This preference is titled well, it determines whether to use the items homebranch or the items holdingbranch for determining circulation rules.

The descriptions, however, are wrong:
homebranch => 'the library the item is from'
holdingbranch => 'the library the item was checked out from'

This is not what happens.

To recreate:
1 - Set an all all rule for all libraries with a checkout period of 5 days
2 - Set an all all rule for library A with a checkout period of 7 days
3 - Sign in to Koha as Library B
4 - Set CircControl to "item's home library"
5 - Set HomeOrHoldingBranch to "the library the item was checked out from"
6 - Find an item with home and holding branch of library A
7 - Check this out to a patron
8 - The item will be a 7 day loan
9 - You would expect to use the rules of the library you checked out from "Library B"