbursement of capital, without a premium, and are entitled to receive cash dividends that are 10% higher than those attributable to common shares.

Adjusted net income, as determined by Brazilian Corporate Law, is an amount equal to our net income adjusted to reflect allocations to or from (i) legal reserve, (ii) statutory reserve and (iii) a contingency reserve for anticipated losses, if any.

We may also make additional distributions to the extent that we have profits and reserves available to distribute. All of the above distributions may be made as dividends or as tax-deductible interest on shareholders’ equity. Interest on shareholders’ equity are tax-deductible payments pursuant to Brazilian Corporate law, that a company may make, in addition to dividends, which the company may treat as financial expenses for tax and social contribution purposes. For more information on the payment of interests on shareholders’ equity, see “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Dividends and Dividend Distribution Policy—Dividends and Interest on Shareholders’ Equity.” We paid dividends and interest on shareholders’ equity of R$3.3 billion, R$4.0 billion and R$2.8 billion in 2016, 2015 and 2014, respectively.

Our management expects to meet 2017 capital requirements primarily from cash provided from our operations. Net cash provided by operations was R$11.4 billion, R$9.9 billion and R$9.4 billion in 2016, 2015 and 2014, respectively.

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Adjustments to net income for purposes of calculating the basis for dividends include allocations to various reserves that effectively reduce the amount available for the payment of dividends. For the fiscal year ended December 31, 2016, in addition to the interim dividend and interest on own capital payments made in 2016, management decided to propose (i) the allocation of R$550.0 million of profits available for distribution to Reserve of Modernization and Expansion and (ii) an additional dividends payment to shareholders in the amount of R$1.9 billion. The proposal to allocate profits to Reserve of Modernization and Expansion and to pay dividends will be approved at the shareholders’ meeting that will approve the 2016 annual report. See “Item 10. Additional Information—B. Memorandum and Articles of Association—Description of Our Bylaws—Voting Rights.”

Accounting Pronouncements

The Company’s financial statements are in compliance with the IFRS as issued by IASB as of December 31, 2016, which are the same as those followed by the financial statements at December 31, 2015, except for the new pronouncements, interpretations and amendments, of the following standards, amendments and interpretations published by IASB and the IFRS Interpretations Committee (IFRIC), described below, which came into effect on January 1, 2016, but did not cause significant impacts on the financial statements.

IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, as amended;

IFRS 7 Financial Instruments: Disclosures, as amended;

IFRS 11 Accounting for Acquisitions of Interests in Joint Operations, as amended;

IFRS 14 Regulatory Deferral Accounts, as issued;

IAS 1 Disclosure Initiative, as amended;

IAS 16 and IAS 38 Clarification of Acceptable Methods of Depreciation and Amortization, as amended;

IAS 19 Employee Benefits, as amended; and

IAS 27 Equity Method in Separate Financial Statements, as amended.

On the date of preparation of these financial statements, the following IFRS amendments had been published; however, their application was not mandatory. We do not adopt early any pronouncement, interpretation or amendment that has been issued, before application is mandatory.

Standards and Amendments to the Standards	Effective as of:
IAS 7 Cash Flow, as amended	January 1, 2017
IAS 12 Income Taxes, as amended	January 1, 2017
IFRS 9 Financial Instruments, issued	January 1, 2018
IFRS 15 Revenue from Contracts with Customers, as issued	January 1, 2018
IFRS 2 Classification and Valuation of Share Based Transactions, as amended	January 1, 2018
IFRS 4 Insurance Contracts, as amended	January 1, 2018
IAS 40 Investment Property Transfers, as amended	January 1, 2018
IFRIC 22 Transactions in Foreign Currency and Advance Payments, as issued	January 1, 2018
Annual Improvements to IFRS, 2014-2016 Cycle, as issued	January 1, 2017 / 2018
IFRS 16 Leases, as issued	January 1, 2019
IFRS 10, 12 and IAS 28 Investment Entities: Applying the Consolidation Exception, as amended	TBD

Based on our preliminary analysis, we expect that the implementation of many of these standards, changes and interpretations will not have a significant impact on our financial statements in the initial period of application. However, we expect the following standards that have been issued, but are not yet mandatory, may have a significant impact on our consolidated financial statements at the time of its application and prospectively.

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IFRS 9 - Financial Instruments, Issue: In July 2014, the IASB issued the final version of IFRS 9, which replaces IAS 39 and all previous versions of IFRS 9.

IFRS 9 applies to financial assets and liabilities and establishes the classification, valuation, losses and write-off criteria for recognition of such items, as well as a new hedge accounting model. The Company estimates that major changes will occur in the documentation of hedge policies and strategies, as well as in the estimation of expected losses on financial assets. The changes introduced by IFRS 9 will affect the recognition of financial assets and derivative financial instruments as of January 1, 2018. The Company is carrying out the process of implementing the new criteria, but due to the relevance of the potentially affected items and the complexity of the estimates, understands that it is not reasonably possible to quantify the impacts of the application of this standard on the closing date of the fiscal year ended December 31, 2016.

IFRS 15 - Revenue from Contracts with Customers, Issuance: IFRS 15 establishes criteria’s for the accounting of revenues from customer contracts. The Company is currently in the process of estimating the impacts of this new standard on its contracts. This analysis identified a number of expected impacts related to the following aspects, among others:

Under the current accounting policy, the Company offers commercial packages that combine equipment’s and services of telephony, fixed and mobile, data, internet and television, total revenue of services is distributed among its elements identified based on their respective fair values.

Under IFRS 15, amounts will be allocated to each element based on the basis of the independent selling prices of each individual component in relation to the total price of the package and will be recognized when (and the measure) the obligation is satisfied. Consequently, the application of the new criteria will mean an acceleration in the recognition of equipment sales revenues, which are generally recognized at the time of delivery to the final consumer. To the extent that the packages are marketed at a discount, the difference between the profit on sales of equipment and the amount received from the customer at the inception of the contract will be recognized as a contractual asset.

According to the criteria currently in force, all costs directly related to obtaining commercial contracts (sales commissions and other expenses with third parties) are accounted as expenses when incurred. On the other hand, IFRS 15 requires the recognition of an asset for the amounts incurred by these concepts and its subsequent accounting to the income statement according to the period of the respective agreement. Likewise, certain costs related to the performance of the contract, currently recognized as expenses, when incurred, will be deferred when associated with compliance obligations over the period of contract.

Compared to the current standard, IFRS 15 establishes much more detailed requirements on the accounting treatment of contract changes. Thus, certain changes will be recorded retrospectively and others prospectively as a separate or contract resulting from the redistribution of revenues among the various performance obligations identified.

The Company is advancing in the process of implementing the new criteria, but due to the high number of transactions affected, the high volume and dispersion of the necessary information and the complexity of the estimates, the Company understands that at the closing date of the year ended December 31, 2016 cannot reliably measure the impact of the application of this standard. However, considering the current commercial offers as well as the volume of affected contracts, the Company estimates that the changes introduced by IFRS 15 will have a significant impact on its financial statements at the date of its initial application. In addition, the Company's financial statements will include more quantitative disclosures of revenue-related accounts.

IFRS 16 - Leasing, Issuance: IFRS 16 establishes that companies acting as lessees must recognize in the balance sheet the assets and liabilities arising from all lease agreements (except for short-term lease agreements and those for low value assets).

The Company has a very large number of leases as a lessee of various assets, such as third-party towers, circuits, real estate and land (where the towers are primarily located). Under the current standard, significant portions of such contracts are classified as operating leases, where payments are generally recorded on a straight-line basis over the contract term.

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The Company is currently in the process of estimating the impact of this new standard on such contracts. In this analysis, the estimate of the term of the lease is included, considering the non-cancellable period and the periods covered if exercised the option to extend the lease for those cases in which exist reasonable certainty, which will depend, of the expected use of the Company's assets installed in the leased assets.

In addition to the term of the lease, assumptions will be used to calculate the discount rate, which will depend mainly on the incremental financing rate for the estimated periods. In addition to the previous estimates, the standard allows two transition methods, being: i) full retrospective for each comparative period presented; and (ii) modified retrospective with the cumulative effect of the initial application of the recognized standard at the date of initial application. In addition, it is possible to choose specific practical relieves at the time of applying the standard on measurement of liability, discount rate, losses, leases ending within twelve months after the first application, initial direct costs, and lease duration. Thus, depending on the transition method to be chosen, the impacts will be different.

Due to the different alternatives, as well as the complexity of the estimates and the high number of contracts, the Company has not yet completed the implementation process, so that at the closing date of the year ended December 31, 2016 it is not possible to estimate the impact of the application of this standard. However, considering the volume of contracts affected, the Company estimates that the changes introduced by IFRS 16 will have a significant impact on its financial statements from the date of adoption, including the recognition of the right to use and the corresponding obligations in respect to the contracts which, under the current standard, are classified as operating leases. In addition, depreciation of the right to use the assets and recognition of interest on the lease obligation will replace a significant portion of the amount recognized as expenses in the income statement of the operating lease. The classification of payments in the statement of cash flows will also be affected by the adoption of IFRS 16.

C. Research and Development, Patents and Licenses

Research and Development

We operate in a fast-paced, dynamic and convergent industry, which demands that our products and services be continuously revamped to keep up with growth expectations.

In addition, to keep pace with constant innovation, we created a business incubator that allows us to easily handle emerging business opportunities of large sizes or risks that otherwise would be difficult to manage by our current business units. In 2016, we invested R$0.6 million in innovation.

The table below presents our investments in development, update and modernization of systems to support the launch of new products and services. In 2016, we invested R$50.9 million in development.

R&D investments	2016		2015		2014
	(in millions of reais)
Development		50.3		47.9		37.6
Innovation (business incubator and tests)		0.6		0.5		0.6
Total		50.9		48.4		38.2

Patents and Licenses

Our principal intellectual property assets include:

permission to use the trademark name “Telefônica” and all names derived from “Telefônica”;

our name “Telefônica Brasil S.A.”;

our commercial brands in Brazil, “Vivo,” and sub-brands such as “Vivo Fixo,” Vivo TV,” “Vivo Internet,” “Meu Vivo,” “Vivo Empresas,” “Vivo Play,” “Vivo Ads” for our advertising services, “Vivo Apps e muito mais” for our digital services, and “Vivo Fibra” among others; and

our past commercial brands, “GVT”, “Global Village Telecom”, “Super 15” for long-distance services, “Speedy” for broadband products, “DUO” for telephone and broadband service and “TRIO” for telephone, broadband and Digital TV service.

In September 2016, the Brazilian Trademark Office recognized the “Vivo” mixed trademark as of “high reputation”, thus protected in all branches of activities.

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Trend Information

Increasingly, Brazilian consumers’ consumption patterns have converged towards an emphasis on the consumption of data, rather than traditional services. In addition, the evolution of technology has exponentially increased the quantity of connected devices. Accordingly, we plan to continue to invest efficiently in a more modern infrastructure in the mobile segment through the 4G technology and in the fixed segment through an increased ultra-broadband footprint, improving the experience of our customers with faster and reliable connections.

Due to a macroeconomic scenario of ongoing recovery, we expect the competitive environment in the coming years to emphasize sustainability through initiatives to further monetize the customer base, as well as efforts to contain expenses. During 2017, regulatory issues of great importance to the Brazilian telecommunications sector are expected to alter market dynamics during the year.

