The piece, called Saddam Hussein Shark, shows the handcuffed ex-Iraqi ruler suspended in liquid and wearing nothing more than underpants.
The mayor of Middelkerke, Michel Landuyt, said the work could “shock people”, including Muslims.
He said he decided to ban Czech artist David Cerny’s sculpture before the row over cartoons of the Prophet Muhammad.
The Saddam piece, which echoes British artist Damien Hirst’s famous shark suspended in formaldehyde, was first shown in Prague last September.
But Mr Landuyt felt its exhibition would be too much for the small Belgian seaside town. “In my view, it was too shocking,” he said.
“They wanted to put this piece in a location where many children come, so that couldn’t be allowed,” he told the BBC.
He added that the work was now going to be displayed in a museum in the Belgian city of Ostend.
“When you go to a museum and are prepared to see those things and there is an explanation, perhaps there is no problem. But when you come somewhere where you don’t expect that, it can be a problem,” he said.
Mr Cerny is an anti-conformist artist. His previous works have included a man hanging from a pole using just one hand, a series of “kits” including one of Jesus, and a pair of naked bronze figures urinating into a pond.
Damien Hirst’s well-known shark installation, entitled The Physical Impossibility of Death in the Mind of Someone Living, was commissioned by art collector Charles Saatchi in 1991 for £50,000.
It propelled Hirst to fame when it first went on display in 1992.