The server migration window takes on the task of moving every bug on one server to another server, including screenshot images.
The server migration window itself can act as a proxy during the process. Acting as a proxy is the best option if the source server is unable to connect to the target server directly. In most cases, it doesn't matter which option you choose.
If 'Clear target database' is set to No, there could be project name conflicts during the migration. The target server can resolve such conflicts by treating the projects as one, adding all the bugs in the source project to the target project, or by renaming the source project before adding it to the target server.
Be aware that clearing any of the databases during the migration process could potentially delete valuable bug reports, so double check what you are doing before choosing this option. Clearing the target database, however, is a good way of making sure that the target server correctly replicates the source server.