To quote from ISO 8879:1986 Clause 9.5, lines 8-13, 14, 19-22:
    A replacement character is considered to be in the same entity as
    its reference.
    A replacement character is treated as though it were entered
    directly except that the replacement for a numeric character
    reference is always treated as data in the context in which
    the replacement occurs.
    NOTES
    2 When a document is translated to a different document character
    set, the character number of each numeric character reference must
    be changed to the corresponding character number of the new set.