diff --git a/packages/extension/src/TestExecution/ProcessBuilderFactory.ts b/packages/extension/src/TestExecution/ProcessBuilderFactory.ts
index ff9f95a6..60ebade8 100644
--- a/packages/extension/src/TestExecution/ProcessBuilderFactory.ts
+++ b/packages/extension/src/TestExecution/ProcessBuilderFactory.ts
@@ -7,19 +7,25 @@ import {
     Xdebug,
 } from '@vscode-phpunit/phpunit';
 import { inject, injectable } from 'inversify';
-import { TestRunProfileKind } from 'vscode';
+import { TestRunProfileKind, type WorkspaceFolder } from 'vscode';
 import { Configuration } from '../Configuration';
+import { TYPES } from '../types';
 
 @injectable()
 export class ProcessBuilderFactory {
     constructor(
         @inject(Configuration) private config: Configuration,
         @inject(PHPUnitXML) private phpUnitXML: PHPUnitXML,
+        @inject(TYPES.WorkspaceFolder) private workspaceFolder: WorkspaceFolder,
     ) {}
 
     async create(profileKind?: TestRunProfileKind): Promise<ProcessBuilder> {
         const options = { cwd: this.phpUnitXML.root() };
-        const pathReplacer = new PathReplacer(options, this.config.get('paths') as Path);
+        const pathReplacer = new PathReplacer(
+            options,
+            this.config.get('paths') as Path,
+            this.workspaceFolder.uri.fsPath,
+        );
         const xdebug = await new Xdebug(this.config).setMode(this.toMode(profileKind));
         return new ProcessBuilder(this.config, options, pathReplacer, xdebug);
     }
diff --git a/packages/phpunit/src/Configuration/PathReplacer.test.ts b/packages/phpunit/src/Configuration/PathReplacer.test.ts
index bdb577e8..cbefd406 100644
--- a/packages/phpunit/src/Configuration/PathReplacer.test.ts
+++ b/packages/phpunit/src/Configuration/PathReplacer.test.ts
@@ -12,23 +12,33 @@ import {
 import { PathReplacer } from './PathReplacer';
 
 describe('PathReplacer', () => {
-    const givenPathReplacer = (paths?: Record<string, string>, cwd?: string) => {
+    const givenPathReplacer = (
+        paths?: Record<string, string>,
+        cwd?: string,
+        workspaceFolder?: string,
+    ) => {
         return new PathReplacer(
             { cwd: cwd ?? phpUnitProject('') },
             paths ?? {
                 [VAR_WORKSPACE_FOLDER]: '/app',
             },
+            workspaceFolder,
         );
     };
 
     const toWindows = (path: string) => path.replace(/\//g, '\\').replace(/\\$/g, '');
 
-    const givenPathReplacerForWindows = (paths?: Record<string, string>, cwd?: string) => {
+    const givenPathReplacerForWindows = (
+        paths?: Record<string, string>,
+        cwd?: string,
+        workspaceFolder?: string,
+    ) => {
         return new PathReplacer(
             { cwd: cwd ?? phpUnitProjectWin('') },
             paths ?? {
                 [VAR_WORKSPACE_FOLDER]: '/app',
             },
+            workspaceFolder,
         );
     };
 
@@ -282,4 +292,52 @@ describe('PathReplacer', () => {
         const remotePath = '/app/tests/AssertionsTest.php';
         expect(pathReplacer.toLocal(remotePath)).toEqual(remotePath);
     });
+
+    describe('workspaceFolder differs from cwd (monorepo / nested config)', () => {
+        const workspace = '/workspace';
+        const cwd = '/workspace/apps/api';
+
+        it(`replaces ${VAR_WORKSPACE_FOLDER} with workspaceFolder, not cwd`, () => {
+            const pathReplacer = new PathReplacer({ cwd }, undefined, workspace);
+
+            expect(
+                pathReplacer.toRemote(`${VAR_WORKSPACE_FOLDER}/apps/api/phpunit.xml.dist`),
+            ).toEqual('/workspace/apps/api/phpunit.xml.dist');
+        });
+
+        it(`replaces ${VAR_WORKSPACE_FOLDER_BASENAME} with basename of workspaceFolder, not cwd`, () => {
+            const pathReplacer = new PathReplacer({ cwd }, undefined, workspace);
+
+            expect(pathReplacer.replacePathVariables(`${VAR_WORKSPACE_FOLDER_BASENAME}`)).toEqual(
+                'workspace',
+            );
+        });
+
+        it(`replaces ${VAR_PWD} with cwd, not workspaceFolder`, () => {
+            const pathReplacer = new PathReplacer({ cwd }, undefined, workspace);
+
+            expect(pathReplacer.toRemote(`${VAR_PWD}/vendor/bin/phpunit`)).toEqual(
+                '/workspace/apps/api/vendor/bin/phpunit',
+            );
+        });
+
+        it(`does not double-nest path when ${VAR_WORKSPACE_FOLDER} contains subdirectory`, () => {
+            const pathReplacer = new PathReplacer({ cwd }, undefined, workspace);
+
+            const result = pathReplacer.toRemote(
+                `${VAR_WORKSPACE_FOLDER}/apps/api/vendor/bin/phpunit`,
+            );
+
+            expect(result).toEqual('/workspace/apps/api/vendor/bin/phpunit');
+            expect(result).not.toContain('apps/api/apps/api');
+        });
+
+        it(`falls back to cwd when workspaceFolder is not provided`, () => {
+            const pathReplacer = new PathReplacer({ cwd });
+
+            expect(
+                pathReplacer.toRemote(`${VAR_WORKSPACE_FOLDER}/apps/api/phpunit.xml.dist`),
+            ).toEqual('/workspace/apps/api/apps/api/phpunit.xml.dist');
+        });
+    });
 });
diff --git a/packages/phpunit/src/Configuration/PathReplacer.ts b/packages/phpunit/src/Configuration/PathReplacer.ts
index 1370a469..a4556b57 100644
--- a/packages/phpunit/src/Configuration/PathReplacer.ts
+++ b/packages/phpunit/src/Configuration/PathReplacer.ts
@@ -29,16 +29,20 @@ export class PathReplacer {
     constructor(
         private options: SpawnOptions = {},
         paths?: Path,
+        workspaceFolder?: string,
     ) {
         this.cwd = this.fixWindowsDriveLetter(
             (this.options?.cwd as string) ?? (process.env.cwd as string),
         );
+        const workspaceFolderPath = workspaceFolder
+            ? this.fixWindowsDriveLetter(workspaceFolder)
+            : this.cwd;
         this.pathVariables = new Map<string, string>();
         this.pathVariables.set(VAR_PWD, this.cwd);
-        this.pathVariables.set(VAR_WORKSPACE_FOLDER, this.cwd);
+        this.pathVariables.set(VAR_WORKSPACE_FOLDER, workspaceFolderPath);
         this.pathVariables.set(
             VAR_WORKSPACE_FOLDER_BASENAME,
-            this.cwd ? path.basename(this.cwd) : '',
+            workspaceFolderPath ? path.basename(workspaceFolderPath) : '',
         );
         this.pathVariables.set(VAR_USER_HOME, os.homedir());
         this.pathVariables.set(VAR_PATH_SEPARATOR, path.sep);