The UK and EU have agreed on a "large part" of the agreement that will lead to the "orderly withdrawal" of the UK.
Negotiators Michel Barnier and David Davis said the deal on what the UK calls the implementation period was a "decisive step" in the Brexit process.
But issues still to be resolved include the Northern Ireland border.
And Scotland's fishing industry has reacted angrily to the deal, which will see the UK "consulted" on quotas and access to its waters until 2021.
Brexit Secretary Mr Davis said Monday's transition agreement, which is conditional on both sides agreeing a final withdrawal treaty, would smooth the path to a future permanent relationship.
Mr Barnier said the legal text marked a "decisive step" but added that it was "not the end of the road".
The key aspects of the agreement announced in Brussels are:
The transitional period will last from Brexit day on 29 March 2019 to 31 December 2020
EU citizens arriving in the UK between these two dates will enjoy the same rights and guarantees as those who arrive before Brexit. The same will apply to UK expats on the continent
The UK will be able to negotiate, sign and ratify its own trade deals during the transition period
The UK will still be party to existing EU trade deals with other countries
The UK's share of fishing catch will be guaranteed during transition but UK will effectively remain part of the Common Fisheries Policy, yet without a direct say in its rules, until the end of 2020
Northern Ireland will effectively stay in parts of the single market and the customs union in the absence of other solutions to avoid a hard border with the Republic of Ireland
The EU says this so-called "backstop option" for Northern Ireland was a key part of December's phase one agreement with the UK and must continue to apply "unless and until another solution is found".
Theresa May has suggested this outcome - which is favoured by Dublin - would be unacceptable as it would effectively shift the existing land border to the Irish Sea and compromise UK sovereignty.
Both the UK and the EU hope the terms of an agreement on the transitional period can be signed off by Mrs May's fellow 27 leaders at the EU summit this week.
The UK has said it had secured a number of improvements to the text, including an explicit reference to Gibraltar being covered by the agreement and the creation of a joint committee to oversee the process.