Parenthetical double negation?

The sentence reads correctly, but a bit clumsily because legally and physically are not bound. By that I mean, the negation makes sense, but I have trouble immediately understanding what you're referring to with "legally, not physically." You might consider:

He cannot go outside (legally speaking, but not physically), because he is on house arrest.

Because the term house arrest already provides a great deal of context, it probably isn't even necessary to include the word physically. Perhaps try rephrasing with something like:

Legally, he is not permitted to go outside because he is on house arrest.

In legalese typically shall not is used. It avoids the ambiguity of the word can. May not would also seem to be appropriate.