Hello @Adam-4611,
This behavior is expected because Azure AD Connect only synchronizes users to domains that are verified by Azure AD and you can't use <domainname>.onmicrosoft.com
for synchronization.
The domain has to be a valid Internet domain (such as, .com, .org, .net, .us). Therefore, use different name other than onmicrosoft.com for your organization which you can buy it from Domain Name providers (like: GOdaddy).
If you have plan to buy a new domain in later sometime, then no need to add UPN suffixes as onmicrosoft.com and just proceed further by selecting "Continue without matching all UPN suffixes to verified domain" option as show below, so any UPN that contains a non-routable domain, such as ".local" (example: billa@Company portal .local), will be synchronized to an .onmicrosoft.com domain (example: billa@Company portal .onmicrosoft.com).
Once you add and verify the domain in Azure AD then you can add same name as UPN suffixes in local AD and update to user that suffix name so that Azure AD connect sync updated all synchronized with new suffix name.
More information: https://learn.microsoft.com/en-us/microsoft-365/enterprise/prepare-a-non-routable-domain-for-directory-synchronization?view=o365-worldwide
Hope this helps.
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