No it’s processed on device. You can even try this with airplane mode. The cutout feature still works even for new photos taken while offline. There is on-device processing of nudes.

And turning it off or on makes no effect. No matter what, it is not possible on an iPhone to use many photo features if the photo is of a nude person.

They already exist on the iPhone. Take a nude. Try and use the cutout feature. Find that you’re absolutely not able to do it. Now find a non nude picture and use the cutout feature. Find that you can absolutely use it.

This stuff is already enacted right now on iPhone.