diff --git a/CHANGELOG.md b/CHANGELOG.md
index d1c6d636..d1e7b0c8 100644
--- a/CHANGELOG.md
+++ b/CHANGELOG.md
@@ -2,6 +2,10 @@
 
 ## Unreleased
 
+- Fix a bug where dynamic variables (those declared with `sh:`) were not
+  running in the task directory when the task has a custom dir or it was
+  in an included taskfile
+  ([#384](https://github.com/go-task/task/issues/384)).
 - The watch feature (via the `--watch` flag) got a few different bug fixes and
   should be more stable now
   ([#423](https://github.com/go-task/task/pull/423), [#365](https://github.com/go-task/task/issues/365)).
diff --git a/internal/compiler/compiler.go b/internal/compiler/compiler.go
index 1e0fabfa..16c13886 100644
--- a/internal/compiler/compiler.go
+++ b/internal/compiler/compiler.go
@@ -8,6 +8,6 @@ import (
 // E.g. variable merger, template processing, etc.
 type Compiler interface {
 	GetVariables(t *taskfile.Task, call taskfile.Call) (*taskfile.Vars, error)
-	HandleDynamicVar(v taskfile.Var) (string, error)
+	HandleDynamicVar(v taskfile.Var, dir string) (string, error)
 	ResetCache()
 }
diff --git a/internal/compiler/v2/compiler_v2.go b/internal/compiler/v2/compiler_v2.go
index 5c1d6e46..d9319547 100644
--- a/internal/compiler/v2/compiler_v2.go
+++ b/internal/compiler/v2/compiler_v2.go
@@ -4,6 +4,7 @@ import (
 	"bytes"
 	"context"
 	"fmt"
+	"path/filepath"
 	"strings"
 	"sync"
 
@@ -37,8 +38,20 @@ type CompilerV2 struct {
 // 4. Taskvars file variables
 // 5. Environment variables
 func (c *CompilerV2) GetVariables(t *taskfile.Task, call taskfile.Call) (*taskfile.Vars, error) {
-	vr := varResolver{c: c, vars: compiler.GetEnviron()}
+	// NOTE(@andreynering): We're manually joining these paths here because
+	// this is the raw task, not the compiled one.
+	dir := t.Dir
+	if !filepath.IsAbs(dir) {
+		dir = filepath.Join(c.Dir, dir)
+	}
+
+	vr := varResolver{
+		c:    c,
+		dir:  dir,
+		vars: compiler.GetEnviron(),
+	}
 	vr.vars.Set("TASK", taskfile.Var{Static: t.Task})
+
 	for _, vars := range []*taskfile.Vars{c.Taskvars, c.TaskfileVars, call.Vars, t.Vars} {
 		for i := 0; i < c.Expansions; i++ {
 			vr.merge(vars)
@@ -49,6 +62,7 @@ func (c *CompilerV2) GetVariables(t *taskfile.Task, call taskfile.Call) (*taskfi
 
 type varResolver struct {
 	c    *CompilerV2
+	dir  string
 	vars *taskfile.Vars
 	err  error
 }
@@ -63,7 +77,7 @@ func (vr *varResolver) merge(vars *taskfile.Vars) {
 			Static: tr.Replace(v.Static),
 			Sh:     tr.Replace(v.Sh),
 		}
-		static, err := vr.c.HandleDynamicVar(v)
+		static, err := vr.c.HandleDynamicVar(v, vr.dir)
 		if err != nil {
 			vr.err = err
 			return err
@@ -74,7 +88,7 @@ func (vr *varResolver) merge(vars *taskfile.Vars) {
 	vr.err = tr.Err()
 }
 
-func (c *CompilerV2) HandleDynamicVar(v taskfile.Var) (string, error) {
+func (c *CompilerV2) HandleDynamicVar(v taskfile.Var, dir string) (string, error) {
 	if v.Static != "" || v.Sh == "" {
 		return v.Static, nil
 	}
@@ -92,7 +106,7 @@ func (c *CompilerV2) HandleDynamicVar(v taskfile.Var) (string, error) {
 	var stdout bytes.Buffer
 	opts := &execext.RunCommandOptions{
 		Command: v.Sh,
-		Dir:     c.Dir,
+		Dir:     dir,
 		Stdout:  &stdout,
 		Stderr:  c.Logger.Stderr,
 	}
diff --git a/internal/compiler/v3/compiler_v3.go b/internal/compiler/v3/compiler_v3.go
index 0cc9ba78..1c0e2d5b 100644
--- a/internal/compiler/v3/compiler_v3.go
+++ b/internal/compiler/v3/compiler_v3.go
@@ -4,6 +4,7 @@ import (
 	"bytes"
 	"context"
 	"fmt"
+	"path/filepath"
 	"strings"
 	"sync"
 
@@ -31,6 +32,13 @@ func (c *CompilerV3) GetVariables(t *taskfile.Task, call taskfile.Call) (*taskfi
 	result := compiler.GetEnviron()
 	result.Set("TASK", taskfile.Var{Static: t.Task})
 
