The Proxy design pattern is a structural pattern that allows for the creation of a placeholder or surrogate object that can act as a substitute for a real object. The proxy provides a layer of indirection between the client and the real object, which allows the proxy to perform additional operations before or after forwarding requests to the real object.

When a method annotated with @Transactional is called, Spring dynamically creates a proxy object around the actual object that is being invoked. This proxy intercepts the method call and starts a transaction before the actual method is executed. Once the method completes, the proxy commits the transaction, or rolls it back if an exception occurs.