[Zubersoft]

So, just to be clear:

1) You are using the Sync Library->Synchronize to a cloud folder feature
2) The Windows device has "Create Subdirectories per Song" enabled
3) You synchronize to the folder on your iPad, but MobileSheets is looking for files in folders but the synchronization has placed them without folders (as if "Create Subdirectories per Song" was unchecked even though it's checked on your iPad)

Does that seem to match your experience so far? If you look in the OneDrive sync folder, are subdirectories being used for the songs or is it just a flat list of files? What happens if you create a library backup file on the Windows device and restore that under Settings->Backup and Restore->Restore Library from Backup? Does that seem to work without issue? 

As far as your question, the "Create Subdirectories per Song" setting applies when importing, restoring a backup, and using the sync feature.

Thanks,
Mike