There's been a number of bugs/requests for this:
https://github.com/microsoft/vscode-python/issues/9065
https://github.com/microsoft/vscode-python/issues/9043
https://github.com/microsoft/vscode-python/issues/7956
https://github.com/microsoft/vscode-python/issues/9620

I believe we could implement a remote file system for a remote server URI and then we'd behave the way customers want (and incidentally do the same thing Jupyter Lab does here)