For the list of query features, supported without using local SQL engine, see SQL Translation. If you set this property to false and run a query, using not supported features, via this command you will get an exception: "Select statement cannot be directly executed by service".
Please note, however, that if you use local SQL engine, and a query requires it to run, all the data from the tables, mentioned in the query, is loaded to the local cache. If this is a lot of data, and you prefer rather to get an exception than to load huge volumes of data to local cache, set this parameter to true.
Target Platforms: Windows 7, Windows Vista SP1 or later, Windows XP SP3, Windows Server 2008 (Server Core not supported), Windows Server 2008 R2 (Server Core supported with SP1 or later), Windows Server 2003 SP2