"The difference between overlaying and attaching an xref is in cases with multiple levels (nesting) of xrefs (A.dwg references B.dwg, which references C.dwg). If you xref–attach C.dwg in B.dwg, and then attach B.dwg in A.dwg, you can see the C.dwg contents/entities in both B.dwg and A.dwg. But if you overlay C.dwg in B.dwg, you can see the C.dwg geometry in B.dwg, but not in A.dwg.
Simply – the overlaid xref displays only one level up in the hierarchy while attached xref appears in all levels up. Overlays also allow to create circular references."
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