diff --git a/loader/include.go b/loader/include.go
index 823c2f7a..9244f2b3 100644
--- a/loader/include.go
+++ b/loader/include.go
@@ -109,28 +109,36 @@ func ApplyInclude(ctx context.Context, workingDir string, environment types.Mapp
 			WorkingDir: r.ProjectDirectory,
 		})
 
+		envFile := r.EnvFile
 		if len(r.EnvFile) == 0 {
-			f := filepath.Join(r.ProjectDirectory, ".env")
-			if s, err := os.Stat(f); err == nil && !s.IsDir() {
-				r.EnvFile = types.StringList{f}
-			}
-		} else {
-			envFile := []string{}
-			for _, f := range r.EnvFile {
-				if !filepath.IsAbs(f) {
-					f = filepath.Join(workingDir, f)
-					s, err := os.Stat(f)
-					if err != nil {
-						return err
-					}
-					if s.IsDir() {
-						return fmt.Errorf("%s is not a file", f)
-					}
+			envFile = types.StringList{".env"}
+		}
+
+		resolvedEnvFile := []string{}
+		for _, f := range envFile {
+			for _, loader := range options.ResourceLoaders {
+				if !loader.Accept(f) {
+					continue
+				}
+				path, err := loader.Load(ctx, f)
+				if err != nil {
+					return err
+				}
+				s, err := os.Stat(path)
+				if os.IsNotExist(err) && len(r.EnvFile) == 0 {
+					break // Skip if default .env not found
+				}
+				if err != nil {
+					return err
+				}
+				if s.IsDir() {
+					return fmt.Errorf("%s is not a file", f)
 				}
-				envFile = append(envFile, f)
+				resolvedEnvFile = append(resolvedEnvFile, path)
+				break
 			}
-			r.EnvFile = envFile
 		}
+		r.EnvFile = resolvedEnvFile
 
 		envFromFile, err := dotenv.GetEnvFromFile(environment, r.EnvFile)
 		if err != nil {
diff --git a/loader/include_test.go b/loader/include_test.go
index f44d417b..b2383c8d 100644
--- a/loader/include_test.go
+++ b/loader/include_test.go
@@ -163,6 +163,85 @@ services:
 
 }
 
+func TestLoadWithIncludeEnvTripleTimes(t *testing.T) {
+	fileName := "compose.yml"
+	tmpdir := t.TempDir()
+	// file in root
+	yaml := `
+include:
+  - path:
+    - ./module/compose.yml
+    env_file:
+      - ./custom.env
+services:
+  a:
+    image: alpine
+    environment:
+      - VAR_NAME`
+	createFile(t, tmpdir, `VAR_NAME=value`, "custom.env")
+	path := createFile(t, tmpdir, yaml, fileName)
+	// file in /module
+	yaml = `
+include:
+  - path:
+    - ./submodule/compose.yml
+    env_file:
+      - ../custom.env
+services:
+  b:
+    image: alpine
+    environment:
+      - VAR_NAME`
+	createFileSubDir(t, tmpdir, "module", yaml, fileName)
+
+	yaml = `
+include:
+  - path:
+    - ./subsubmodule/compose.yml
+    env_file:
+      - ../../custom.env
+services:
+  c:
+    image: alpine
+    environment:
+      - VAR_NAME`
+	createFileSubDir(t, tmpdir, "module/submodule", yaml, fileName)
+
+	yaml = `
+services:
+  d:
+    image: alpine
+    environment:
+      - VAR_NAME`
+	createFileSubDir(t, tmpdir, "module/submodule/subsubmodule", yaml, fileName)
+
+	p, err := Load(types.ConfigDetails{
+		WorkingDir: tmpdir,
+		ConfigFiles: []types.ConfigFile{{
+			Filename: path,
+		}},
+		Environment: nil,
+	}, func(options *Options) {
+		options.SkipNormalization = true
+		options.ResolvePaths = true
+		options.SetProjectName("project", true)
+	})
+	assert.NilError(t, err)
+	a := p.Services["a"]
+	// make sure VAR_NAME is only accessible in include context
+	assert.Check(t, a.Environment["VAR_NAME"] == nil, "VAR_NAME should not be defined in environment")
+	b := p.Services["b"]
+	assert.Check(t, b.Environment["VAR_NAME"] != nil, "VAR_NAME is not defined in environment")
+	assert.Equal(t, *b.Environment["VAR_NAME"], "value")
+	c := p.Services["c"]
+	assert.Check(t, c.Environment["VAR_NAME"] != nil, "VAR_NAME is not defined in environment")
+	assert.Equal(t, *c.Environment["VAR_NAME"], "value")
+	d := p.Services["d"]
+	assert.Check(t, d.Environment["VAR_NAME"] != nil, "VAR_NAME is not defined in environment")
+	assert.Equal(t, *d.Environment["VAR_NAME"], "value")
+
+}
+
 func TestIncludeWithProjectDirectory(t *testing.T) {
 	var envs map[string]string
 	if runtime.GOOS == "windows" {