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Background Diabetic nephropathy (DN) is a common complication of diabetes mellitus (DM) that imposes an enormous burden on the healthcare system. Although some studies show that traditional Chinese medicine (TCM) treatments confer a protective effect on DN, the long-term impact remains unclear. This study aims to examine end-stage renal disease (ESRD) and mortality rates among TCM users with DN. Methods A total of 125,490 patients with incident DN patients from 2004 to 2006 were identified from the National Health Insurance Research Database in Taiwan and followed until 2012. The landmark method was applied to avoid immortal time bias, and propensity score matching was used to select 1:1 baseline characteristics-matched cohort. The Kaplan–Meier method and competing-risk analysis were used to assess mortality and ESRD rates separately. Results Among all eligible subjects, about 60% of patients were classified as TCM users (65,812 TCM users and 41,482 nonusers). After 1:1 matching, the outcomes of 68,882 patients were analyzed. For the ESRD rate, the 8-year cumulative incidence was 14.5% for TCM users [95% confidence interval (CI): 13.9–15.0] and 16.6% for nonusers (95% CI: 16.0–17.2). For the mortality rate, the 8-year cumulative incidence was 33.8% for TCM users (95% CI: 33.1–34.6) and 49.2% for nonusers (95% CI: 48.5–49.9). After adjusting for confounding covariates, the cause-specific hazard ratio of ESRD was 0.81 (95% CI: 0.78–0.84), and the hazard ratio of mortality for TCM users was 0.48 (95% CI: 0.47–0.50). The cumulative incidence of mortality increased rapidly among TCM users with ESRD (56.8, 95% CI: 54.6–59.1) when compared with TCM users without ESRD (30.1, 95% CI: 29.4–30.9). In addition, TCM users who used TCM longer or initiated TCM treatments after being diagnosed with DN were associated with a lower risk of mortality. These results were consistent across sensitivity tests with different definitions of TCM users and inverse probability weighting of subjects. Conclusions The lower ESRD and mortality rates among patients with incident DN correlates with the use of TCM treatments. Further studies about specific TCM modalities or medications for DN are still needed. Electronic supplementary material The online version of this article (10.1186/s12906-019-2491-y) contains supplementary material, which is available to authorized users.