Our top priority is making our customers' digital life easier to manage. We are committed to providing digital and interconnected, cross platform services that deliver a better user experience and effective customer care, building a competitive advantage to attract new customers and loyalty our current base.

We believe that revenue growth will continue to be driven over the next few years by mobile and fixed data services.

E. Off-balance-Sheet Arrangements

None.

F. Tabular Disclosure of Contractual Obligations

Our contractual obligations and commercial commitments as of December 31, 2016 are as follows:

	Total		Up to year		1-3 years		4-5 years		After 5 years
	(in millions of reais, as of December 31, 2016)
Contractual obligations
Loans, financing and leases (1)		5,669.8		2,543.0		1,711.7		603.7		811.4
Debentures		3,554.3		2,120.5		1,406.5		27.3		-
Pension and other post-retirement benefits		327.7		11.0		4.4		4.5		307.8
Total contractual obligations		9,551.8		4,674.5		3,122.6		635.5		1,119.2
Commercial commitments
Trade accounts payable		7,683.2		7,611.3		-		-		71.9
Total commercial commitments		7,683.2		7,611.3		-		-		71.9

(1)

Includes present value of minimum lease payments on operating leases of rental of equipment, facilities and stores, administrative buildings, and cell sites and contingent consideration relating to the GVT acquisition. See Note 4 to our consolidated financial statements.

Long-Term Debt – Loans, financing, leases and debentures

	Amount
Year ending December 31,	(in millions of reais, as of December 31, 2016)
2018		2,309.6
2019		808.6
2020		380.9
2021		250.0
2022		239.1
2023 and forward		572.3
Total		4,560.5

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Safe Harbor

See “Cautionary Statement Regarding Forward-Looking Statements.”

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ITEM 6.

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

Directors and Senior Management

We are managed by a Board of Directors (Conselho de Administração) and a Board of Executive Officers (Diretoria).

Board of Directors

Our Board of Directors comprises a minimum of five and a maximum of 17 members, elected and dismissed by the shareholders at the shareholders’ meeting, serving for a term of three years and may be reelected. The following is a list of the current members of our Board of Directors, their respective positions and dates of their election. The members of our Board of Directors are currently mandated until the ordinary general meeting scheduled to take place up to April 2019.

Name	Position	Date of Appointment
Eduardo Navarro de Carvalho	Chairman	April 28, 2016 (1)
Ángel Vilá Boix	Director	April 28, 2016
Antonio Carlos Valente da Silva	Director	April 28, 2016
Antonio Gonçalves de Oliveira	Director	April 28, 2016
Francisco Javier de Paz Mancho	Director	April 28, 2016
Ramiro Sánchez de Lerín Garcia-Ovies	Director	April 28, 2016
Sonia Julia Sulzbeck Villalobos	Director	April 28, 2016
Luis Francisco Javier Bastida Ibargüen	Director	April 28, 2016
Luiz Fernando Furlan	Director	April 28, 2016
Narcís Serra Serra	Director	April 28, 2016
José Maria Del Rey Osorio	Director	January 04, 2017
Roberto Oliveira de Lima	Director	April 28, 2016

(1)

Mr. Eduardo Navarro de Carvalho was elected as a Director on April 28, 2016 and as the Chairman of the Board on June 10, 2016.

Set forth below are brief biographies of our directors:

Eduardo Navarro de Carvalho is 54 years old and is our Chief Executive Officer, Chairman of our Board of Directors and member of our the Nominations, Compensation and Corporate Governance Committee. He is also Vice President of SP Telecomunicações Participações Ltda., and CEO of Innoweb Ltda., POP Internet Ltda. and Telefônica Data S.A. He is Chairman of the Board of Directors of Telefônica Factoring do Brasil Ltda. He is also the Officer of SindiTelebrasil since November 17, 2016. He was Director of Strategy and Alliances at Telefónica S.A., and from February 2014 to January 2017, he was the Chief Commercial Digital Officer of Telefónica S.A. Previously, he was responsible for Strategic Planning and Regulatory at Telefónica Internacional S.A. From 1999 to 2005, he served as Vice President of Corporate Strategy and Regulatory Group at Telefonica in Brazil, participating in the Steering Committee of several companies of the Telefónica group in Brazil. He worked for five years as a consultant at McKinsey & Company (1994-1999), during which he led projects in Brazil, Spain, Portugal and South Africa, focusing on strategies in the areas of Industry, Infrastructure and Telecommunications. He began his professional experience in the steel industry, where he worked from 1986 to 1994 in Group ARBED in Brazil. He graduated in Metallurgical Engineering from the Federal University of Minas Gerais, Brazil.

Ángel Vilá Boix, is 52 years old and a member of our Board of Directors and our Strategy Committee. He is also Chief Strategy and Financial Officer of the Executive Committee of Telefónica S.A. Mr. Vilá became a part of the Telefónica Group in 1997 as Controller of the Group, and in 1998 he became CFO of Telefónica Internacional. In 2000, he was appointed as Head of Corporate Development of the Group and from 2010 on, he also oversaw the affiliated companies of the Group, composed by Atento, T-Gestiona and Telefónica Contenidos. In 2011, he became Head Manager of Finance and Corporate Development, and recently he became the new Head Manager of Strategy and Finance. Due to the different positions that he held within the Telefónica Group, Mr. Vilá concluded important transactions such as O2 plc, Brasicel/VIVO, E-Plus, GVT, Telco/TI or Telefónica Germany IPO. Before he joined Telefónica, he worked at Citigroup, McKinsey&Co, Ferrovial and Planeta. Currently, he is a member of the Board of Directors of Telefónica Germany and Trustee of Telefónica Foundation. He was also member of the Board of Telco SpA (Italy), BBVA, Digital Plus, Atento, Telefónica Contenidos, Telefónica Czech Republic, Endemol, CTC Chile, Indra SSI and Terra Lycos, and Consultant of the Advisory Board of Macquarie MEIF Funds. Institutional Investor appointed Mr. Vilá as the Best CFO in European Telecoms in 2015. Mr. Vilá was also awarded by Thomson Reuters Extel Pan-European Awards as the n.1 CFO in Spain, in the years of 2013 and 2014, as well as n.1 CFO for Telecommunications Services in Europe for 2014. He graduated in Industrial Engineering from Universitat Politecnica de Catalunya and holds a master of Business Administration degree from the Columbia University (New York).

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Antonio Carlos Valente da Silva is 64 years old and serves as a Member of the Board of Directors and of the Service Quality and Marketing Committee of Telefônica Brasil S.A.. He is the Chairman of the Board of Telefónica Venezuela since November 2009. He was member of the Consejo Asessor of Telefónica Internacional S.A.U from 2015 to 2016; President of the Board of Trustees of Fundação Telefônica from December 2010 to December 2016, Chief Executive Officer of Telefônica Brasil S.A. between January 2007 and March 2015, and member of the Appointments, Compensation and Corporate Governance Committee of Telefônica Brasil S.A. in the same period. He was Chief Executive Officer of Telefônica Data S.A., Vice-President Director of SP Telecomunicações Participações Ltda., Chairman of the Board of Directors of Telefônica Factoring do Brasil Ltda., member of the Control Committees of Media Networks Brasil Soluções Digitais Ltda., of Telefônica Transportes e Logística Ltda. and of Telefônica Serviços Empresariais do Brasil Ltda. He was the Chief Executive Officer of the merged companies Vivo S.A., A. Telecom S.A., Telefônica Sistemas de Televisão S.A., Ajato Telecomunicação Ltda., Lemontree Participações S.A., GTR-T Participações e Empreendimentos S.A., Comercial Cabo TV São Paulo S.A. and TVA Sul Paraná S.A. He was the Chief Executive Officer of Vivo Participações S.A. from May 10, 2011 until October 3, 2011. He was also the President of Telebrasil (Brazilian Association of Telecommunications), President of SindiTelebrasil (National Union of Fixed and Mobile Telephone Service Operators) and President of Febratel (Brazilian Federation of Telecommunications) from 2010 through 2013. He was President of AHCIET (Asociación Hispanoamericana de Centros de Investigación y Empresas de Telecomunicaciones) from 2007 to 2011; president of the Official Spanish Chamber of Commerce in Brazil from 2011 to 2015 and former President of the Euro-chambers in Brazil (an association that gathers the main Chambers of Commerce from the European Union in Brazil). He was a member of the CDES (Economic and Social Development Council of the Presidency of the Republic of Brazil). He is also a member of the Advisory Council of CPqD, (Brazilian Telecommunications Research and Development Center), member of the Board of Executive Officers of ABDIB (Brazilian Base Industries Association), member of COINFRA (FIESP’s Infrastructure Commission) and member of the Advisory Council of Catenon Brasil. He has a degree in Electrical Engineering from PUC/RJ and has significant experience in the telecommunications market, in which he has been working since 1975. He has a post-graduate degree in business and administration from PUC/RJ and has concluded several specialization courses in telecommunication systems in Brazil and abroad, as well as several specialization courses in business management, including corporate strategy at MIT/Sloan.

Antonio Gonçalves de Oliveira is 72 years old and is a member of our Board of Directors and our Control and Audit Committee since September 2011. Mr. Oliveira is the Vice-Chairman of the Association of Friends of the Museum of Contemporary Art of USP (AAMAC) since 2011. He is also a member of the Fiscal Board of Jereissati Participações, since April 2016. Mr. Oliveira was a member of the Board of Directors of Paranapanema S.A., from April 2012 to April 2014, and a member of the Fiscal Board of Klabin S.A., from April 2010 until April 2013. He was a member of the Board of Directors of Vivo Participações S.A. from March 2001 to September 2011, and of its Control and Audit Committee from July 2005 to September 2011, being its president for 5 years. Mr. Oliveira was also a member of the Board of Directors of TELESP Celular S.A. and a member of the Board of Directors and of the Control and Audit Committee of the following companies: Tele Sudeste Celular Participações S.A., Telemig Celular Participações S.A., Telemig Celular S.A., Tele Leste Celular Participações S.A., Tele Centro Oeste Celular Participações S.A. and Celular CRT Participações S.A., until these companies ceased to exist, due to their incorporation by Vivo Participações S.A. Mr. Oliveira was the Chairman of the Fiscal Board Companhia de Eletricidade da Bahia (COELBA) from April 2006 to April 2008, chairman of AAMAC from 2006 to 2010, member of the Fiscal Board of Iguatemi Shopping Centers, from 2007 to 2008, and of Melpaper, from 2009 to 2010, and a member of the Council of Representatives of the Federação das Indústrias do Estado de São Paulo (FIESP). Mr. Gonçalves de Oliveira was a member of the Advisory Board of the Caixa de Previdência dos Funcionários do Banco do Brasil (PREVI) for 4 years, and he was also a member of the Council of Social and Economic Development of the Brazilian government and of the Working Group for Small and Medium Enterprises in Mercosul, nominated by the Brazilian government. He was member of the Steering Committee and Management of the Banco do Povo de Estado de São Paulo, member of the Associação de Empresas Brasileiras para a Integração de Mercados (ADEBIM), and Chairman of the Deliberative Board of the Association of the Associação Naconal dos Funcionários do Banco do Brasil (ANABB), for 8 years. In the role of sociologist, he was President of the

Association of Sociologists of the State of São Paulo, for 6 years, and Director of the Latin American Association of Sociology for 4 years. Mr. Oliveira was the executive coordinator of the Movimento Nacional da Micro e Pequena Empresa. Mr. Gonçalves holds a degree in Social Sciences, a master’s degree in Communication Sciences and a post-graduate degree in Sociology of Organizations from the Universidade de São Paulo in Brazil. He also holds a specialist title in Human Resources from Fundação Getúlio Vargas in São Paulo and extension courses on business management topics. Mr. Oliveira is Certified Counselor by the Brazilian Institute of Corporate Governance, IBGC, due to his experience in supervisory boards, management boards and fiscal boards.

