The promotional poster, which appeared on the bar's Facebook page, sparked outrage on social media in the predominantly Buddhist nation, which has seen a surge in religious nationalism in recent months.
General manager Mr Philip Blackwood, 32, owner U Tun Thurein, 40, and manager Ko Htut Ko Ko Lwin, 26, were detained for police questioning December and the bar was shuttered after a complaint by an official from religious authorities, police said.
The posting for the newly opened VGastro.bar, a tapas restaurant and nightclub in a Yangon embassy area, showed a psychedelic mock-up of the Buddha wearing DJ headphones to trail a cheap drinks night this Sunday.
"According to Mr Philip's statement, they were trying to promote the bar. Buddha grabs people's interest... however Buddhists cannot accept it," a police official in Yangon's Bahan township told reporters late Wednesday.
"This insults the religion. So we opened the case under the Religion Act. We will file a lawsuit," he said, requesting not to be named.
Under the act, anyone who attempts to insult, destroy or damage any religion can be punished by a maximum of two years in jail, with another two-year penalty for those who attempt to insult religion through the written word.
The New Zealander is due to appear in a Yangon court on December 11 where he may be charged and deported, the police official told AFP.
A small group of locals protested outside the bar on December 10 night, another police source said, requesting anonymity.
After criticism erupted the bar, which opened just two weeks ago, deleted the post and wrote an apology on the Facebook page.
"VGastro management would like to express our sincere regret if we have offended the citizens of this wonderful city, who have welcomed us so warmly and generously," it said.
"Our intention was never to cause offense to anyone or toward any religious group. Our ignorance is embarrassing."
But the apology attracted a slew of angry comments from Burmese social media users including one saying "Shame on you!", while another decried the bar management as "utterly unprofessional and culturally insensitive."
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