Layers can be placed inside group layers. A group layer can be thought of as a sub-document. First, all layers within the group layer are blended together. Then, the resulting composite image is used in place of the group layer when rendering the rest of the document.
A group layer has it's own canvas, which can be larger or smaller than the top-level document canvas. Filter layers and adjustment layers placed inside group layers work on the group layer's canvas and not on the document canvas. Group layers can be used to composite or filter parts of an image independently.
Content from behind a group layer can be copied into the group layer using a Group Background Layer. Among other things, this allows the creation of filter groups, which don't contain any content of their own, but instead take content from the background and apply several filters to it at once.