This behavior is by design: type identity is not preserved on the client,
otherwise strong coupling between server and client would be required.
Web services a lot about interoperability and it is essential for
interoperability that there are no assumptions are made about the
implementation or type system of a given Web Service.

WebService publishes its contract (service description) which describes the
message exchange and the wire signatures, but holds no details on the web
service implementation.  In this particular case the
System.Net.NetworkCredential class will be described as a schema type with
three elements: UserName, Password and Domain, on the client side, when the
proxy is generated from the service description, again no assumption is
made about the web service implementation, and types declared in the wsdl
re-created on the client as a User defined types without any
business-object logic, with just one grantee: the serialized instances of
the created classes (wire signature) will validate against
service-published contract.