diff --git a/.gitignore b/.gitignore
index 20560b810..1dcc082a8 100644
--- a/.gitignore
+++ b/.gitignore
@@ -175,6 +175,7 @@
 /test-sha1
 /test-sigchain
 /test-string-pool
+/test-subprocess
 /test-svn-fe
 /test-treap
 /common-cmds.h
diff --git a/Makefile b/Makefile
index 1f1ce04ed..f96d990d5 100644
--- a/Makefile
+++ b/Makefile
@@ -425,6 +425,7 @@ TEST_PROGRAMS_NEED_X += test-run-command
 TEST_PROGRAMS_NEED_X += test-sha1
 TEST_PROGRAMS_NEED_X += test-sigchain
 TEST_PROGRAMS_NEED_X += test-string-pool
+TEST_PROGRAMS_NEED_X += test-subprocess
 TEST_PROGRAMS_NEED_X += test-svn-fe
 TEST_PROGRAMS_NEED_X += test-treap
 TEST_PROGRAMS_NEED_X += test-index-version
diff --git a/setup.c b/setup.c
index 2e2865cc4..be550af42 100644
--- a/setup.c
+++ b/setup.c
@@ -221,6 +221,14 @@ void setup_work_tree(void)
 		git_dir = make_absolute_path(git_dir);
 	if (!work_tree || chdir(work_tree))
 		die("This operation must be run in a work tree");
+
+	/*
+	 * Make sure subsequent git processes find correct worktree
+	 * if $GIT_WORK_TREE is set relative
+	 */
+	if (getenv(GIT_WORK_TREE_ENVIRONMENT))
+		setenv(GIT_WORK_TREE_ENVIRONMENT, ".", 1);
+
 	set_git_dir(make_relative_path(git_dir, work_tree));
 	initialized = 1;
 }
diff --git a/t/t1501-worktree.sh b/t/t1501-worktree.sh
index 2c8f01f66..f072a8ed4 100755
--- a/t/t1501-worktree.sh
+++ b/t/t1501-worktree.sh
@@ -340,4 +340,11 @@ test_expect_success 'make_relative_path handles double slashes in GIT_DIR' '
 	git --git-dir="$(pwd)//repo.git" --work-tree="$(pwd)" add dummy_file
 '
 
+test_expect_success 'relative $GIT_WORK_TREE and git subprocesses' '
+	GIT_DIR=repo.git GIT_WORK_TREE=repo.git/work \
+	test-subprocess --setup-work-tree rev-parse --show-toplevel >actual &&
+	echo "$TRASH_DIRECTORY/repo.git/work" >expected &&
+	test_cmp expected actual
+'
+
 test_done
diff --git a/test-subprocess.c b/test-subprocess.c
new file mode 100644
index 000000000..667d3e507
--- /dev/null
+++ b/test-subprocess.c
@@ -0,0 +1,21 @@
+#include "cache.h"
+#include "run-command.h"
+
+int main(int argc, char **argv)
+{
+	const char *prefix;
+	struct child_process cp;
+	int nogit = 0;
+
+	prefix = setup_git_directory_gently(&nogit);
+	if (nogit)
+		die("No git repo found");
+	if (!strcmp(argv[1], "--setup-work-tree")) {
+		setup_work_tree();
+		argv++;
+	}
+	memset(&cp, 0, sizeof(cp));
+	cp.git_cmd = 1;
+	cp.argv = (const char **)argv+1;
+	return run_command(&cp);
+}