(An idiom not to be translated literally... ^_~)
As you say, a literal translation is often not the best way to go. I've recently had to translate a line from Russian which uses an idiom about "the bitterness of bread" - wait, what? That simply doesn't work in English. I always remember that J.R.R. Tolkien offered specific notes on how to translate the Names in Lord of the Rings - he valued the connections and connotations between them as more important than the actual words he'd written.
From a PPC perspective, though, a fanfic which uses the wrong translation of things - or worse, mixes between translations - would probably be considered bad. I would say that for a translated work, a fanfic can always reference the original language, or it can reference the same language as it is written in. Invoking a third language would be out.
Given how much of fanfic is written in English, this does introduce bias: a French speaker writing in English about Frodon Sacquet of Hobbitebourg would be considered 'bad', whereas it's hard to imagine many English-first-language fans of almost anything non-English writing competent fanfic in the original language.
... honestly, actually, I'd find a fanfic which consistently used a translation's names quite charming. The issue would come, as you suggest, when stuff other than names began to be translated. If a character wound up using a back-translated version of their catchphrase, that would be bad writing.