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Francisco Javier de Paz Mancho is 58 years old and is a member of our Board of Directors and of Chairman our Nominations, Compensation and Corporate Governance Committee. Mr. Mancho is also a member of the Board of Directors of Telefónica S.A., Telefónica de Argentina S.A. and Telefónica Móviles México, and member of the Advisory Board of Telefónica América Latina. He is also Chairman of Telefónica Engenharia da Segurança and Lead Director of Telefónica S.A. He was Chairman of Telefónica Gestión de Serviços Compartidos Espanha S.A. from September 2014 to March 2016 and of Atento Inversiones y Teleservicios from December 2008 to December 2012. From June 2004 until December 2007, he was the President of Mercasa. He was Deputy Chairman and Manager of Corporate Strategy of Panrico Donuts Group (1996–2004), General Manager of the Ministry of Tourism and Commerce (1993–1996), General Secretary of the Socialism Youth and Member of the Executive Council of PSOE (1984-1993). He also served the following posts: Director of the Tunnel of Cadí (2004-2006), Chairman of the Patronal Pan y Bollería Marca (COE) (2003-2004), Director of Mutua de Accidentes de Zaragoza (MAZ) (1998-2004), Director of the Panrico Group (1998-2004), Chairman of the Observatório de la Distribuicion Comercial del Ministerio de Comercio y Turismo (1994-1996), Member of the Economic and Social Board and its permanent Commission (1991-1993 and 1996-2000), and Director of Tabacalera S.A. (1993-1996). Mr. Mancho holds degrees in Information and Publicity and a degree in law studies from the Executive Management Program of IESE (Universidad de Navarra).

Ramiro Sánchez de Lerín Garcia-Ovies is 62 years old and a member of our Board of Directors and the General Secretary of the Board of Directors of Telefónica S.A. He is also member of the Executive Committee. He began his career at Arthur Andersen, working for its auditing department and later on for its fiscal department. In 1982, he became a Legal Consultant for the State Government (King Counsel – Abogado del Estado) and started to work for the local Fiscal Auditors in Madrid (Delegación de Hacienda de Madrid). He was designated to the State Secretariat for European Communications and, later on, to the Ministry of Foreign Affairs. In the private sector, from 1988 on, Mr. Lerín was the General Secretary and the Secretary of the Board of Directors of the listed Companies Elosúa, S.A.; Tabacalera, S.A.; Altadis, S.A. and Xfera Móviles, S.A. He also worked as a professor in the Catholic Institute of Company Administration and Management (Instituto Católico de Administración y Dirección de Empresas – ICADE) and in the Public Treasury Institute of Company and School (Instituto de Empresa and Escuela de Hacienta Pública). He is a member of the Fundación Centro Nacional del Vidrio and Fundación Padre Arrupe. After working as CEO of Tabacalera together with Mr. César Alierta, in 2003 he joined the Telefónica Group as its General Counsel and Executive Member of the Executive Committee.

Sonia Julia Sulzbeck Villalobos is 53 years old and a member of the Board of Directors and of the Service Quality and Marketing Committee of Telefônica Brasil S.A. She is also a standing member of the Board of Directors of Cia. Distribuidora de Gás do Rio de Janeiro – CEG and alternate member of the Board of Directors of Usiminas. As volunteer work, she participates in the Board of Director of CFA Society Brasil, a non-profit association that gathers around 800 professionals that have a CFA certification (Chartered Financial Analyst) in the country. She is founding partner of Villalobos Consultoria Ltda. since 2009. From 2005 to 2009, she was Manager of Fundos de America Latina, in Chile, managing mutual and institutional funds of Larrain Vial AGF. From 1996 to 2002, she was responsible for Private Equity investments in Brazil, Argentina and Chile for the company Bassini, Playfair & Associates, LLC. As of 1989, Mrs. Villalobos was Head of Research of Banco Garantia. She holds a degree in Public Administration from EAESP/FGV, from 1984, and became a master in Finance, from the same institution, in 2004. She was the first to receive the CFA certification in Latin America, in 1994.

Luis Francisco Javier Bastida Ibargüen is 71 years old and is a member of our Board of Directors, President of our Control and Audit Committee and member of our Nominations, Compensation and Corporate Governance Committee. Since 2002, he has acted as an independent consultant. During 2000 and 2001, he worked in Banco Bilbao Vizcaya Argentaria, where he was a member of the Steering Committee and head of the Global Asset Management Division. Mr. Bastida began working at Banco Bilbao Vizcaya Argentaria in 1988. From 1994 to 2000, he was Chief Financial Officer (CFO), reporting directly to the Chairman. From 1976 to 1987, he worked at Banco Bilbao, where he had different responsibilities, mainly in areas related to finance. From 1970 to 1976, he worked for General Electric in New York and Spain. At General Electric, he was a member of the Finance Management Program and the International Finance Program and worked in various capacities in the Finance and Strategic Planning Functions. He holds degrees in Business Sciences at the E.S.T.E. University in San Sebastián–Spain and holds an MBA from Columbia University in New York.

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Luiz Fernando Furlan is 70 years old and is a member of the Boards of Directors of Telefônica Brasil S.A. (Brasil), Telefónica S.A. (Spain), BRF S.A. (Brasil), AGCO Corporation (USA). He is member of the Conselho Superior de Gestão em Saúde Pública of the State of São Paulo (Brazil) and Chairman of the Board of LIDE – Grupo de Líderes Empresariais (Brasil). Previously, he was Chairman of the Board of Directors at Sadia S.A., from 1993 to 2002 and from 2008 to 2009, company within which he held numerous executive positions from 1976 to 1993. He was Co-Chairman of the board of BRF Brasil Foods S.A. from 2009 to 2010, as well as a member of the board of Amil Participações S.A. from 2008 to 2013, as well as a member of the Advisory Board of Panasonic (Japan). He served as Minister of State at the Ministério de Desenvolvimento, Indústria e Comércio Exterior of Brazil from 2003 to 2007. He has been the Chairman of the Board of Directors of Fundação Amazonas Sustentável “FAS” (Brazil) from 2008 to 2015, institution within which he has become an honorary member. He was also a commissioner member of Global Ocean Commission (USA) – 2013 to 2015. He holds a degree in Chemical Engineering from FEI (University of Industrial Engineering) and in Business Administration from University of Santana – São Paulo, with extension and specialization courses in Brazil and abroad.

Narcís Serra Serra is 73 years old and is as a member of our Board of Directors and of our Control and Audit Committee. He is the Vice President of Telefónica Chile S.A. From 1991 to 1995, he was Vice President of the Spanish Government, and from 1982 to 1991, served as Minister of Defense. From 1979 to 1982, he was the Mayor of Barcelona. Mr. Serra holds a doctorate in economics from the Universidad Autónoma de Barcelona and is President of Barcelona Institute for International Studies (IBEI).

José María Del Rey Osorio is 65 years old and serves as a member of our Board of Directors and of our Strategy Committee. He holds a degree in Economy and Business Administration from the Universisad Autónoma de Madrid. Since joining the Telefônica Group in 1983, he has acquired significant experience with the group, occupying, among other roles, the positions of General Manager of Strategic Planning of Telefónica Internacional S.A., from 2001 to 2004; Vice-President of Strategy and Regulation of Telecomunicações de São Paulo S.A. – TELESP, from 1999 to 2001; and Manager of Economic Analysis of Telefónica S.A., from 1988 to 1998. Mr. Osorio acted as member of the Board of Directors of COSESA, ST-HILO, from 1990 to 1996, of Telefónica Investigación y Desarrollo S.A., from 2003 to 2005, and from Telefônica del Perú, from 2005 to 2012, among other companies. Before joining the Telefônica Group, he worked at Servicios de Estudios Económicos de EDES E INITEC, in the National Institute of Industry’s (INI) companies and in the management and planning of the INI’s corporation.

Roberto Oliveira de Lima is 65 years old and serves as a member of our Board of Directors and a member of the Service Quality and Marketing Committee. His career includes positions in the areas of information technology, finance and general administration in companies such as Saint Gobain, Rhodia and Accor. From 1999 to 2005, he was Chairman of the Board of Directors of the Credicard Group and CEO of the Banco Credicard. From 2005 to 2011, he was the Chief Executive Officer of Vivo Participações S.A. and Vivo S.A. Since then he has served on the boards of companies such as Edenred, located in Paris - France, Naspers Holdings in South Africa and Grupo Pão de Açúcar, Rodobens and Natura Brazil. From January to August 2014, he became Chairman of the Publicis Group Worldwide in Brazil. From September 2014 to October 2016 he was the Chief Executive Officer of Natura Cosméticos S.A. He holds a degree in Public Administration and a MBA from Fundação Getúlio Vargas, Brazil. He also holds a master’s degree in Finance and Strategic Planning from the Institute Superieur des Affaires, Jouy en Josas, France.

There is no family relationship between any of the directors named above. There is no arrangement or understanding with major shareholders, customers, suppliers or others, pursuant to which any director referred to above was selected as such.

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Board of Executive Officers

The Board of Executive Officers consists of at least three (3) and no more than 15 members, who may or may not be our shareholders, must be resident in the country, are appointed by our Board of Directors for a period of three (3) years, may be reelected, and who may remain in office until reappointed or replaced. Our Board of Executive Officers is responsible for our day-to-day management and for representing us in our business with third parties. Any of our executive officers may be removed at any time by a decision of the Board of Directors.

The following are the current members of the Board of Executive Officers, their respective positions and the date of their appointment.

Name	Position	Date of Appointment
Eduardo Navarro de Carvalho	Chief Executive Officer	November 16, 2016
Breno Rodrigo Pacheco de Oliveira	General Secretary and Legal Officer	June 10, 2016
David Melcon Sanchez-Friera	Chief Financial and Investor Relations Officer	June 10, 2016

Set forth below are brief biographies of our executive officers:

Breno Rodrigo Pacheco de Oliveira is 41 years old and serves as General Secretary and Legal Officer of Telefônica Brasil S.A., Innoweb Ltda., POP Internet Ltda. and Telefônica Data S.A. He is also Corporate Secretary of our Board of Directors, member and Chairman of the Deliberative Council of Visão Prev Sociedade de Previdência Complementar and Officer of SP Telecomunicações Participações Ltda. Mr. Oliveira is also Corporate Secretary and member of the Board of Directors of Telefônica Factoring do Brasil Ltda., Corporate Secretary and member of the Board of Directors of Telefônica Corretora de Seguros Ltda., Chairman and member of the Board of Directors of Companhia ACT de Participações and Companhia AIX de Participações and member of the Board of Directors of Tectotal Tecnologia sem Complicações S.A. He was General Secretary and Legal Officer of Global Village Telecom S.A. and GVT Participações S.A., until April 1, 2016, when these companies were merged into Telefônica Brasil S.A. He was also Officer of the following merged companies: Vivo S.A., A.Telecom S.A., Telefônica Sistema de Televisão S.A., Ajato Telecomunicação Ltda., Lemontree Participações S.A., TVA Sul Paraná S.A., GTR-T Participações e Empreendimentos S.A. and Comercial Cabo TV São Paulo S.A. until July 1, 2013, when these companies were merged into us. He was also General Secretary and Legal Officer from February 3, 2011 to October 3, 2011 of Vivo Participações S.A. (when it was merged into the company) and of Vivo S.A. from April 2005 to February 2011. He holds a law degree from Universidade do Vale do Rio dos Sinos – UNISINOS, Brazil.

