The problem is for some (probably historical) reason, the Microsoft.UI.Xaml nuget package was added to the project.

This package is a WinUI 2, not WinUI 3 package. It's latest version as of today is 2.8.4.

WinUI 2 is is a library of controls that provides official native Microsoft UI controls and features for Windows UWP apps.

But although WinUI 3 is internally based on the same source code as UWP, it's 100% binary incompatible. So the solution is to simply remove this package and use the standard WinUI3 packages, which are usually setup by Visual Studio-provided WinUI3 templates.

When using these templates, Microsoft.UI.Xaml.dll is implicitly provided by the Microsoft.WindowsAppSDK package.