Britain will be able to negotiate new trade deals with other countries, but can not put them into effect during the transition period unless authorised by the EU.
But the EU's draft, in a footnote to the five-page document, calls for the ability to sanction Britain in cases where it would take too long to refer a breach of the transition rules to the EU's top court.
May and her ministers assured Japanese businesses of the importance of maintaining free and frictionless trade after Brexit during the meeting but said nothing firm on the matter, a source familiar with the discussions told Reuters.
They believe this will create a loophole which will effectively let Britain dodge new rules and regulations f or the transition period - something hey are determined to block.
Tory MP Jacob Rees-Mogg, head of the influential backbench group of Tory Brexiteers known as the European Research Group, hit out at the plan.
With less than 300 days to go until the United Kingdom leaves the European Union, the Freight Transport Association (FTA) has urged the United Kingdom government to take "decisive steps" to agree the format and parameters of Britain's future trading relationships with its European neighbours.
A Department for Exiting the European Union spokesman said: 'This is a draft document produced by the EU that simply reflects their stated directives.
May's Cabinet is divided between those who want to remain close to the EU's single market and customs union and those who want a clean break so Britain can strike new trade deals around the world.
'The Secretary of State set out the UK's position in his speech in Teesside last month. We have achieved all we set out to achieve in these negotiations.
The development will anger remainers who have clung to hope that Britain will strike a deal with the European Union that allows a close relationship with the European Union after Brexit.
The hardline stance means Britain would have to swallow new European Union laws without any right to challenge them, or face heavy punishments which would harm the economy.
"This is a crucial year for the Brexit negotiations and of course we will all be better informed, we hope, by certainly this time next year about the future trading relationship with the EU", Bank of England Governor Mark Carney said Thursday.
The plan has yet to be agreed by May's senior ministers, who are meeting this week to try to hammer out their goals for the final trade partnership between Britain and the EU.
Transition increasingly looks less like building a bridge and more like being made to walk the plank.
"I'm sure the PM will be reiterating that when she meets the companies today, and also the commitment to securing an implementation period as soon as possible to give them a period of time to adjust to the new relationship that we are going to build with the European Union".