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You do not have the necessary perssmion to change Domain Logon Name for the user
Check this thread - social.microsoft.com/.../not-able-to-create-new-user-on-crm2011onpremise
Feel free to mark my reply as an answer.
Got the same problem, and I solved it.
First you need to go to "Information Services (IIS) Manager", click on "Application Tools", then right click on CRMAppTool, "Advanced Settings", next to "Identity", click on "...", select "Custom Account", enter the Account Name and Password you are using in the CRM organization.
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