David Melcon Sanchez Friera is 46 years old and Chief Financial and Investor Relations Officer of Telefonica Brasil since April 8, 2016. He is also Financial Officer of Innoweb Ltda., POP Internet Ltda. and Telefônica Data S.A., Officer of SP Telecomunicações Participações Ltda. and Vice Chairman of Telefonica Corretora de Seguros Ltda. Mr. Melcon has more than 20 years of experience as Financial Officer in the Telecommunications industry in Latin America and European countries. He was the Transformation Officer of the Telefonica Group from 2015 to 2016. From 2012 to 2014 he was Vice Chairman of the Board of Directors and Chief Financial Officer of Telefonica Czech Republic; from 2007 to 2012 he held the position of Financial and Control Officer of the Telefonica Group in Europe and worked as Executive of the Financial Department of Telefonica Latinoamerica and of the Telefonica Móviles Group from 2005 to 2007. Before that, he held senior roles at Telefonica S.A. from 2001 to 2005, and began his career working at Arthur Andersen from 1996 to 2001. Mr. Melcon was also Chairman of the Supervisory Board of Telefonica Slovakia from 2013 to 2014 and, in the same period, he was a member of the Board of Directors of Tesco Mobile Czech Republic. From 2010 to 2011, he was a member of the Supervisory Board of Hansenet, in Germany and member of the Board of Directors of Telfin Ireland from 2010 to 2012. Mr. Melcon holds a degree in Economic and Business Administration from the University of Zaragoza (Spain), and a Master in Audit and Business Analysis from the University Complutense – Madrid (Spain).

For the biography of Eduardo Navarro de Carvalho, see “—C. Board Practices—Board of Directors.”

There is no family relationship between any of the executive officers named above. There is no arrangement or understanding with major shareholders, customers, suppliers or others, pursuant to which any executive officer referred to above was selected as such.

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Compensation

For the year ended December 31, 2016, the aggregate amount of compensation paid to all our directors and executive officers was approximately R$109.3 million, of which R$39.8 million corresponded to salaries and R$69.5 million corresponded to bonuses.

For the year ended December 31, 2016, our directors and officers did not receive any pension, retirement or similar benefits. For a description of our pension plan, see “—D. Employees—Pension Plans.”

Board Practices

Board of Directors

Our Board of Directors typically meets once every three months and the Chairman may call special meetings. Our Board takes action by majority vote, provided the majority of its members in office are present, with the Chairman having, in addition to his or her regular vote, the deciding vote in the event of a tie. The specific responsibilities of the Chairman include representing the Board in the General Shareholders Meetings, chairing the General Shareholders Meetings, selecting the Secretary from among those present, and calling and chairing meetings of the Board.

Our Board of Directors is responsible, among other things, for:

establishing our general business policies;

electing and removing, at any time, the members of our Board of Executive Officers, and establishing their responsibilities with due regard for legal and statutory provisions;

supervising our management and examining, at any time, our corporate records, and requesting information regarding the execution or the process of execution of any agreements and other acts;

calling General Shareholders Meetings;

approving the financial statements, management reports, proposals for allocation of the company’s results and the submission of such documents to the General Shareholders Meeting;

appointing and deposing external auditors, as well as the responsible for wholesale operations;

determining the distribution of interim dividends;

determining the payment of interest on equity “ad referendum” of the General Shareholders Meeting;

authorizing the purchase of our shares to be cancelled or kept in treasury;

appointing and removing the person responsible for internal auditing;

approving the budget and annual business plan;

deliberating on the issuance of new shares by increasing the corporate capital within the limits authorized by the bylaws;

approving the issuance of commercial paper and depositary receipts;

authorizing the disposal of assets directly related to public telecommunications services;

approving agreements, investments and obligations in an amount greater than R$250 million that have not been contemplated in the budget;

approving employment and compensation plans, incentive policies and professional development, regulation and staffing of the company, and the terms and conditions of collective bargaining agreements to be executed with unions representing various categories of the company’s employees and adhesion or disassociation from pension plans, all with respect to employees of the company; the Board of Directors can, at its own discretion, assign to the company’s Board of Executive Officers limits to deliberate on these matters;

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authorizing the acquisition of interest in other companies on a definitive basis and the encumbrance and creation of lien on or sale of an equity interest;

authorizing the offering of ordinary nonconvertible unsecured debentures;

approving the organizational structure of the company; the Board of Directors can assign to the officers of the Board of Executive Officers limits to the exercise of such powers, subject to legal and bylaws provisions;

approving and modifying the internal regulations of the Board of Directors;

deliberating as to the issuance of warrants;

deliberating, by delegation of the General Shareholders Meeting, about the following aspects related to the company’s issuance of debentures: (i) opportunity to issue, (ii) time and conditions of expiration, amortization or redemption, (iii) time and conditions of the payment of interest, of the participation in the profits and of the premium of repayment, if any, (iv) method of subscription or placement, and (v) the type of debentures;

approving the establishment of technical and advisory committees for advice on matters of interest to the company, to elect members of such committees and approve the committees, internal regulations, which shall contain specific rules concerning their organization, functions, powers, and compensation of members;

authorizing the sale of property, the creation of in rem guarantees and the provision of guarantees on behalf of third parties, and setting limits on the practice of such acts by the officers;

establishing, as an internal regulation, the limits for the officers to authorize the disposition or encumbrance of permanent assets, including those related to public telecommunications services which are disabled or inoperable;

approving the company’s participation in consortia in general, and the terms of such participation; the Board of Directors may delegate such powers to the officers and establish limits, as it seeks to develop activities in line with the company’s purpose;

setting the limits for the officers to authorize the practice of reasonable gratuitous acts for the benefit of employees or the community of which the company is a part of, including the donation of unserviceable assets to the company; and

approving the creation and dissolution of subsidiaries of the company, in Brazil or abroad.

One of the members of our Board of Directors was elected by the preferred shareholders in a separate voting process and the others were elected by the holders of common shares.

Fiscal Board

Brazilian Corporate Law and our bylaws each require that we maintain a statutory Fiscal Board (Conselho Fiscal). Our permanent, statutory Fiscal Board, which is a separate and distinct entity from our outside auditors, is primarily charged with certain advisory, reporting, oversight and review functions with respect to the company’s financial statements. Our statutory Fiscal Board is also responsible for rendering opinions on management’s annual report and management proposals, including financial statements, to be submitted at shareholders meetings relating to a change in the company’s capital composition, investment plans, budget, debenture issuances or subscription bonuses, payment of dividends and consolidations, mergers and spin-offs. However, the statutory Fiscal Board, as required by Brazilian Corporate Law and our bylaws, has only an advisory role and does not participate in the management of the company. Indeed, decisions of the statutory Fiscal Board are not binding on the company under Brazilian Corporate Law.

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In accordance with Brazilian Corporate Law and our bylaws, the Fiscal Board consists of a minimum of three (3) and a maximum of five (5) active members and an equal number of alternates. The members of the Fiscal Board are elected for a period of one (1) year and may be reelected.

One member of the Fiscal Board and his or her alternate must be elected by holders of preferred shares in a separate voting process. The following are the current members of the Fiscal Board:

Members	Alternates	Date Appointed
Flavio Stamm	Gilberto Lerio	April 28, 2016
Cremênio Medola Netto	Juarez Rosa da Silva	April 28, 2016
Charles Edwards Allen	Stael Prata Silva Filho	April 28, 2016

Committees

Brazilian Corporate Law does not require a corporation to maintain committees responsible for ethics, corporate governance or compensation. Nevertheless, our Board of Directors has created the following committees:

Control and Audit Committee;

Nominations, Compensation and Corporate Governance Committee; and

Service Quality and Marketing Committee; and

Strategy Committee.

Control and Audit Committee

Our Control and Audit Committee was created by our Board of Directors in December 2002 and comprises a minimum of three (3) and a maximum of five (5) directors, who are not members of our Board of Executive Officers, and who are appointed by the Board of Directors to serve as members of the Control and Audit Committee for the duration of their respective terms as members of the Board of Directors. The Committee has its own charter, which was approved by the Board of Directors. The Committee provides support to the Board of Directors.

According to its charter, the Control and Audit Committee shall meet four (4) times per year (once every three (3) months) and report its conclusions to the Board of Directors. Our Control and Audit Committee and our statutory Fiscal Board may have some similar attributes.

The Control and Audit Committee, among other responsibilities that may be required by the Board of Directors, is charged with informing and providing recommendations to the Board of Directors regarding the following:

the appointment of the independent auditors, the terms and conditions of their contracts and, if necessary, their termination and renewal;

the analysis of the company’s accounts, compliance with certain legal requirements and the adoption of generally accepted accounting principles;

the results of each internal and independent audit and management’s response to the auditor’s recommendations;

the quality and integrity of the company’s internal control systems;

the performance of the independent auditors, requesting that their opinions on the company’s annual reports and the contents of the main audit reports be clear and precise; and

any communications with the internal auditors about any significant deficiencies in our control systems and identified financial conditions.

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The following are the current members of the Control and Audit Committee:

Members	Date Appointed
Luis Francisco Javier Bastida Ibargüen	June 10, 2016
Antonio Gonçalves de Oliveira	June 10, 2016
Narcís Serra Serra	June 10, 2016

Nominations, Compensation and Corporate Governance Committee

Our Nominations, Compensation and Corporate Governance Committee was established in November 1998, and was restructured in October 2004, and consists of three (3) to five (5) directors appointed by the Board of Directors to serve for the duration of their respective terms as members of the Board of Directors. The Committee meets from time to time, depending on the availability of its members and when called by its chair. The Nominations, Compensation and Corporate Governance Committee, among other responsibilities that may be required by the Board of Directors, is charged with informing and providing recommendations to the Board of Directors regarding the following:

the appointment of executive officers for our company and our subsidiaries;

the parameters on compensation for our executive officers and administrators;

the terms and conditions of executive officers’ employment agreements;

the review of the Board’s compensation plan and any amendments;

the incentive plans related to compensation;

the compensation policy for directors and executive officers of the company; and

the annual corporate governance report.

The following individuals are the current members of the Nominations, Compensation and Corporate Governance Committee:

Members	Date Appointed
Luis Francisco Javier Bastida Ibargüen	June 10, 2016
Eduardo Navarro de Carvalho	November 16, 2016
Francisco Javier de Paz Mancho	June 10, 2016

Service Quality and Marketing Committee

The Service Quality and Marketing Committee was created on December 16, 2004 and provides assistance to our Board of Directors. The Committee consists of at least three (3), and at most five (5), members of our Board of Directors selected periodically to serve for the duration of their respective terms as members of the Board of Directors. The Committee meets from time to time, depending on the availability of its members and when called by its chair. The Committee is responsible for review and analysis of quality indices measuring our principal services and to ensure that the requisite degree of commercial assistance is furnished to our clients.

