diff --git a/compiler/src/dotty/tools/dotc/core/Types.scala b/compiler/src/dotty/tools/dotc/core/Types.scala
index ca20fe086716..2a609e1deec9 100644
--- a/compiler/src/dotty/tools/dotc/core/Types.scala
+++ b/compiler/src/dotty/tools/dotc/core/Types.scala
@@ -4650,7 +4650,13 @@ object Types extends TypeUtils {
         cachedSuper = tycon match
           case tycon: HKTypeLambda => defn.AnyType
           case tycon: TypeRef if tycon.symbol.isClass => tycon
-          case tycon: TypeProxy => tycon.superType.applyIfParameterized(args)
+          case tycon: TypeProxy =>
+            if validSuper != Nowhere && args.exists(_.isProvisional) then
+              // applyIfParameterized may perform eta-reduction leading to different
+              // variance annotations depending on the instantiation of type params
+              // see tests/pos/typeclass-encoding3b.scala:348 for an example
+              validSuper = Nowhere
+            tycon.superType.applyIfParameterized(args)
           case _ => defn.AnyType
       cachedSuper
 
@@ -4678,8 +4684,8 @@ object Types extends TypeUtils {
      */
     override def underlyingMatchType(using Context): Type =
       if ctx.period != validUnderlyingMatch then
-        validUnderlyingMatch = if tycon.isProvisional then Nowhere else ctx.period
         cachedUnderlyingMatch = superType.underlyingMatchType
+        validUnderlyingMatch = validSuper
       cachedUnderlyingMatch
 
     override def tryNormalize(using Context): Type = tycon.stripTypeVar match {
diff --git a/tests/neg/typeclass-encoding3.scala b/tests/pos/typeclass-encoding3b.scala
similarity index 95%
rename from tests/neg/typeclass-encoding3.scala
rename to tests/pos/typeclass-encoding3b.scala
index ff403314cd1a..8ff416728718 100644
--- a/tests/neg/typeclass-encoding3.scala
+++ b/tests/pos/typeclass-encoding3b.scala
@@ -345,5 +345,12 @@ object functors {
   }
 
   MonadFlatten.flattened(List(List(1, 2, 3), List(4, 5))) // ok, synthesizes (using ListMonad)
-  MonadFlatten.flattened(List(List(1, 2, 3), List(4, 5)))(using ListMonad) // error
+  MonadFlatten.flattened(List(List(1, 2, 3), List(4, 5)))(using ListMonad) // was an error
+  /*
+  Before the changes, when checking `ListMonad <:< functors.Monad.Impl[T]`
+  we eventually got to the comparison `[X] =>> T[X] <:< [+X] =>> List[X]`
+  because the `This` type member of `ListMonad` has a covariance annotation.
+  This failed the variance conformance checks despite the fact that T had been instantiated to List,
+  since it had been substituted into the refinement (and cached) before its instantiation.
+  */
 }
\ No newline at end of file