If you didn't paint it, yes it would rust.
After cutting, file and sand it smooth. No smoother than 320 grit. Make sure it is clean prior to painting. If you want extra protection, apply paraphin-type wax after the paint has cured for a few days.
It may rust eventually, but far after the bottom of the fender rusts out. The dirt builds up at the bottom, not up by the light.
The side light from a '97 A8 is square, not rectangular. It would look quite odd.
The reason for the hole difference is you got a PFL (pre facelift) fender, but your car is a facelift.
If you are really worried about rust you should be checking more susceptible places: rear wheel wells, subframes front and rear, roof channels, hard brake lines. And under the battery tray in extreme cases.
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