Members	Date Appointed
Antonio Carlos Valente da Silva	June 10, 2016
Sonia Julia Sulzbeck Villalobos	June 10, 2016
Roberto Oliveira de Lima	June 10, 2016

Strategy Committee

The Strategy Committee was created on October 7, 2016 and provides assistance to our Board of Directors. The Strategy Committee consists of at least three (3), and at most five (5), members of our Board of Directors selected periodically to serve for the duration of their respective terms as members of the Board of Directors. The Strategy Committee meets from time to time, depending on the availability of its members and when called by its chair. The Strategy Committee is responsible for reviewing and monitoring the Company and the group’s strategy policy in Brazil.

Members	Date Appointed
Ángel Vila Boix	October 7, 2016
José María Del Rey Osorio	January 4, 2017
Luiz Fernando Furlan	October 7, 2016

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Employees

As of December 31, 2016, we had 33,331 employees. We have full-time and part-time employees. Our part-time employees work primarily at our stores and call centers. Our employees are divided into the following categories: 36.8% in production and operations; 35.9% in sales; 19.6%in customer care; and 7.7% in support.

As of December 31, 2015, we had 33,847 employees. We have full-time and part-time employees. Our part-time employees work primarily at our stores and call centers. Our employees are divided into the following categories: 38.0% in production and operations; 34.5% in sales; 19.7%in customer care; and 7.8% in support.

As of December 31, 2014, we had 18,419 employees. We have full-time and part-time employees. Our part-time employees work primarily at our stores and call centers. Our employees are divided into the following categories: 26.33% in production and operations; 60.0% in sales; 4.1%in customer care; and 9.6% in support.

Approximately 9.2% of our employees are union members. These unions have state representation, so we have employees represented by the unions of all 26 states plus the Federal District. In turn, 19 of these unions are associated with the National Federation of Telecommunications Workers (Fenattel) and other 8 unions are associated with the Interstate Federation of Workers and Researchers in Telecommunications (Fitratelp). Besides these 27 unions, we have employees represented by São Paulo Engineers’ Union.

Our collective bargaining agreement for these employees was renewed for 100% of our employees on September 1, 2016 and will expire on August 31, 2017 for economic clauses and on August 31, 2018 for social clauses.

Our management considers relations with our work force to be very good. We have never experienced a work stoppage for a significant period or that had a material effect on our operations.

Pension Plans

Before December 1999, the SISTEL plan (managed by the Fundação Sistel de Seguridade Social), was a defined benefit plan that supplemented government-provided retirement benefits, was adopted for all the employees of the former Telebrás System and we were contingently liable for all of the unfunded obligations of the plan.

In January 2000, we and the other companies that formerly belonged to the Telebrás system agreed to divide the existing SISTEL plan into 15 separate plans, resulting in the creation of private plans covering those employees already enrolled in the SISTEL plan. These new private pension plans, called PBS plans, were still administered by the Fundação Sistel and have retained the same terms and conditions of the initial plan. The division was carried out to allocate liability among the companies that formerly belonged to the Telebrás system according to each company’s contributions with respect to its own employees. Joint liability among the SISTEL plan sponsors continues with respect to retired employees, who will necessarily remain members of the PBS plans.

Under the PBS plans, we made monthly contributions to each plan according to a percentage of the salary of each employee who was a participant of such plan. Each employee member also made a monthly contribution to their plan on the basis of age and salary. Pension benefits of members of PBS plans vested at the same time their retirement benefits vested under the government-provided retirement plan. Fundação Sistel operates independently from us, and its assets and liabilities are fully segregated.

Beginning in 2000, we decided to establish defined contributions plans, and offered these to participants in our PBS plans, as well as to employees who do not already have a pension plan. Unlike the PBS plans, which are defined benefits plans, the defined contribution plans are financed by contributions from participating employees, as well as by our contributions as sponsor, which are credited to the individual accounts of the participants. We are responsible for all management and maintenance expenses of these plans, including the risks of death and permanent injury of the participants.

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In 2005, we created a closed social security entity called Visão Prev Sociedade de Previdência Complementar to manage the pension plans of the Telefónica group in Brazil. From 2005 to 2010, management of all plans was transferred from Fundação Sistel to Visão Prev, except for PBS-A Plan, which continues to be managed by Fundação Sistel.

In 2011, the Visão Telesp, Visão Telefônica Empresas, Visão Assist and Visão ATelecom plans were consolidated into the Visão Telefônica plan. Following the acquisition of the Tevecap S.A., or TVA, we became sponsors of Abrilprev Plan, a defined contribution plan for employees of these companies.

On September 1, 2013, we began offering the Visão Multi Pension Plan to our employees who do not have a pension plan. This plan was launched in order to standardize private pension benefits following the corporate restructuring of our subsidiaries in Brazil. In this plan, participants can make basic contributions of 1-2% and additional contributions of 0-5% of salary and we contribute a percentage between 50% to 125%, depending on length of service.

In July 2014, a spin-off of the Abrilprev plan covering employees of the TVA companies was approved and its management transferred to Visão Prev. This plan is now called Visão TVA.

In September 2015, the merger of the plans CelPrev Telemig, Visão Celular CRT, Visão Telebahia Celular, Visão Telergipe Celular, Visão Telerj Celular, Visão Telest Celular, TCP Prev by the plan Visão Telefônica was approved. Also in September 2015 the merger of the plan Visão TVA by the plan Visão Multi was approved.

In May 2015, the company also became a sponsor of private pension plans of the open entity Brasilprev, that were offered to the employees of the GVT Group companies.

Between January and March 2016, the process of migration of the 259 participants of the Brasilprev plan to the Visão Multi plan was carried out.

In 2016, we sought to improve efficiency in the management of private pension plans, aligning the main market practices, and standardizing the benefit through actions of: (i) implementing the collection in July of administrative fees from the participants for the maintenance of the Visão Multi plan; (ii) reversion of 100% of the value of the leftover fund to the company (50% were reverted until 2015, the other part being allocated to the participants); (iii) incorporation of plans managed by Visão Prev.

In March 2016, the process of incorporating the PBS Telemig plan to the Telefónica BD plan was approved.

In November 2016, the incorporation of the Visão Terra plan to the Visão Multi plan was approved.

In December 2016, the incorporations of the Visão TGestiona and Vivo Prev plans to the Visão Telefônica Plan were approved, and will be completed in the first quarter of 2017.

Considering the total workforce, 26.2% of our employees are participants of our private retirement plans.

Share Ownership

None of our directors or executive officers beneficially owns, on an individual basis, 1% or more of our common or preferred shares (including ADSs representing preferred shares) or of our total equity share capital. We currently have two share ownership plans in place:

Performance & Investment Plan (“PIP”)

The general shareholders’ meeting of Telefónica S.A. (our indirect controlling shareholder), held on May 18, 2011, approved a new long-term incentive plan – Performance & Investment Plan, or the PIP, for executives of Telefónica S.A. and of other entities within the Telefónica group, including us. The plan grants a certain number of shares of Telefónica S.A. to selected participants who meet the necessary requirements of the program.

The new PIP program was divided in three cycles (2011, 2012 and 2013), each of which has a three-year duration, with the start date of each cycle occurring in July 1 of each year. The cycles are independent of each other.

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The executives of Telefónica group are eligible to participate in the program and they must remain in the Telefónica group for a minimum period of three years starting from the date they were qualified. In order to deliver the shares to executives at the end of each three-year cycle, the Telefónica group performs an analysis to determine if the evaluation indicators of the shares of Telefónica, which are primarily measured in terms of the total return to shareholders, or TRS, have been achieved.

The distribution of shares related to the first cycle (2011-2014) did not occur, given that the minimum TRS set forth in the program was not achieved.

The 2012-2015 cycle ended in June 2015 and, after reaching the TSR, 68 executives of the Company were entitled to receive 258,552 shares of Telefónica S.A..

The 2013-2016 cycle ended in June 2016 and the distribution of shares did not occur, given that the minimum TRS set forth in the program was not achieved.

In 2014, Telefônica approved the extension of this program for three cycles, each lasting three years, beginning on October 1, 2014 and ending on September 30, 2017. The number of shares is communicated early in the cycle, and after the period of three years from the grant date, the shares are transferred to the participant if the specified TRS is reached.

The next distributions of shares are scheduled as follows:

Cycle 2014-2017: scheduled to occur in September 2017, with 66 executives (including three executives appointed pursuant to the bylaws) of Telefônica Brasil having the potential right to receive 365,215 shares of Telefónica S.A. (including initial shares and co-investing), which, as of December 31, 2016, accrued R$6.3 million.

Cycle 2015-2018: scheduled to occur in September 2018, with 106 executives (including three executives appointed pursuant to the bylaws) of Telefônica Brasil having the potential right to receive 581,899 shares of Telefónica S.A. (including initial shares and co-investing), which, as of December 31, 2016, accrued R$5.3 million.

Global Employee Share Plan (“GESP”)

The program is only available to certain director-level executives, not including members of the Boards of Directors and Fiscal Board.

Telefónica's Annual Shareholders' Meeting, held on May 30, 2014, approved an incentive plan for the acquisition of Telefónica’s shares by the Telefónica Group employees at an international level, including employees of the Company and its subsidiaries. Through this plan, the possibility of acquiring shares of Telefónica is offered, with a certain number of shares being delivered to participants whenever certain requirements are met.

The total planned duration of the plan was 2 years. The employees enrolled in the plan were able to acquire shares of Telefónica through monthly contributions of 25 to 150 euros (or equivalent in local currency), with a maximum value of 1,800 euros over a period of 12 months (period of purchase).

The delivery of shares will occur after the vesting of rights pursuant to the plan, as from July 31, 2017, and is conditioned on: (i) continued employment with the company during the two-year duration of the program (the rights vesting period), subject to certain special conditions relating to casualties; and (ii) the exact number of shares to be delivered at the end of the vesting period depends on the number of shares acquired and held by employees. Thus, the employees enrolled in the plan who remained in the Telefónica Group and held the shares acquired for an additional period of twelve months after the end of the purchase period are entitled to receive a free share for each share they have acquired and held until the end of the vesting period.

Talent for the Future Share Plan (“TFSP”)

The Annual General Shareholders’ Meeting of Telefónica held in 2014 approved a long-term program to reward the commitment, outstanding performance and high potential of its executives globally with the allocation of shares of Telefónica.

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Participants do not need to pay for their initial shares. The initially expected total duration of the plan is three years. The beginning of the cycle was on October 1, 2014 and will last until September 30, 2017. The number of shares is stated in the beginning of the cycle and, after the period of three years from the grant date, the shares will be transferred to the participant if the goal is reached.

The delivery of shares is conditional upon: (i) maintain an active working relationship in the Telefónica Group at the date of the cycle’s consolidation; and (ii) the achievement of results which represent the fulfillment of the objectives set for the plan. The level of success is based on the comparison of the evolution of shareholder remuneration considering price and dividends (Total Shareholder Return - TSR) of Telefónica share, vis-à-vis the evolution of TSRs corresponding to a number of companies quoted in the telecommunications industry, which correspond to the Comparison Group. The maximum number of shares allocated in the first open cycle on December 31, 2016 is as follows:

Cycle 2014-2017: scheduled to occur in September 2017, with 61 executives of Telefônica Brasil having the potential right to receive 58,000 initial shares of Telefónica S.A., which, as of December 31, 2016, accrued R$1.0 million.

Cycle 2015-2018: scheduled to occur in September 2018, with 123 executives of Telefônica Brasil having the potential right to receive 90,000 initial shares of Telefónica S.A., which, as of December 31, 2016, accrued R$828 thousand.

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ITEM 7.

