diff --git a/lib/sax.js b/lib/sax.js
index 552c4d3..7b4b1c7 100644
--- a/lib/sax.js
+++ b/lib/sax.js
@@ -1376,7 +1376,15 @@
           }
 
           if (c === ';') {
-            parser[buffer] += parseEntity(parser)
+            var parsedEntity = parseEntity(parser)
+
+            // Custom entities can contain tags, so we potentially need to parse the result
+            if (parser.state === S.TEXT_ENTITY && !sax.ENTITIES[parser.entity] && parsedEntity !== '&' + parser.entity + ';') {
+              chunk = chunk.slice(0, i) + parsedEntity + chunk.slice(i)
+            } else {
+              parser[buffer] += parsedEntity
+            }
+
             parser.entity = ''
             parser.state = returnState
           } else if (isMatch(parser.entity.length ? entityBody : entityStart, c)) {
diff --git a/test/entity-tags.js b/test/entity-tags.js
new file mode 100644
index 0000000..7f17526
--- /dev/null
+++ b/test/entity-tags.js
@@ -0,0 +1,15 @@
+require(__dirname).test({
+  xml: 'testing &custom; hi &unknown;',
+  entities: {
+    custom: '<foo bar="baz">hi</foo>'
+  },
+  expect: [
+    ['text', 'testing '],
+    ['opentagstart', {'name': 'FOO', attributes: {}}],
+    ['attribute', {name: 'BAR', value: 'baz'}],
+    ['opentag', {'name': 'FOO', attributes: {BAR: 'baz'}, isSelfClosing: false}],
+    ['text', 'hi'],
+    ['closetag', 'FOO'],
+    ['text', ' hi &unknown;']
+  ]
+})
diff --git a/test/index.js b/test/index.js
index 1df008f..a5335b6 100644
--- a/test/index.js
+++ b/test/index.js
@@ -10,6 +10,11 @@ exports.sax = sax
 exports.test = function test (options) {
   var xml = options.xml
   var parser = sax.parser(options.strict, options.opt)
+  if (options.entities) {
+    for (var key in options.entities) {
+      parser.ENTITIES[key] = options.entities[key]
+    }
+  }
   var expect = options.expect
   var e = 0
   sax.EVENTS.forEach(function (ev) {