Nezzar, in office from 1990 to 1994 while Algeria was battling Islamists in a brutal civil war, has been accused of torture and arbitrary arrests by a group of alleged victims.
Last year, the Swiss attorney general's office said it could not move forward with the case as there was no conclusive evidence of a "conflict" in Algeria during the period in question, leaving a key condition for prosecution unfulfilled.
In a May 30th ruling, made public on Wednesday, Switzerland's Federal Tribunal overturned that decision following an appeal by the plaintiffs.
The attorney general now has to re-examine the case, although it is not yet clear if Nezzar will face trial.
He was arrested in Switzerland in October 2011 following a complaint filed by rights groups TRIAL International over his alleged role in violations committed from 1992 to 1994.
TRIAL invoked special Swiss legislation adopted in 2011 that allows the country's justice system to try people suspected of war crimes committed anywhere in the world.
Nezzar was freed shortly after his arrest on condition that he continue to cooperate with Swiss justice and the case has been subject to multiple arguments and appeals since.
The attorney general's office told AFP on Wednesday that it would study the court's ruling before deciding on its next steps.
TRIAL insists there is evidence that Nezzar "authorised and incited the military and public function agents to exercise acts of tortures, to commit murders, extrajudicial killings, enforced disappearances and other acts
constituting grave violations of international humanitarian law."