diff --git a/src/dstack/_internal/core/models/repos/local.py b/src/dstack/_internal/core/models/repos/local.py
index b0a5e0c59..2316c2c4f 100644
--- a/src/dstack/_internal/core/models/repos/local.py
+++ b/src/dstack/_internal/core/models/repos/local.py
@@ -84,9 +84,9 @@ def write_code_file(self, fp: BinaryIO) -> str:
                 .add_custom_ignore_filename(".dstackignore")
                 .build()
             ):
-                path = entry.path().relative_to(repo_path.absolute())
-                if path != Path("."):
-                    t.add(path, recursive=False)
+                entry_path_within_repo = entry.path().relative_to(repo_path)
+                if entry_path_within_repo != Path("."):
+                    t.add(entry.path(), arcname=entry_path_within_repo, recursive=False)
         logger.debug("Code file size: %s", sizeof_fmt(fp.tell()))
         return get_sha256(fp)
 
diff --git a/src/tests/_internal/core/models/repos/test_local.py b/src/tests/_internal/core/models/repos/test_local.py
new file mode 100644
index 000000000..e6a1b8ab2
--- /dev/null
+++ b/src/tests/_internal/core/models/repos/test_local.py
@@ -0,0 +1,79 @@
+import io
+import tarfile
+from pathlib import Path
+
+import pytest
+
+from dstack._internal.core.models.repos.local import LocalRepo
+
+
+class TestRepoPathType:
+    REPO_DIR_NAME = "repo"
+
+    @pytest.fixture
+    def repo_parent_dir(self, tmp_path: Path) -> Path:
+        repo_dir = tmp_path / self.REPO_DIR_NAME
+        repo_dir.mkdir()
+        (repo_dir / "file.txt").touch()
+        (repo_dir / "inner").mkdir()
+        (repo_dir / "inner" / "file.txt").mkdir()
+        return tmp_path
+
+    @staticmethod
+    def check(repo: LocalRepo) -> None:
+        fp = io.BytesIO()
+        repo.write_code_file(fp)
+        fp.seek(0)
+        with tarfile.open(fileobj=fp, mode="r") as tar:
+            names = tar.getnames()
+            assert "file.txt" in names
+            assert "inner/file.txt" in names
+
+    def test_absolute(self, repo_parent_dir: Path):
+        repo = LocalRepo.from_dir(repo_parent_dir.resolve() / self.REPO_DIR_NAME)
+        self.check(repo)
+
+    def test_relative(self, repo_parent_dir: Path, monkeypatch):
+        monkeypatch.chdir(repo_parent_dir)
+        repo = LocalRepo.from_dir(self.REPO_DIR_NAME)
+        self.check(repo)
+
+    def test_cwd(self, repo_parent_dir: Path, monkeypatch):
+        monkeypatch.chdir(repo_parent_dir / self.REPO_DIR_NAME)
+        repo = LocalRepo.from_dir(".")
+        self.check(repo)
+
+    def test_with_parent_reference(self, repo_parent_dir: Path, monkeypatch):
+        cwd = repo_parent_dir / "test"
+        cwd.mkdir()
+        monkeypatch.chdir(cwd)
+        repo = LocalRepo.from_dir(Path("..") / self.REPO_DIR_NAME)
+        self.check(repo)
+
+
+def test_ignore_rules(tmp_path: Path):
+    (tmp_path / "file1.txt").touch()
+    (tmp_path / "file2.py").touch()
+    (tmp_path / ".hidden").touch()
+    (tmp_path / ".dstackignore").write_text("file2.py\n")
+    (tmp_path / "inner").mkdir()
+    (tmp_path / "inner" / "file3.txt").touch()
+    (tmp_path / "inner" / "file4.py").touch()
+    (tmp_path / "inner" / ".gitignore").write_text("*.txt")
+    (tmp_path / ".git").mkdir()
+    (tmp_path / ".git" / "config").touch()
+
+    repo = LocalRepo.from_dir(tmp_path)
+    fp = io.BytesIO()
+    repo.write_code_file(fp)
+    fp.seek(0)
+
+    with tarfile.open(fileobj=fp, mode="r") as tar:
+        names = tar.getnames()
+        assert "file1.txt" in names
+        assert "file2.py" not in names  # ignored by .dstackignore
+        assert ".hidden" in names
+        assert ".dstackignore" in names
+        assert "inner/file3.txt" not in names  # ignored by inner/.gitignore
+        assert "inner/file4.py" in names
+        assert ".git/config" not in names  # .git always ignored