I have traced this back to the fact that the ShowDotFiles option is only checked in the NT functions in ntdll, but notepad (and notepad++) use the comdlg32 open dialog which does not use those NT functions but the shell32 ones.
It seems to me that the comdlg32 open dialog should check if ShowDotFiles is active and if so, to pass the SHCONTF_INCLUDEHIDDEN flag to the shell32 objects. But I might (probably?) be wrong.
I think that shell32 in shfldr_unixfs.c should check this setting instead. Since it's skipping ntdll and using the Unix file APIs directly, it should report the same thing to applications that ntdll does, namely that dotfiles are not hidden files.