This functionality works as intended for me in the web application. However, when utilizing Thunderbird on Linux (given that native Outlook isn't a viable option), I've encountered an issue where declining an event without an accompanying email still results in the event's automatic deletion.
The current behavior of deleting events upon declining attendance is unexpected and deviating from the norm in most other calendars. I'd argue that it is objectively incorrect; when marking an event as "not attending," the intention is to convey non-participation, not to signify the event's cancellation. Deleting an item should always be a deliberate action and not something that users inadvertently trigger.
Since our migration to MS365, several colleagues have encountered challenges with this unexpected behavior, leading to prolonged searches for solutions, resulting in substantial time loss. At least the user experience across platforms should be consistent, so that when the toggle is enabled, events declined in any calendar client are processed in the same way as in the web app. However, I'd suggest to reconsider, if the current way of deleting events that are declined is correct in the first place.