Function or template is not child of stylesheet

An xsl:function or xsl:template declares a component, and a processor looks for components only at the top level, as children of xsl:stylesheet, xsl:transform or xsl:package. One nested inside another instruction is an error, and the stylesheet does not compile.

Incorrect:

<xsl:stylesheet xmlns:xsl="http://www.w3.org/1999/XSL/Transform" version="2.0">
  <xsl:template match="chapter">
    <xsl:function name="my:depth" as="xs:integer">
      <xsl:sequence select="1"/>
    </xsl:function>
  </xsl:template>
</xsl:stylesheet>

Correct:

<xsl:stylesheet xmlns:xsl="http://www.w3.org/1999/XSL/Transform" version="2.0">
  <xsl:template match="chapter">
    <xsl:value-of select="my:depth(.)"/>
  </xsl:template>
  <xsl:function name="my:depth" as="xs:integer">
    <xsl:sequence select="1"/>
  </xsl:function>
</xsl:stylesheet>

A template or function inside xsl:override replaces a component of a used package, and is left alone.