Parenthetical double negation?
Solution 1:
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.
Solution 2:
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.
Solution 3:
In legalese typically shall not is used. It avoids the ambiguity of the word can. May not would also seem to be appropriate.