This option controls the behavior of the filtering engine for the hierarchical taxonomies. Enable this if you want the products belonging to the filter children terms to show in the results for the parent term.
Let’s illustrate this on a small example. Imagine you make a filter out of the Product Categories taxonomy of your shop. Product categories are a hierarchical taxonomy, meaning that there may exist sub-categories. Let’s say we have a shoe shop, and you have a parent category of Boots, which has the subcategories of Hunting Boots, Hiking Boots and Casual Boots.
If you wish for the products for all the subcategories (as well as all the possible sub-sub-sub… categories) to show when the shop is filtered for the Boots category, enable the Include subterms’ products option. If on the other hand you choose to leave it unchecked, only the products that are directly declared as belonging to the Boots category will be displayed when you apply the Boots filter option.