Note that Emacs can interface with tools for encrypting and decrypting (and can work seamlessly with encrypted files in many cases), but Emacs itself is not performing those activities. There are many ways of encrypting things, and a decision on which approach to use is probably not going to be entirely tied to Emacs (although you’ll want to be confident that the two things will work together).
How would the local language server inspect a file which is on some other machine?
You should start by establishing how that is going to work, and add that information to your question.