Abstract: Current unsupervised domain adaptation (UDA) methods for semantic segmentation typically assume identical class labels between the source and target domains. This assumption ignores the label-level domain gap, which is common in real-world scenarios, and limits their ability to identify finer-grained or novel categories without requiring extensive manual annotation.A promising direction to address this limitation lies in recent advancements in foundation models, which exhibit strong generalization abilities due to their rich prior knowledge. However, these models often struggle with domain-specific nuances and underrepresented fine-grained categories.To address these challenges, we introduce DynAlign, a two-stage framework that integrates UDA with foundation models to bridge both the image-level and label-level domain gaps. Our approach leverages prior semantic knowledge to align source categories with target categories that can be novel, more fine-grained, or named differently. (e.g., vehicle to car, truck, bus). Foundation models are then employed for precise segmentation and category reassignment. To further enhance accuracy, we propose a knowledge fusion approach that dynamically adapts to varying scene contexts. DynAlign generates accurate predictions in a new target label space without requiring any manual annotations, allowing seamless adaptation to new taxonomies through either model retraining or direct inference. Experiments on the GTA $\rightarrow$ IDD and GTA$\rightarrow$ Mapillary benchmarks validate the effectiveness of our approach, achieving a significant improvement over existing methods. Our code is publically available at https://github.com/hansunhayden/DynAlign.