String controlXml = "" +
                "<client>" +
                "   <name>Hello&nbsp;World</name>" +
                "</client>";

String testXml = "" +
                "<client>" +
                "   <name>Hello&nbsp;World</name>" +
                "</client>";

XMLUnit.setIgnoreComments(true);
XMLUnit.setIgnoreWhitespace(true);
Diff diff = new Diff(controlXml,testXml);
boolean result = diff.similar(); //result is false

[Fatal Error] :1:103: The entity "nbsp" was referenced, but not declared.

XMLUnit.setExpandEntityReferences(false);  //tried true, false
        XMLUnit.setIgnoreDiffBetweenTextAndCDATA(false);  //tried true, false