diff --git a/extensions/terminal-suggest/src/fig/shared/test/utils.test.ts b/extensions/terminal-suggest/src/fig/shared/test/utils.test.ts
index 728e51571dc17..f0e322f557525 100644
--- a/extensions/terminal-suggest/src/fig/shared/test/utils.test.ts
+++ b/extensions/terminal-suggest/src/fig/shared/test/utils.test.ts
@@ -10,6 +10,7 @@ import {
 	longestCommonPrefix,
 	compareNamedObjectsAlphabetically,
 	fieldsAreEqual,
+	getCWDForFilesAndFolders,
 } from '../utils';
 
 function expect<T>(a: T): { toEqual: (b: T) => void } {
@@ -141,3 +142,42 @@ suite('fig/shared/ compareNamedObjectsAlphabetically', () => {
 		ok(compareNamedObjectsAlphabetically({ name: ['c'] }, { name: ['x'] }) < 0);
 	});
 });
+
+suite('fig/shared/ getCWDForFilesAndFolders', () => {
+	test('should return / when cwd is null', () => {
+		expect(getCWDForFilesAndFolders(null, 'foo')).toEqual('/');
+	});
+
+	test('should return cwd with trailing slash when dirname is empty', () => {
+		expect(getCWDForFilesAndFolders('/home/user', 'foo')).toEqual('/home/user/');
+		expect(getCWDForFilesAndFolders('/home/user/', 'bar')).toEqual('/home/user/');
+	});
+
+	test('should normalize relative parent directory paths', () => {
+		expect(getCWDForFilesAndFolders('/home/user/project', '../')).toEqual('/home/user/');
+		expect(getCWDForFilesAndFolders('/home/user/project', '../sibling')).toEqual('/home/user/');
+	});
+
+	test('should normalize relative current directory paths', () => {
+		expect(getCWDForFilesAndFolders('/home/user/project', './')).toEqual('/home/user/project/');
+		expect(getCWDForFilesAndFolders('/home/user/project', './child')).toEqual('/home/user/project/');
+	});
+
+	test('should handle child directories', () => {
+		expect(getCWDForFilesAndFolders('/home/user/project', 'child/')).toEqual('/home/user/project/child/');
+		expect(getCWDForFilesAndFolders('/home/user/project', 'child/subdir/')).toEqual('/home/user/project/child/subdir/');
+	});
+
+	test('should handle absolute paths', () => {
+		expect(getCWDForFilesAndFolders('/home/user/project', '/absolute/path/')).toEqual('/absolute/path/');
+	});
+
+	test('should handle home directory paths', () => {
+		expect(getCWDForFilesAndFolders('/home/user/project', '~/documents/')).toEqual('~/documents/');
+	});
+
+	test('should normalize complex relative paths', () => {
+		expect(getCWDForFilesAndFolders('/home/user/project', '../other/../final/')).toEqual('/home/final/');
+		expect(getCWDForFilesAndFolders('/home/user/project', './child/../sibling/')).toEqual('/home/user/project/sibling/');
+	});
+});
diff --git a/extensions/terminal-suggest/src/fig/shared/utils.ts b/extensions/terminal-suggest/src/fig/shared/utils.ts
index 74283d5122f03..1d22363f6d165 100644
--- a/extensions/terminal-suggest/src/fig/shared/utils.ts
+++ b/extensions/terminal-suggest/src/fig/shared/utils.ts
@@ -3,6 +3,7 @@
  *  Licensed under the MIT License. See License.txt in the project root for license information.
  *--------------------------------------------------------------------------------------------*/
 
+import * as path from 'path';
 import { osIsWindows } from '../../helpers/os.js';
 import { createErrorInstance } from './errors.js';
 
@@ -216,9 +217,12 @@ export const getCWDForFilesAndFolders = (
 		return ensureTrailingSlash(cwd);
 	}
 
-	return dirname.startsWith('~/') || dirname.startsWith('/')
+	const result = dirname.startsWith('~/') || dirname.startsWith('/')
 		? dirname
 		: `${cwd}/${dirname}`;
+	
+	// Normalize the path to resolve '..' and '.' components
+	return ensureTrailingSlash(path.normalize(result));
 };
 
 export function localProtocol(domain: string, path: string) {