When I open the attached file test.xml in "emacs -Q", Emacs complains in
*Warnings*:

  Warning (emacs): File contents detected as iso-latin-1.
    Consider adding an xml declaration with the encoding specified,
    or saving as utf-8, as mandated by the xml specification.

The file looks fine to me, I have even used nxml-insert-xml-declaration
to re-create the XML declaration.

Reproduced in a current build of emacs-26 and on master.