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Internal recipients receive an Internet Connection Sharing file instead of a Calendar Sharing message or "Policy does not allow granting permissions" error in Outlook

Symptoms
Consider the following scenario: 
  • In Microsoft Outlook, you right-click an Exchange calendar, point to Share, and then click Share Calendar.
  • You add recipients to the To field of the message by typing the recipients' aliases and then accepting the autocomplete suggestions that are provided by Outlook.
  • You send the sharing invitation.
In this scenario, you experience one of the following symptoms:
  • You receive the following error message:
    Policy does not allow granting permissions at this level to one or more of the recipient(s). please select another permission level and send the sharing invite again.
  • You receive the following prompting message:

    The Calendar was shared with some of the recipients. However, calendar sharing is not available with the following entries because of permission settings on your network:

    Contact name <Contact address>

    Do you want to send them a copy of this calendar in an e-mail message instead?

    Yes No

    Some contacts that are listed are internal to your intranet and to your Exchange servers. However, these contacts are listed together with their external address and not with their internal account name.

    If you click Yes, you receive the following prompting message:

    Send a Calendar via E-mail

    Specify the calendar information you want to include.

    Calendar: Selected_Calendar

    Date Range: Date_Range

    Detail: Availability_Information

    Advanced:

    OK Cancel
    If you click OK, an email Calendar Sharing message is created that contains an Internet Connection Sharing attachment that contains the calendar data. However, the Internet Connection Sharing file does not let internal recipients share your calendar through the Exchange server. The Connection Sharing file provides only a copy of your calendar's information.
Cause
This issue occurs when an internal recipient is also in your Contacts list in Outlook. When you add this recipient to a Calendar Sharing message, the autocomplete feature of Outlook adds the recipient to the recipient list by using the recipient's external email address.

For example, a recipient has the Exchange alias User1. When you add them as a recipient to the Calendar Sharing message, their address is displayed as User_name (User1@contoso) and not as User_name.
Workaround
To work around this issue, select internal recipients directly from the global address list. To do this, follow these steps:
  1. In the Sharing invitation, click the To button. The Select names window opens.
  2. In the Address, select Global Address List.
  3. In the Search box, type the recipient's name.
  4. Select the recipient to whom you want to send the invitation, and then click To.
  5. Repeat steps 3 and 4 for each internal Exchange recipient to whom you want to send the invitation.
  6. Click OK, and then click Send.
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