I use
<Deployment>
<DeploymentItem filename="TestProject1\Config\" outputDirectory="TestConfig" /><br>
</Deployment>
in the Local.testsettings to copy all files under TestProject1\Config\ to 'TestRoot'\TestConfig\, but it copies the files direct in the Test 'TestRoot' folder.
I found out that it work after restarting Visual Studio. A rebuild of the solution or clicking the Refresh button in the TestListEditor will not include a change/setting of the outputDirectory attribute in of DeploymentItem....