The Department of Foreign Affairs said in a statement that it had asked China to immediately clarify the law, which was issued by the Hainan Provincial People's Congress.
The statement said the regulation reinforces China's expansive territorial claims and violates international law, particularly the UN Convention on the Law of the Sea.
It said the rule was also contrary to the spirit of the Declaration on the Conduct of Parties in the South China Sea, which China signed with Southeast Asian countries in 2002.
The rule took effect this month, affecting 2 million of the South China Sea's 3.5 million square kilometers. The sweeping area encompasses island groups claimed by Vietnam, the Philippines and others and in some cases occupied by their armed forces.