+	// NOTE(@andreynering): We're manually joining these paths here because
+	// this is the raw task, not the compiled one.
+	dir := t.Dir
+	if !filepath.IsAbs(dir) {
+		dir = filepath.Join(c.Dir, dir)
+	}
+
 	rangeFunc := func(k string, v taskfile.Var) error {
 		tr := templater.Templater{Vars: result, RemoveNoValue: true}
 		v = taskfile.Var{
@@ -40,7 +48,7 @@ func (c *CompilerV3) GetVariables(t *taskfile.Task, call taskfile.Call) (*taskfi
 		if err := tr.Err(); err != nil {
 			return err
 		}
-		static, err := c.HandleDynamicVar(v)
+		static, err := c.HandleDynamicVar(v, dir)
 		if err != nil {
 			return err
 		}
@@ -61,7 +69,7 @@ func (c *CompilerV3) GetVariables(t *taskfile.Task, call taskfile.Call) (*taskfi
 	return result, nil
 }
 
-func (c *CompilerV3) HandleDynamicVar(v taskfile.Var) (string, error) {
+func (c *CompilerV3) HandleDynamicVar(v taskfile.Var, dir string) (string, error) {
 	if v.Static != "" || v.Sh == "" {
 		return v.Static, nil
 	}
@@ -79,7 +87,7 @@ func (c *CompilerV3) HandleDynamicVar(v taskfile.Var) (string, error) {
 	var stdout bytes.Buffer
 	opts := &execext.RunCommandOptions{
 		Command: v.Sh,
-		Dir:     c.Dir,
+		Dir:     dir,
 		Stdout:  &stdout,
 		Stderr:  c.Logger.Stderr,
 	}
diff --git a/task_test.go b/task_test.go
index f86d2741..9613f814 100644
--- a/task_test.go
+++ b/task_test.go
@@ -303,16 +303,15 @@ func TestPrecondition(t *testing.T) {
 }
 
 func TestGenerates(t *testing.T) {
+	const dir = "testdata/generates"
+
 	const (
 		srcTask        = "sub/src.txt"
 		relTask        = "rel.txt"
-		absTask        = "abs.txt"
+		absTask        = "sub/abs.txt"
 		fileWithSpaces = "my text file.txt"
 	)
 
-	// This test does not work with a relative dir.
-	dir, err := filepath.Abs("testdata/generates")
-	assert.NoError(t, err)
 	var srcFile = filepath.Join(dir, srcTask)
 
 	for _, task := range []string{srcTask, relTask, absTask, fileWithSpaces} {
@@ -800,6 +799,18 @@ func TestWhenDirAttributeItCreatesMissingAndRunsInThatDir(t *testing.T) {
 	_ = os.RemoveAll(toBeCreated)
 }
 
+func TestDynamicVariablesShouldRunOnTheTaskDir(t *testing.T) {
+	tt := fileContentTest{
+		Dir:       "testdata/dir/dynamic_var",
+		Target:    "default",
+		TrimSpace: false,
+		Files: map[string]string{
+			"subdirectory/dir.txt": "subdirectory\n",
+		},
+	}
+	tt.Run(t)
+}
+
 func TestDisplaysErrorOnUnsupportedVersion(t *testing.T) {
 	e := task.Executor{
 		Dir:    "testdata/version/v1",
diff --git a/testdata/dir/dynamic_var/.gitignore b/testdata/dir/dynamic_var/.gitignore
new file mode 100644
index 00000000..5e4f4543
--- /dev/null
+++ b/testdata/dir/dynamic_var/.gitignore
@@ -0,0 +1 @@
+subdirectory/dir.txt
diff --git a/testdata/dir/dynamic_var/Taskfile.yml b/testdata/dir/dynamic_var/Taskfile.yml
new file mode 100644
index 00000000..9a2d8cd6
--- /dev/null
+++ b/testdata/dir/dynamic_var/Taskfile.yml
@@ -0,0 +1,11 @@
+version: '3'
+
+tasks:
+  default:
+    cmds:
+      - echo '{{.FOLDER}}' > dir.txt
+    dir: subdirectory
+    vars:
+      FOLDER:
+        sh: basename $(pwd)
+    silent: true
diff --git a/testdata/dir/dynamic_var/subdirectory/dir.txt b/testdata/dir/dynamic_var/subdirectory/dir.txt
new file mode 100644
index 00000000..bcba6aa2
--- /dev/null
+++ b/testdata/dir/dynamic_var/subdirectory/dir.txt
@@ -0,0 +1 @@
+subdirectory
diff --git a/testdata/generates/Taskfile.yml b/testdata/generates/Taskfile.yml
index 4dc6e9ec..e2f4a87b 100644
--- a/testdata/generates/Taskfile.yml
+++ b/testdata/generates/Taskfile.yml
@@ -4,7 +4,7 @@ vars:
   BUILD_DIR: $pwd
 
 tasks:
-  abs.txt:
+  sub/abs.txt:
     desc: generates dest file based on absolute paths
     deps:
       - sub/src.txt
diff --git a/variables.go b/variables.go
index 649bac4a..a6929cfd 100644
--- a/variables.go
+++ b/variables.go
@@ -60,7 +60,7 @@ func (e *Executor) CompiledTask(call taskfile.Call) (*taskfile.Task, error) {
 	new.Env.Merge(r.ReplaceVars(e.Taskfile.Env))
 	new.Env.Merge(r.ReplaceVars(origTask.Env))
 	err = new.Env.Range(func(k string, v taskfile.Var) error {
-		static, err := e.Compiler.HandleDynamicVar(v)
+		static, err := e.Compiler.HandleDynamicVar(v, new.Dir)
 		if err != nil {
 			return err
 		}