diff --git a/bazel/protobuf.bzl b/bazel/protobuf.bzl
index aeacfba8da6..a12208e9579 100644
--- a/bazel/protobuf.bzl
+++ b/bazel/protobuf.bzl
@@ -145,6 +145,29 @@ def get_plugin_args(
         ),
     ]
 
+def _make_prefix(label):
+    """Returns the directory prefix for a label.
+
+    @repo//foo/bar:sub/dir/file.proto  =>  'external/repo/foo/bar/'
+    //foo/bar:sub/dir/file.proto       =>  'foo/bar/'
+    //:sub/dir/file.proto              =>  ''
+
+    That is, the prefix can be removed from a file's full path to
+    obtain the file's relative location within the package's effective
+    directory."""
+
+    wsr = label.workspace_root
+    pkg = label.package
+
+    if not wsr and not pkg:
+        return ""
+    elif not wsr:
+        return pkg + "/"
+    elif not pkg:
+        return wsr + "/"
+    else:
+        return wsr + "/" + pkg + "/"
+
 def get_staged_proto_file(label, context, source_file):
     """Copies a proto file to the appropriate location if necessary.
 
@@ -163,7 +186,8 @@ def get_staged_proto_file(label, context, source_file):
     else:
         # Current target and source_file are in different packages (most
         # probably even in different repositories)
-        copied_proto = context.actions.declare_file(source_file.basename)
+        prefix = _make_prefix(source_file.owner)
+        copied_proto = context.actions.declare_file(source_file.path[len(prefix):])
         context.actions.run_shell(
             inputs = [source_file],
             outputs = [copied_proto],
@@ -236,10 +260,14 @@ def declare_out_files(protos, context, generated_file_format):
     out_file_paths = []
     for proto in protos:
         if not is_in_virtual_imports(proto):
-            out_file_paths.append(proto.basename)
+            prefix = _make_prefix(proto.owner)
+            full_prefix = context.genfiles_dir.path + "/" + prefix
+            if proto.path.startswith(full_prefix):
+                out_file_paths.append(proto.path[len(full_prefix):])
+            elif proto.path.startswith(prefix):
+                out_file_paths.append(proto.path[len(prefix):])
         else:
-            path = proto.path[proto.path.index(_VIRTUAL_IMPORTS) + 1:]
-            out_file_paths.append(path)
+            out_file_paths.append(proto.path[proto.path.index(_VIRTUAL_IMPORTS) + 1:])
 
     return [
         context.actions.declare_file(
diff --git a/bazel/test/python_test_repo/BUILD b/bazel/test/python_test_repo/BUILD
index b0f0e53d95e..127a43568c8 100644
--- a/bazel/test/python_test_repo/BUILD
+++ b/bazel/test/python_test_repo/BUILD
@@ -29,11 +29,18 @@ proto_library(
     name = "helloworld_proto",
     srcs = ["helloworld.proto"],
     deps = [
+        ":hello_dep_proto",
         "@com_google_protobuf//:duration_proto",
         "@com_google_protobuf//:timestamp_proto",
     ],
 )
 
+# Test that .proto files can be located in strict subdiretories of the package.
+proto_library(
+    name = "hello_dep_proto",
+    srcs = ["subdir/hello_dep.proto"],
+)
+
 py_proto_library(
     name = "helloworld_py_pb2",
     deps = [":helloworld_proto"],
@@ -79,6 +86,7 @@ proto_library(
     import_prefix = "google/cloud",
     strip_import_prefix = "",
     deps = [
+        ":hello_dep_proto",
         "@com_google_protobuf//:duration_proto",
         "@com_google_protobuf//:timestamp_proto",
     ],
diff --git a/bazel/test/python_test_repo/helloworld.proto b/bazel/test/python_test_repo/helloworld.proto
index b333a7409b8..d9cb0b53c30 100644
--- a/bazel/test/python_test_repo/helloworld.proto
+++ b/bazel/test/python_test_repo/helloworld.proto
@@ -23,6 +23,7 @@ package helloworld;
 
 import "google/protobuf/timestamp.proto";
 import "google/protobuf/duration.proto";
+import "subdir/hello_dep.proto";
 
 // The greeting service definition.
 service Greeter {
@@ -36,8 +37,10 @@ message HelloRequest {
   google.protobuf.Timestamp request_initiation = 2;
 }
 
-// The response message containing the greetings
+// The response message containing the greetings, plus some additional
+// data of a type defined in a separate .proto file.
 message HelloReply {
   string message = 1;
   google.protobuf.Duration request_duration = 2;
+  HelloDep dep = 3;
 }
diff --git a/bazel/test/python_test_repo/subdir/hello_dep.proto b/bazel/test/python_test_repo/subdir/hello_dep.proto
new file mode 100644
index 00000000000..ad9f751496d
--- /dev/null
+++ b/bazel/test/python_test_repo/subdir/hello_dep.proto
@@ -0,0 +1,21 @@
+// Copyright 2019 The gRPC authors.
+//
+// Licensed under the Apache License, Version 2.0 (the "License");
+// you may not use this file except in compliance with the License.
+// You may obtain a copy of the License at
+//
+//     http://www.apache.org/licenses/LICENSE-2.0
+//
+// Unless required by applicable law or agreed to in writing, software
+// distributed under the License is distributed on an "AS IS" BASIS,
+// WITHOUT WARRANTIES OR CONDITIONS OF ANY KIND, either express or implied.
+// See the License for the specific language governing permissions and
+// limitations under the License.
+
+syntax = "proto3";
+
+package helloworld;
+
+message HelloDep {
+  repeated int64 numbers = 1;
+}