This configuration flag has no impact on the icon overlay.
However, I found a OneDrive setting that caused the problem. By changing this setting I was able to correct the display behavior. Even though it's no longer a problem for me, I am still documenting my findings below as it may help somebody else.
On the computer where I had the problem I am running the latest Windows 10 insider preview release (currently Build 16275). I installed XYplorer on another computer that has Windows 10 and OneDrive but is not subscribed to the insider preview release. On that computer everything is working fine. So I compared OneDrive between the two computers.
On my main computer where I am running Windows 10 insider preview, Microsoft pushed out a new OneDrive feature that's called 'Files On Demand'. It's explained in more detail here:
https://blogs.windows.com/windowsexperi ... -insiders/
https://support.office.com/en-us/articl ... n-US&ad=US
With this flag set to on, the Windows Explorer interface changes and each file and folder has a status reflecting the on-demand status:

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When this flag is on, a couple of strange things happen in XYplorer:
1. All files and folders get a short-cut overlay.
2. With the configuration tweak setting of 'TouchScreenMode=1', all the folder icons in the tree that are within the OneDrive folder become 25 % bigger which doesn't look too good:

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3. The OneDrive folder and all the sub-folders and files within the folder aren't displayed when I deactivate the configuration setting 'Show junctions'. This is even the case when the 'Files On-Demand' flag is switched to off. However, on my other computer where I don't run the Windows 10 preview version, the OneDrive folder and sub-folders show up even if the 'Show junctions' flag is unchecked.
4. When I hoover over a folder or file there is a pop-up with the junction target but it's in Chinese (or maybe it's Japanese, can't tell).

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5. When I click on the breadcrumb, the OneDrive folder changes to something undefined and I get message 'not found'.

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6. All of the files within the OneDrive folder display empty icons as soon as they have been synchronized to OneDrive (files that are new and haven't been synchronized yet do show the correct icon).

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Before I found out about the OneDrive flag I was able to work around this specific issue by going to the function 'New Files' creating a new Test file for each file extension.

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After that files with these extensions show the correct icon (not only in the sub-folder where I added the new files but in all OneDrive sub-folders). This only works for the current session of XYplorer. After restarting the program, this process has to be repeated.

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Once I uncheck the flag 'Files On-Demand', everything looks ok (including icons), except the top-level icon (the OneDrive folder icon) is still larger than the other ones and has the short-cut overlay. However, that's not a problem since all the other issues are gone.

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