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

Major Shareholders

In accordance with our bylaws, we have two classes of capital stock authorized and outstanding: common shares (ações ordinárias) and preferred shares (ações preferenciais). Our common shares have full voting rights. Our preferred shares have voting rights only under limited circumstances.

On October 31, 2016, Telefônica Brasil received a correspondence from the shareholder Telefónica Latinoamérica Holding, S.L. stating that Telefónica Internacional, S.A. transferred to them their entire stake in the Company, or 24.09% of the Company's capital, represented by 46,746,635 common shares (8.18% of such class) and 360,532,578 preferred shares (32.22% of such class). The transfer of shareholding was held due to a universal succession under an internal reorganization in the Telefónica Group, through which Telefónica Internacional, S.A. was merged into Telefónica Latinoamérica Holding, S.L.

As a result, on December 31, 2016, Telefónica S.A. owned 34.67% of our common shares, Telefónica Latinoamérica Holding, S.L. owned 8.18% of our common shares and SP Telecomunicações owned 51.46% of our common shares. Since Telefónica Latinoamérica Holding, S.L. is a wholly owned subsidiary of Telefónica and owns 60.60% of the equity share capital of SP Telecomunicações, Telefónica has effective control over 94.47% of our outstanding common shares. Accordingly, Telefónica has the ability to control the election of our Board of Directors and to determine the direction of our strategic and corporate policies. None of Telefónica, Telefónica Latinoamérica Holding, S.L. or SP Telecomunicações has any special voting rights beyond those ordinarily accompanying the ownership of our common and preferred shares.

Telefónica S.A.’s shares are traded on various stock exchanges, including exchanges in Madrid, Barcelona, Bilbao, Valencia, London, New York, Lima and Buenos Aires.

Telefónica is one of the largest telecommunications companies in the world in terms of market capitalization and number of customers. With its strong mobile, fixed and broadband networks, and its innovative portfolio of digital solutions, Telefónica is transforming itself into a “Digital Telco,” a company that will be even better placed to meet the needs of its customers and capture new revenue growth.

The following tables set forth information relating to the ownership of common and preferred shares by Telefónica, SP Telecomunicações, Telefónica Latinoamérica Holding, S.L., any other shareholders known to us to beneficially own more than 5% of our common or preferred shares and our officers and directors, based on 571,644,217 common shares and 1,119,340,706 preferred shares outstanding as of December 31, 2016. We are not aware of any other shareholder that beneficially owns more than 5% of our common or preferred shares.

Shareholder’s Name	Number of common shares owned		Percentage of outstanding common shares
SP Telecomunicações		294,158,155		51.46	%
Telefónica S.A.		198,207,608		34.67	%
Telefónica Latinoamérica Holding, S.L.		46,746,635		8.18	%
All directors and executive officers as a group		1,508		–

Shareholder’s Name	Number of preferred shares owned		Percentage of outstanding preferred shares
SP Telecomunicações		38,537,435		3.44	%
Telefónica S.A.		305,122,195		27.26	%
Telefónica Latinoamérica Holding, S.L.		360,532,578		32.22	%
Artisan Partners Limited Partnership (1)		72,321,188		6.46	%
All directors and executive officers as a group		21,848		–

(1)

The number of preferred shares beneficially owned is as of December 31, 2016, as reported in a Schedule 13G filed by Artisan Partners Limited Partnership, Artisan Investments GP LLC, Artisan Partners Holdings LP and Artisan Partners Asset Management Inc. on February 3, 2017. As set forth in the Schedule 13G, Artisan Partners Limited Partnership has shared power to vote 65,136,571 preferred shares and shared power to dispose of 72,321,188 preferred shares. As set forth in the Schedule 13G, Artisan Partners Limited Partnership does not have shared power to vote the remaining 7,184,617 preferred shares which Artisan Partners Limited Partnership has reported in its Schedule 13G that it beneficially owns. Securities reported on the Schedule 13G as being beneficially owned by Artisan Partners Limited Partnership are held by Artisan Partners Limited Partnership and/or one or more of its investment adviser subsidiaries on behalf of investment advisory clients, which may include investment companies registered under the Investment Company Act, employee benefit plans, pension funds or other institutional clients. The business address of Artisan Partners Limited Partnership reported on the Schedule 13G is 875 East Wisconsin Avenue, Suite 800, Milwaukee, WI 53202.

As of December 31, 2016, there were a total of 242 ADR holders of record and 186,139,798 ADRs outstanding, representing 186,139,798 preferred shares or 17% of outstanding preferred shares. Since some of these ADRs are held by nominees, the number of record holders may not be representative of the number of beneficial holders.

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Related Party Transactions

Transactions with related parties are submitted to review by our related parties committee and, when necessary, approval by our board of directors and shareholders, in compliance with our bylaws. We believe that all related party transactions are carried out according to guidelines, criteria and market rules in order to provide sufficient transparency to contracts between related parties.

Note 29 to our consolidated financial statements presents, in tabular format, more detailed financial information with respect to transactions and balances with related parties. We provide below a summary description of our material transactions with related parties to which we are currently party or have been party in the last three years.

Telefónica S.A.

On January 2, 2008, we entered into a copyright licensing agreement, or Brand Fee agreement with Telefónica S.A., with respect to the brand “Telefonica.” The amounts in connection with these agreements totaled R$337 million in 2016, R$337 million in 2015 and R$327 million in 2014.

Telxius Cable Brasil Ltda (former Telefônica Internacional Wholesales Services Brasil Ltda.)

On June 3, 2002, we entered into a supply agreement for the IP Band with Telefônica Internacional Wholesales Services Brasil Ltda., with respect to the internet transit service, which is a connection dedicated to the transportation of internet traffic. The amounts in connection with these agreements totaled R$176 million in 2016, R$174 million in 2015 and R$147 million in 2014.

Some international roaming services are provided by companies in the Telefónica group.

Telefónica International Wholesale Services, S.L

On April 7, 2016, we entered into a supply agreement for the IP Band with Telefônica Internacional Wholesale Services S.L ., with respect to the internet transit service, which is a connection dedicated to the transportation of internet traffic. The amounts in connection with these agreements totaled R$49 million in 2016.

Telxius Torres Brasil Ltda.

On March 31, 2016, we entered into a supply agreement for the use of infrastructure owned by Telxius Torres Brasil Ltda by the Company. The amounts in connection with said agreement totaled R$71 million in 2016.

Interests of Experts and Counsel

Not applicable.

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ITEM 8.

FINANCIAL INFORMATION

Consolidated Statements and Other Financial Information

See Note 19 of our Consolidated Financial Statements.

Legal Proceedings

We are party to legal proceedings incidental to the normal course of our business. The main categories of such proceedings include:

administrative and judicial litigation with Instituto Nacional da Seguridade Social, the National Institute of Social Security, or INSS;

administrative and judicial proceedings relating to tax payments;

lawsuits brought by employees, former employees and trade unions relating to non-compliance with the labor legislation;

civil judicial proceedings regarding consumer rights; and

other civil suits, including litigation arising out of the breakup of Telebrás and events preceding the breakup.

Our policy with respect to provisioning for contingencies classifies the various legal proceedings to which we are party as “probable,” “possible” and “remote.” We and our subsidiaries are parties to labor, tax, civil and regulatory claims and set up a provision for contingencies for which the likelihood of loss was estimated as probable. Our senior management classifies each legal proceeding into one of these three categories (probable, possible and remote) based upon the advice of internal and external counsel and specialized technical advisors in charge of each matter. Due to the level of provisioning and based on its analysis of the individual cases, our management believes that no additional liabilities related to any legal proceedings will have a material effect on our financial condition or results of operations, other than as described below.

There are no material proceedings in which any of our directors, any members of our senior management, or any of our affiliates is either a party adverse to us or to our subsidiaries or has a material interest adverse to us or to our subsidiaries.

Tax Matters — Probable Loss

Federal Taxes

On December 31, 2016, the company was party to federal administrative and judicial proceedings relating to (i) claims resulting from the non-ratification of compensation and refund requests, formulated by the company; (ii) social contributions relating to an alleged failure to pay 11% on the value of invoices, billing and receipts from service providers hired for the transfer of labor; (iii) CIDE (Contribution for Intervention in the Economic Domain) levied on the remittance of funds abroad relating to technical services, administrative assistance and to services of similar nature, as well as royalties; (iv) fixed: non-inclusion of interconnection and EILD expenses in the FUST and FUNTTEL base and wireless: non-inclusion of revenues from interconnection in the FUST and FUNTTEL tax base; (v) contribution to Empresa Brasileira de Comunicação, created by Law No. 11,652/08; (vi) TFI/TFF on mobile stations; (vii) IRRF on interest on shareholder’s equity; (viii) Public Price for Numbering Resources Management (PPNUM) by ANATEL instituted by Resolution No. 451/06; (ix) Social Investment Fund (Finsocial) offset amounts; (x) failure to pay withholding social contribution levied on services rendered, remuneration, salaries and other salary bases; (xi) COFINS – Requirement resulting from non-inclusion of financial income into the tax base; and (xii) additional charges to the PIS and COFINS tax base, as well as additional charges to COFINS required by Law No. 9718/98.

In the opinion of management, the chances of loss in the foregoing federal administrative and judicial proceedings is probable. On December 31, 2016, total consolidated provisions for these federal administrative and judicial proceedings amounted to R$2,872.6 million.

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State and Municipal Taxes

State Taxes

On December 2016, the company was party to administrative and judicial proceedings in progress referring to (i) ICMS not levied on telecommunication services; (ii) disallowance of ICMS tax incentives for cultural projects; (iii) environmental administrative fine; (iv) disallowance of ICMS credits referring to Covenant 39; (v) co-billing; (vi) fixed asset ICMS tax credit reversal; and (vii) ICMS tax on internet (data) infrastructure lease payments. On December 31, 2016, total consolidated provisions for these state level administrative and judicial proceedings amounted to R$226.6 million.

Municipal Taxes

On December 31, 2016, the company was party to tax claims at a municipal level, both in the administrative and judicial sphere which, based on the opinion of our legal advisors, are classified as a probable loss, related to (i) real estate property tax (Imposto Predial Territorial e Urbano - IPTU); (ii) Service tax on leases of movable assets for supplementary or intermediate activities; (iii) Audit, control and surveillance tariff (taxa de vigilância, controle e fiscalização - TVCF); and (iv) Service tax retention on fixed duration service contracts. On December 31, 2016, total consolidated provisions for these municipal level proceedings amounted to R$30.5 million.

Tax Matters — Possible Loss

The following tax proceedings were pending as of December 31, 2016, and, in the opinion of our management and our legal advisors, the chance of loss in these cases is “possible.”

Federal Taxes

On December 31, 2016, the company was party to various federal administrative and judicial proceedings, which are waiting to be tried at various court levels. On December 31, 2016, the total consolidated amount was R$6,169.8 million.

