For the list of query features, supported without using local SQL engine, see SQL Translation. If you set this connection string parameter to false and run a query, using not supported features, 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.