Introduction Diabetes mellitus and thyroid dysfunction are two endocrine disorders that can affect each other, and the effects of which are poorly understood until now. Association between subclinical hypothyroidism (SCH) and diabetic nephropathy (DN) remains unclear. Aim The aim was to evaluate the association between subclinical hypothyroidism and diabetic nephropathy in patients with type 2 diabetes mellitus (T2DM). Patients and methods A total of 242 patients with type 2 diabetes were recruited in the study who, according to the results, were subdivided into three groups: euthyroid group [thyroid stimulating hormone (TSH) 0.30–4.2 mIU/ml], SCH group (TSH >4.2 and < 10 mIU/ml) with negative antithyroid peroxidase antibodies (anti-TPO), and SCH group with positive anti-TPO. Results Our study shows a high prevalence of subclinical hypothyroidism (29.8%) and DN (47.1%) among type 2 diabetic patients. SCH predicted diabetic nephropathy with an odd ratio of 1.86 (1.01–3.41) and P value of 0.03. There is a significant positive correlation between albuminuria with TSH (P< 0.001), and there is a significant positive correlation between albuminuria with anti-TPO (P< 0.001). Moreover, there are significant inverse correlations between glomerular filtration rate (GFR) with TSH (P<0.05) and between GFR and anti-TPO (P< 0.001). Conclusion and recommendation There is an association between subclinical hypothyroidism and diabetic nephropathy in T2DM. Regular testing of the thyroid function is recommended for all patients with T2DM to avoid DN or more deterioration of the kidney functions. Future larger studies are needed to know the exact mechanism by which high serum TSH leads to renal impairment and for evaluating the proper TSH target in patients with T2DM.