Key proceedings refer to: (i) Non-compliance manifestations due to the ratification of compensation requests made by the company; (ii) Income Tax on foreign currency remittances for the payment of technical and administrative services, as well as on royalties; (iii) social security contribution (INSS) on compensation payment for salary devaluation arising from losses caused by “Plano Verão” (Summer Plan) and “Plano Bresser” (Bresser Plan), SAT (Work Accident Insurance), Social Security and payables to third parties (INCRA and SEBRAE), supply of meals to employees, 11% retention (labor assignment); (iv) PIS levied on roaming; (v) CPMF levied on operations resulting from the technical cooperation agreement with the National Treasury Department (STN) (offsetting through the Integrated System of Federal Government Financial Administration - SIAFI) and on foreign-exchange contracts required by the Central Bank; (vi) IRPJ and CSLL related to deductions on revenues from reversal of provisions; (vii) Income tax and social contribution – disallowance of costs and miscellaneous expenses not substantiated; (viii) deductions of COFINS from loss in swap transactions; (ix) PIS / COFINS accrual basis versus cash basis; (x) IRPJ payable in connection with allocation of excess funds to Northeast Investment Fund (FINOR), Amazon Region Investment Fund (FINAM) or Economic Recovery Fund of the State of Espírito Santo (FUNRES); (xi) IRPJ on derivative operations; (xii) IRPJ and CSLL – disallowance of expenses related to the goodwill paid in the acquisition of Celular CRT S.A., goodwill arising from the privatization process, Vivo’s corporate restructuring and goodwill from the mergers of Navytree and TDBH; (xiii) goodwill on the acquisition of GVT Holding by Vivendi and Vivo by Telefônica; (xiv) ex-tariff, abrogation of the benefit from the CAMEX Resolution No. 6, increase in the import tariff from 4% to 28%; (xv) industrialization tax (IPI) on the dispatch from company premises of “Fixed access unit” equipment to clients on a lending agreement; (xvi) PIS and COFINS on value added services; (xvii) INSS on stock options, payment requirement for social security contributions on amounts paid by group companies to employees on behalf of the share purchasing plan; (xviii) financial operations tax (Imposto sobre operações financeiras - IOF), payment requirements for intercompany and credit operations; and (xix) contribution to Empresa Brasileira de Comunicação, created by Law No. 11,652/08.

In the opinion of management, the chances of loss in these proceedings are possible, but not probable and, consequently, we have not made any provisions in connection with these proceedings.

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State Taxes

On December 31, 2016, the company was a party to various state administrative and judicial proceedings, which are ongoing in various court levels. On December 31, 2016, the total consolidated amount was R$15,389.8 million.

Key proceedings refer to: (i) provision of facility, utility and convenience services and rental of the “Speedy” service modem; (ii) international calls (DDI); (iii) undue credit related to the acquisition of items intended to property, plant and equipment (fixed assets); (iv) lack of proportionate credit reversal referring to the acquisition of property, plant and equipment items (fixed assets); (v) service provided outside São Paulo state with ICMS paid to São Paulo State; (vi) co-billing, (vii) tax substitution with a fictitious tax base (tax guideline); (viii) use of credits related to acquisition of electric power; (ix) secondary activities, value added and supplementary services; (x) tax credits related to opposition/challenges referring to telecommunications services not provided or mistakenly charged (ICMS CONFAZ Covenant 39/01); (xi) shipment of goods with prices lower than acquisition prices (unconditional discounts); (xii) deferred charge of ICMS - Interconnection (DETRAF – Traffic and Service Provision Document); (xiii) credits derived from tax benefits granted by other states; (xiv) disallowance of tax incentives related to cultural projects; (xv) transfers of assets among business units owned by the company; (xvi) communications service tax credits used in provision of services of the same nature; (xvii) card donation for prepaid service activation; (xviii) reversal of credit from return and free lease in connection with assignment of networks (used by the company itself and exemption from public bodies); (xix) DETRAF (CDR), (xx) ICMS on own consumption; (xxi) ICMS on exemption of public bodies; (xxii) issue of invoices with negative ICMS amounts; (xxiii) restructuring of ledger without prior authorization by the National Treasury Department (STN); (xxiv) ICMS on monthly subscription; and (xxv) ICMS on unmeasured services.

In the opinion of our management, the chances of loss in the foregoing state administrative and judicial proceedings are possible, but not probable and, consequently, we have not made any provisions in connection with these proceedings.

Municipal Taxes

On December 31, 2016, the company was party to various administrative and judicial proceedings at the municipal level, which are ongoing in various court levels. On December 31, 2016, the total consolidated amount was R$853.2 million.

Key proceedings refer to: (i) ISS (Imposto sobre serviços) – secondary activities, value added and supplementary services; (ii) withholding ISS; (iii) real estate property tax (Imposto Predial Territorial e Urbano - IPTU); (iv) Land Use Fee; (v) municipal fees; (vi) tariff for Use of Mobile Network (TUM), infrastructure lease; (vii) advertising services; (viii) services provided by third parties; (ix) business management consulting services provided by Telefonica Internacional (TISA); (x) ISS levied on caller ID services and on cell phone activation; and (xi) service tax on continuous services contracts, provisions, reversals and cancelled invoices.

In the opinion of our management, the chance of loss in the foregoing state administrative and judicial proceedings is possible but not probable and, consequently, we have not made any provisions in connection with these proceedings.

ANATEL

FUST – Universalization of Telecommunications Service

Writs of Mandamus filed separately by the fixed and mobile operators to recognize the right to include interconnection and EILD expenses in the FUST base for fixed services and interconnection revenue in the FUST base for mobile services. We have questioned such charges and the proceedings are waiting to be tried in the court of appeals.

As a result, ANATEL registered various infractions to constitute tax credits and other revenues that were not obtained from the provision of telecommunication services, on which ANATEL believes FUST is due.

On December 31, 2016, the total aggregate amount under dispute was R$4,089.1 million.

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In the opinion of our management and its legal advisors, the chances of loss in the foregoing proceedings are possible, but not probable and, consequently, we have not made any provisions in connection with these proceedings.

FUNTTEL – Fund for the Technological Development of Telecommunications

On December 31, 2016, the company was party to administrative and judicial proceedings, which are waiting to be tried at the lower administrative court and the court of appeals.

Such proceedings concern the collection of contributions to FUNTTEL on other revenues (not related to telecom services), as well as on income and expenses transferred to other operators (interconnection).

On December 31, 2016, the total aggregate amount under dispute was R$1,190.6 million. In the opinion of our management and its legal advisors, the chances of loss in the foregoing proceeding are possible, but not probable and, consequently, we have not made any provisions in connection with this proceeding.

FISTEL – Telecommunications Supervision Fund

Due extension of the effective license period to use telephone switches in connection with use of landline phone carriers and extension of the right to use radiofrequency in connection with wireless service (wireless carriers), ANATEL charges the Installation Inspection Fee, TFI.

This collection is based on ANATEL’s understanding that such extension would represent a taxable event for TFI. We understand that such collection is unjustified, and separately challenged the aforesaid fee in court. On December 31, 2016, total consolidated amount was R$2,352.0 million, without the respective deposit in full.

In the opinion of our management, the chance of loss in the foregoing proceeding is possible but not probable and, consequently, we have not made any provisions in connection with this proceeding.

PPNUM – Price Relative to the Public Administration of Numbering Resources

Our former subsidiary Vivo, along with other wireless carriers in Brazil, are challenging in court the tariff charged by ANATEL for use by such carriers of the numbering resources managed by the agency. When charged by ANATEL, Vivo made a judicial deposit referring to the amounts payable. On April 23, 2009, the carriers received a favorable sentence and the lawsuit is currently waiting to be tried at the court of appeals. On December 31, 2016, the total aggregate amount under dispute was R$6.0 million.

In the opinion of our management and our legal advisors, the chance of loss in the foregoing proceeding is possible but not probable and, consequently, we have not made any provisions in connection with this proceeding.

Labor Litigation

We are also a defendant in several legal proceedings filed by former employees and outsourced employees (alleging joint or several liability), who claim, among other things, deficient overtime payment, unequal compensation, retirement wage supplements, health and security hazard compensation, free extension of health plan benefits to retirees of Company; and proceedings regarding our outsourcing practices.

In addition, we are also a defendant in four public civil actions filed by the Federal Ministry of Labor, which concerns contracting third-party companies in order to perform services related to our core business. Although the likelihood of loss of such actions is “possible,” no value amount has been attributed because currently we are unable to calculate the total amount we will owe in the event we lose and, as a result, we have not recorded any amounts.

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Civil Claims

There are several civil claims against us. We have recorded R$1.0 billion in provisions for these proceedings where the risks are deemed probable, including the civil proceedings described below:

Expansion Plan–PEX. We are defendants in proceedings related to the possible right of individuals who purchased our shares in connection with our network expansion plan after 1996, to receive additional shares from us. These claims are in various levels of the court system. The chance of loss in such proceedings is classified on a case-by-case basis according to the facts presented in each proceeding. For the proceedings in which the chance of loss was classified as “probable,” we recorded a provision of R$256.3 million.

The Company and/or its subsidiaries are parties to various civil proceedings related to consumers in administrative and judicial spheres, referring to non-compliance with services and/products sold. On December 31, 2016, provisioned amounts totaled R$ 386.7 million (R$ 435.8 million on December 31, 2015).

The Company and/or its subsidiaries are parties to various civil proceedings of non-consumer nature in administrative and judicial spheres, all related to the ordinary course of business. On December 31, 2016, provisioned amounts totaled R$ 396.4 million (R$ 384.6 million on December 31, 2015).

There are several civil claims against us for which the chance of loss is possible and for which we have not recorded provisions, including:

Pension Benefit Plan Spin-Off. Sistel Participants Association in São Paulo (ASTEL) and National Federation of Associations of Retirees and Pensioners and Participants in Pension Funds in Telecom (FENAPAS), they filed with two distinct - same object though - public civil action against the company, Sistel Foundation and others, claiming the annulment of the spin-off of the PBS pension benefit plan that occurred in 2000 which caused the creation of the specific TELESP–PBS pension benefit plan, and corresponding allocation of resources resulted from the technical surplus and fiscal contingencies existing at that time. The chance of loss in both of them is possible based on the opinion of our legal advisors. The amount involved in both cases cannot yet be determined until an expert appraisal report is conducted since it includes the spun-off portion of Sistel related to the telecommunication operators from the former “Telebrás System.”

Civil Class Action in which the Company is involved relating to the Community Telephone Plan (PCT), on possible rights to indemnify acquirers of expansion plans who allegedly did not receive shares for their financial investments made in the city of Mogi das Cruzes, with the total consolidated amount involved on December 31, 2015 of R$421.1 million. The São Paulo Court of Justice (TJSP) changed its decision, and judged this matter groundless. The carriers association of Mogi das Cruzes (“claimant” or “Association”) filed a special appeal to reverse that decision. On December 7, 2015, the appeal filed by the Association was dismissed by the High Court of Justice. The Association filed Motions for Clarification, which were not accepted by the High Court of Justice on March 17, 2016. On April 15, 2016, a final decision was handed down, and no further appeals can be filed. The action was dismissed.

Collective Action filed by SISTEL Participants’ Association (ASTEL) in the state of São Paulo, in which SISTEL associates in the state of São Paulo challenge the changes made in the Medical Care Plan for Retired Employees (PAMA) and claim for the reestablishment of the prior status quo. This proceeding is still in the appeal phase, and awaits a decision as regards the possible admission of the Special and Additional Appeals in connection with the Court of Appeals’ decision, which changed the decision rendering the matter groundless. The amount cannot be estimated, and the claims cannot be settled due to their unenforceability, in that it entails a return to the prior plan conditions.

