diff --git a/package.json b/package.json
index 6fc79f7aba1..dcc6b7a6341 100644
--- a/package.json
+++ b/package.json
@@ -1,7 +1,7 @@
 {
   "name": "code-oss-dev",
   "version": "1.44.0",
-  "distro": "07db0bb3dc2da82ce33f2871e0093df1b9085d06",
+  "distro": "de617fbc2d2b5e151b9e4f1713fcd5d29dda04ea",
   "author": {
     "name": "Microsoft Corporation"
   },
diff --git a/src/vs/workbench/api/common/extHost.protocol.ts b/src/vs/workbench/api/common/extHost.protocol.ts
index cbbba0f9265..1b1e36d9d61 100644
--- a/src/vs/workbench/api/common/extHost.protocol.ts
+++ b/src/vs/workbench/api/common/extHost.protocol.ts
@@ -67,6 +67,7 @@ export interface IEnvironment {
 	userHome: URI;
 	webviewResourceRoot: string;
 	webviewCspSource: string;
+	useHostProxy?: boolean;
 }
 
 export interface IStaticWorkspaceData {
diff --git a/src/vs/workbench/api/node/extHostExtensionService.ts b/src/vs/workbench/api/node/extHostExtensionService.ts
index 79189ba670b..3a02c5ce0b7 100644
--- a/src/vs/workbench/api/node/extHostExtensionService.ts
+++ b/src/vs/workbench/api/node/extHostExtensionService.ts
@@ -61,7 +61,7 @@ export class ExtHostExtensionService extends AbstractExtHostExtensionService {
 
 		// Do this when extension service exists, but extensions are not being activated yet.
 		const configProvider = await this._extHostConfiguration.getConfigProvider();
-		await connectProxyResolver(this._extHostWorkspace, configProvider, this, this._logService, this._mainThreadTelemetryProxy);
+		await connectProxyResolver(this._extHostWorkspace, configProvider, this, this._logService, this._mainThreadTelemetryProxy, this._initData);
 
 		// Use IPC messages to forward console-calls, note that the console is
 		// already patched to use`process.send()`
diff --git a/src/vs/workbench/services/extensions/node/extensionHostProcessSetup.ts b/src/vs/workbench/services/extensions/node/extensionHostProcessSetup.ts
index 0f35c544319..e35e1736651 100644
--- a/src/vs/workbench/services/extensions/node/extensionHostProcessSetup.ts
+++ b/src/vs/workbench/services/extensions/node/extensionHostProcessSetup.ts
@@ -25,6 +25,7 @@ import { RunOnceScheduler } from 'vs/base/common/async';
 
 interface ParsedExtHostArgs {
 	uriTransformerPath?: string;
+	useHostProxy?: string;
 }
 
 // workaround for https://github.com/microsoft/vscode/issues/85490
@@ -40,7 +41,8 @@ interface ParsedExtHostArgs {
 
 const args = minimist(process.argv.slice(2), {
 	string: [
-		'uriTransformerPath'
+		'uriTransformerPath',
+		'useHostProxy'
 	]
 }) as ParsedExtHostArgs;
 
@@ -293,6 +295,7 @@ export async function startExtensionHostProcess(): Promise<void> {
 	const { initData } = renderer;
 	// setup things
 	patchProcess(!!initData.environment.extensionTestsLocationURI); // to support other test frameworks like Jasmin that use process.exit (https://github.com/Microsoft/vscode/issues/37708)
+	initData.environment.useHostProxy = args.useHostProxy !== undefined ? args.useHostProxy !== 'false' : undefined;
 
 	// host abstraction
 	const hostUtils = new class NodeHost implements IHostUtils {
diff --git a/src/vs/workbench/services/extensions/node/proxyResolver.ts b/src/vs/workbench/services/extensions/node/proxyResolver.ts
index 4c72df591f5..ad9308548a7 100644
--- a/src/vs/workbench/services/extensions/node/proxyResolver.ts
+++ b/src/vs/workbench/services/extensions/node/proxyResolver.ts
@@ -16,7 +16,7 @@ import { endsWith } from 'vs/base/common/strings';
 import { IExtHostWorkspaceProvider } from 'vs/workbench/api/common/extHostWorkspace';
 import { ExtHostConfigProvider } from 'vs/workbench/api/common/extHostConfiguration';
 import { ProxyAgent } from 'vscode-proxy-agent';
-import { MainThreadTelemetryShape } from 'vs/workbench/api/common/extHost.protocol';
+import { MainThreadTelemetryShape, IInitData } from 'vs/workbench/api/common/extHost.protocol';
 import { toErrorMessage } from 'vs/base/common/errorMessage';
 import { ExtHostExtensionService } from 'vs/workbench/api/node/extHostExtensionService';
 import { URI } from 'vs/base/common/uri';
@@ -35,9 +35,10 @@ export function connectProxyResolver(
 	configProvider: ExtHostConfigProvider,
 	extensionService: ExtHostExtensionService,
 	extHostLogService: ILogService,
-	mainThreadTelemetry: MainThreadTelemetryShape
+	mainThreadTelemetry: MainThreadTelemetryShape,
+	initData: IInitData,
 ) {
-	const resolveProxy = setupProxyResolution(extHostWorkspace, configProvider, extHostLogService, mainThreadTelemetry);
+	const resolveProxy = setupProxyResolution(extHostWorkspace, configProvider, extHostLogService, mainThreadTelemetry, initData);
 	const lookup = createPatchedModules(configProvider, resolveProxy);
 	return configureModuleLoading(extensionService, lookup);
 }
@@ -48,7 +49,8 @@ function setupProxyResolution(
 	extHostWorkspace: IExtHostWorkspaceProvider,
 	configProvider: ExtHostConfigProvider,
 	extHostLogService: ILogService,
-	mainThreadTelemetry: MainThreadTelemetryShape
+	mainThreadTelemetry: MainThreadTelemetryShape,
+	initData: IInitData,
 ) {
 	const env = process.env;
 
@@ -139,12 +141,14 @@ function setupProxyResolution(
 			timeout = setTimeout(logEvent, 10 * 60 * 1000);
 		}
 
+		const useHostProxy = initData.environment.useHostProxy;
+		const doUseHostProxy = typeof useHostProxy === 'boolean' ? useHostProxy : !initData.remote.isRemote;
 		useSystemCertificates(extHostLogService, flags.useSystemCertificates, opts, () => {
-			useProxySettings(flags.useProxySettings, req, opts, url, callback);
+			useProxySettings(doUseHostProxy, flags.useProxySettings, req, opts, url, callback);
 		});
 	}
 
-	function useProxySettings(useProxySettings: boolean, req: http.ClientRequest, opts: http.RequestOptions, url: string, callback: (proxy?: string) => void) {
+	function useProxySettings(useHostProxy: boolean, useProxySettings: boolean, req: http.ClientRequest, opts: http.RequestOptions, url: string, callback: (proxy?: string) => void) {
 
 		if (!useProxySettings) {
 			callback('DIRECT');
@@ -192,6 +196,12 @@ function setupProxyResolution(
 			return;
 		}
 
+		if (!useHostProxy) {
+			callback('DIRECT');
+			extHostLogService.trace('ProxyResolver#resolveProxy unconfigured', url, 'DIRECT');
+			return;
+		}
+
 		const start = Date.now();
 		extHostWorkspace.resolveProxy(url) // Use full URL to ensure it is an actually used one.
 			.then(proxy => {