Services Quality Class Action. The Public Prosecutor Office of the state of São Paulo commenced a class action suit claiming moral and property damages suffered by all consumers of telecommunication services from 2004 to 2009 due to the bad quality of service and failures of the communications system. The Public Prosecutors Office suggested a total award against the company of R$1 billion. A judgment was rendered on April 20, 2010 imposing the payment of damages to all consumers who proved to be eligible for the award. Alternatively, if clients do not prove themselves eligible in a number compatible with the severity of the damage after a period of one year, the judgment establishes that R$60 million should be deposited in a special fund for protection of diffuse customer interests (Fundo Especial de Defesa de Reparação de Interesses Difusos Lesados). It is not possible to estimate how many consumers may present themselves in this procedure nor the values to be claimed by them. The parties filled an appeal and the effects of the sentence were suspended. The appellate court has ruled in our favor and changed the lower court decision. The plaintiff filed an appeal to the Supreme Court, which is awaiting decision. Despite the possible degree of risk, no value amount was attributed to this action because currently we are unable to calculate the total amount to be paid by us in the event we lose and, as a result, we have not recorded any provisions.

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The Company is party to other civil claims, at several levels, related to service rendering. Such claims have been filed by individual consumers, civil associations representing consumer rights or by the Bureau of Consumer Protection (PROCON), as well as by the Federal and State Public Prosecutor’s Office. The Company is also party to other claims of several types related to the normal course of business. On December 31, 2016, possible amounts totaled R$ 2,559.3 million (R$ 2,146.9 million on December 31, 2015).

TGLog is a party to a civil execution proceeding filed with the 3rd Civil Court of Barueri – SP owing to alleged non-payment of transportation service bills. TGLog alleges that it made legitimate discounts owing to contract breaches and losses arising from damages to goods of its customers transported by claimant, which are also subject matter of another proceeding. On December 31, 2016, the case amounted to R$1.2 million (R$1.0 million in December 31, 2015).

The Company has received fines regarding the noncompliance with SAC Decree. We currently have various actions (administrative and judicial proceedings). On December 31, 2016, amounts totaled R$14.2 million (R$ 12.9 million on December 31, 2015).

Ownership of Caller ID. Lune Projetos Especiais Telecomunicação Comércio e Ind. Ltda., a Brazilian company, filed on November 20, 2001 lawsuits against 23 wireless telecommunications operators, including TELESP Celular Participações and its subsidiaries. The lawsuits allege that those operators violated patent No. 9202624-9, related to Equipamento Controlador de Chamadas Entrantes e do Terminal do Usuário, or Caller ID, granted to Lune by the Brazilian Institute of Intellectual Property, or the INPI, on September 30, 1997. An unfavorable decision was handed down determining that the Company should refrain from selling mobile phones with Caller ID service, subject to a daily fine of R$10,000 in case of noncompliance. Furthermore, according to that decision, the Company must pay indemnification for royalties, to be calculated in settlement. Motions for Clarification were opposed by all parties and Lune’s motions for clarification were accepted since an injunctive relief in this stage of the proceedings was deemed applicable. A bill of review appeal was filed in view of the current decision which granted a stay of execution suspending that unfavorable decision until final judgment of the review. A bill of review was filed in view of the sentence handed down on June 30, 2016, by the 4th Chamber of the Court of Justice of the Federal District, in order to annul the lower court sentence and remit the proceedings back to the lower court for a new examination. We believe, based on the opinion of outside counsel that the likelihood of an unfavorable outcome with respect to Lune’s claim against us is possible. We are unable to determine at this time the extent of any potential liabilities with respect to this claim.

Validity of Prepaid Plan Minutes. We and our subsidiaries, together with other Brazilian wireless telecommunications operators, are defendants in various lawsuits brought by the public prosecutor’s office and consumer protection associations challenging the imposition of a deadline for the use of purchased prepaid minutes. The plaintiffs allege that purchased prepaid minutes should not expire after any specified deadline. Conflicting decisions have been issued by the courts reviewing this matter. Although we believe that our criteria for imposing the deadline is in compliance with ANATEL’s rules, we believe, based on the opinion of outside counsel, that the likelihood of an unfavorable outcome with respect to this claim is possible.

Regulatory and Antitrust Litigation

We were involved in several administrative proceedings relating to alleged breaches of obligations and other judicial proceedings relating to sanctions imposed by ANATEL at the administrative level. As of December 31, 2016, amounts recorded for those proceedings were R$5.1 billion, of which R$828.9 million are provisioned.

Administrative and legal proceedings discussing payment of 2% charge on revenue from interconnection services due to the extension of right of use of SMP-related radiofrequencies. Under clause 1.7 of the Authorization Terms that grant right of use of SMP-related radio frequencies, the extension of right of use of such frequencies entails payment every two years, during the extension period (15 years), of a 2% charge calculated on net revenue from the basic and alternative service plans of the service company, determined in the year before that of payment. In the 15th year, the Company will pay 1% of its prior-year net revenue from the basic and alternative service plans.

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However, ANATEL determined that the 2% charge should be calculated on revenue from service plans and also on revenue from interconnection services and other operating income, which is not provided for by clause 1.7 of the referred to Authorization Terms.

Considering, based on the provisions of the Authorization Terms, that revenue from interconnection services should not be included in the calculation of the 2% charge for radiofrequency use right extension, the Company filed administrative and legal proceedings challenging these charges, based on ANATEL’s position.

Dividends and Dividend Distribution Policy

Priority and Amount of Preferred Dividends

The Brazilian Corporate Law determines that the shareholders of a company have the right to receive a minimum percentage of the distributable profits (mandatory dividends) comprising dividends and/or interest on shareholders’ equity, or distributable amount, of the corporation for each fiscal year. If such amount is not determined in the bylaws of the company, Brazilian Corporate Law specifies the criteria to determine the minimum amount of the dividend. See “Item 10. Additional Information—B. Memorandum and Articles of Association.” Moreover, each Brazilian company may issue new preferred shares for public distribution only if one of the following terms applies to the preferred shares: (i) the right to receive dividends equivalent to at least 25% of the adjusted net profit for the fiscal year, to be calculated in accordance with Article 202 of the Brazilian Corporate Law as follows: (a) priority in the receipt of dividends corresponding to at least 3% of the book value per share and (b) the right to an equal share of the profits attributable to the holders of common shares, after the holders of common shares have received a dividend equal to a minimum of 3% of the book value per share; or (ii) the right to receive dividends, at least 10% higher than those paid for each common shares; or (iii) tag-along rights of at least 80% of the price per share paid in the sale of control to be paid by the controlling shareholder and also including the right to receive dividends at least equal to the dividend paid to common shares.

According to our bylaws, we are required to distribute as dividends of each fiscal year ending on December 31, to the extent amounts are available, an aggregate amount equal to at least 25% of adjusted net income as a mandatory dividend. The annual dividend distributed to holders of our preferred shares is 10% higher than the dividend distributed to our common shareholders.

As per our bylaws, our board of directors may declare interim dividends based on (i) the accrued profits recorded in our semiannual financial statements; (ii) the accrued profits recorded in our quarterly financial statements or in our financial statements of shorter periods, provided that the total amounts of dividends paid up every six months does not exceed the total amount within the capital reserve determined per article 182 of Brazilian Corporate Law; and (iii) the amount recorded on the profit and loss account or profit reserve account on our last annual or semiannual financial statements.

Under the Brazilian Corporate Law, a company is allowed to withhold payment of the mandatory dividend in respect of common shares and preferred shares if:

management and the fiscal board report to the shareholders meeting that the distribution would be incompatible with the financial circumstances of the company; and

the shareholders ratify this decision at the shareholder’s meeting.

If that is the case:

management must forward to the CVM within five days of the shareholders meeting an explanation justifying the decision at the shareholders meeting; and

the profits that were not distributed are to be recorded as a special reserve and, if not absorbed by losses in subsequent fiscal years, are to be paid as dividends as soon as the company’s financial situation allows.

For the purposes of the Brazilian Corporate Law, net profits are defined as net income after income tax and social contribution for the fiscal year, net of any accumulated losses from prior fiscal years and any amounts allocated to beneficiary parties’, employees’ and management’s participation in a company’s profits and subscription bonuses.

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Under Brazilian Corporate Law, adjusted net income is an amount equal to our net income adjusted to reflect allocations to or from (i) legal reserves, and (ii) contingency reserves for anticipated losses, if any.

At each annual shareholders meeting, the Board of Directors is required to suggest the allocation of net profits obtained during the preceding fiscal year. Under Brazilian Corporate Law, we are required to maintain a legal reserve, to which 5% of our net profits must be allocated for each fiscal year, until the reserve amounts to 20% of our paid-in capital. Net losses, if any, shall be deducted from accumulated profits, profit reserves and legal reserve, following this order.

Brazilian Corporate Law also provides for an additional allocation of net profits to special accounts, also to be recommended by management and subject to approval by shareholders at the annual shareholders meeting, including the amount of net profits that may be allocated to the contingency reserve for anticipated losses that are deemed probable in future years. Any amount so allocated in a previous year must be either:

reversed in the fiscal year in which the loss was anticipated, if the loss does not in fact occur; or

written-off if the anticipated loss occurs.

Net profits may also be allocated to the unrealized income reserve in case the total amount of mandatory dividends exceeds the amount of realized net income. Such allocation should also be suggested by management and subject to approval by shareholders at the shareholders meeting. For such purpose, realized income is the balance of net profits exceeding the sum of:

the positive net result of equity adjustment; and

earnings, revenues or net profits from transactions or the accounting of assets and liabilities at market value, whose financial realization term occurs after the end of the next fiscal year.

The amounts available for distribution are determined on the basis of financial statements prepared in accordance with the accounting practices adopted in Brazil.

If the minimum dividend to be paid to the holders of preferred shares is not paid for the period set forth in our bylaws, which in no event shall be longer than three years, the holders of preferred shares will be entitled to full voting rights until such dividend is paid in full.

Payment of Dividends

We are required by law and our bylaws to hold an annual shareholders meeting until April 30 of each year to approve, among other issues, the allocation of net profits obtained during the preceding fiscal year and the declaration of dividends by decision of common shareholders, acting on the recommendation of the executive officers, as approved by the Board of Directors. The payment of annual dividends is based on the financial statements prepared for each fiscal year ending on December 31. Under the Brazilian Corporate Law, dividends are required to be paid within 60 days following the date the dividend is declared to the shareholders of record on the declaration date, unless a resolution by the shareholders sets forth another date of payment, which must occur before the end of the fiscal year.

A shareholder has a three-year period from the dividend payment date to claim dividends in respect of its shares, after which any unclaimed dividend distributions legally revert to us. Because our shares are issued in book-entry form, dividends with respect to any share are credited to the account holding the share and no action is required on part of the shareholder. We are not required to adjust the amount of paid-in capital for inflation.

If a shareholder is not a resident of Brazil, he or she must register with the Central Bank to be eligible to receive dividends, sales proceeds or other amounts with respect to his or her shares outside of Brazil. Our preferred shares underlying ADSs are held in Brazil by a Brazilian custodian, Citibank N.A., as the agent for the depositary, which is the registered owner of our shares.

Payments of cash dividends and distributions, if any, will be made in Brazilian currency to the custodian on behalf of the depositary, which will then convert those proceeds into U.S. dollars and will provide for U.S. dollars to be delivered to the depositary for distribution to holders of ADSs. If the custodian is unable to immediately convert the Brazilian currency received as dividends into U.S. dollars, the amount of U.S. dollars payable to holders of ADSs may be adversely affected by devaluations of the Brazilian currency that occur before dividends are converted and remitted. Dividends in respect of the preferred shares paid to resident and non resident shareholders, including holders