diff --git a/analysis/low-level-api-fir/tests/org/jetbrains/kotlin/analysis/low/level/api/fir/diagnostic/compiler/based/DiagnosticCompilerTestFE10TestdataTestGenerated.java b/analysis/low-level-api-fir/tests/org/jetbrains/kotlin/analysis/low/level/api/fir/diagnostic/compiler/based/DiagnosticCompilerTestFE10TestdataTestGenerated.java
index c02c59f5044..6f05c03b433 100644
--- a/analysis/low-level-api-fir/tests/org/jetbrains/kotlin/analysis/low/level/api/fir/diagnostic/compiler/based/DiagnosticCompilerTestFE10TestdataTestGenerated.java
+++ b/analysis/low-level-api-fir/tests/org/jetbrains/kotlin/analysis/low/level/api/fir/diagnostic/compiler/based/DiagnosticCompilerTestFE10TestdataTestGenerated.java
@@ -17899,6 +17899,12 @@ public class DiagnosticCompilerTestFE10TestdataTestGenerated extends AbstractDia
                     runTest("compiler/testData/diagnostics/tests/inference/capturedTypes/capturedFlexibleIntersectionTypesWithDifferentConstructors.kt");
                 }
 
+                @Test
+                @TestMetadata("capturedForIncorporationEscapes.kt")
+                public void testCapturedForIncorporationEscapes() throws Exception {
+                    runTest("compiler/testData/diagnostics/tests/inference/capturedTypes/capturedForIncorporationEscapes.kt");
+                }
+
                 @Test
                 @TestMetadata("capturedInTypeInference.kt")
                 public void testCapturedInTypeInference() throws Exception {
diff --git a/analysis/low-level-api-fir/tests/org/jetbrains/kotlin/analysis/low/level/api/fir/diagnostic/compiler/based/LLFirPreresolvedReversedDiagnosticCompilerFE10TestDataTestGenerated.java b/analysis/low-level-api-fir/tests/org/jetbrains/kotlin/analysis/low/level/api/fir/diagnostic/compiler/based/LLFirPreresolvedReversedDiagnosticCompilerFE10TestDataTestGenerated.java
index d846e9f88ca..9586f0dc171 100644
--- a/analysis/low-level-api-fir/tests/org/jetbrains/kotlin/analysis/low/level/api/fir/diagnostic/compiler/based/LLFirPreresolvedReversedDiagnosticCompilerFE10TestDataTestGenerated.java
+++ b/analysis/low-level-api-fir/tests/org/jetbrains/kotlin/analysis/low/level/api/fir/diagnostic/compiler/based/LLFirPreresolvedReversedDiagnosticCompilerFE10TestDataTestGenerated.java
@@ -17899,6 +17899,12 @@ public class LLFirPreresolvedReversedDiagnosticCompilerFE10TestDataTestGenerated
                     runTest("compiler/testData/diagnostics/tests/inference/capturedTypes/capturedFlexibleIntersectionTypesWithDifferentConstructors.kt");
                 }
 
+                @Test
+                @TestMetadata("capturedForIncorporationEscapes.kt")
+                public void testCapturedForIncorporationEscapes() throws Exception {
+                    runTest("compiler/testData/diagnostics/tests/inference/capturedTypes/capturedForIncorporationEscapes.kt");
+                }
+
                 @Test
                 @TestMetadata("capturedInTypeInference.kt")
                 public void testCapturedInTypeInference() throws Exception {
diff --git a/compiler/fir/analysis-tests/tests-gen/org/jetbrains/kotlin/test/runners/FirLightTreeOldFrontendDiagnosticsTestGenerated.java b/compiler/fir/analysis-tests/tests-gen/org/jetbrains/kotlin/test/runners/FirLightTreeOldFrontendDiagnosticsTestGenerated.java
index 737366797df..5831a2c7655 100644
--- a/compiler/fir/analysis-tests/tests-gen/org/jetbrains/kotlin/test/runners/FirLightTreeOldFrontendDiagnosticsTestGenerated.java
+++ b/compiler/fir/analysis-tests/tests-gen/org/jetbrains/kotlin/test/runners/FirLightTreeOldFrontendDiagnosticsTestGenerated.java
@@ -17893,6 +17893,12 @@ public class FirLightTreeOldFrontendDiagnosticsTestGenerated extends AbstractFir
                     runTest("compiler/testData/diagnostics/tests/inference/capturedTypes/capturedFlexibleIntersectionTypesWithDifferentConstructors.kt");
                 }
 
+                @Test
+                @TestMetadata("capturedForIncorporationEscapes.kt")
+                public void testCapturedForIncorporationEscapes() throws Exception {
+                    runTest("compiler/testData/diagnostics/tests/inference/capturedTypes/capturedForIncorporationEscapes.kt");
+                }
+
                 @Test
                 @TestMetadata("capturedInTypeInference.kt")
                 public void testCapturedInTypeInference() throws Exception {
diff --git a/compiler/fir/analysis-tests/tests-gen/org/jetbrains/kotlin/test/runners/FirPsiOldFrontendDiagnosticsTestGenerated.java b/compiler/fir/analysis-tests/tests-gen/org/jetbrains/kotlin/test/runners/FirPsiOldFrontendDiagnosticsTestGenerated.java
index 68189e8378b..b607c8ab8c4 100644
--- a/compiler/fir/analysis-tests/tests-gen/org/jetbrains/kotlin/test/runners/FirPsiOldFrontendDiagnosticsTestGenerated.java
+++ b/compiler/fir/analysis-tests/tests-gen/org/jetbrains/kotlin/test/runners/FirPsiOldFrontendDiagnosticsTestGenerated.java
@@ -17899,6 +17899,12 @@ public class FirPsiOldFrontendDiagnosticsTestGenerated extends AbstractFirPsiDia
                     runTest("compiler/testData/diagnostics/tests/inference/capturedTypes/capturedFlexibleIntersectionTypesWithDifferentConstructors.kt");
                 }
 
+                @Test
+                @TestMetadata("capturedForIncorporationEscapes.kt")
+                public void testCapturedForIncorporationEscapes() throws Exception {
+                    runTest("compiler/testData/diagnostics/tests/inference/capturedTypes/capturedForIncorporationEscapes.kt");
+                }
+
                 @Test
                 @TestMetadata("capturedInTypeInference.kt")
                 public void testCapturedInTypeInference() throws Exception {
diff --git a/compiler/resolution.common/src/org/jetbrains/kotlin/types/AbstractTypeApproximator.kt b/compiler/resolution.common/src/org/jetbrains/kotlin/types/AbstractTypeApproximator.kt
index 711bd5b8dc5..e6a51ba63af 100644
--- a/compiler/resolution.common/src/org/jetbrains/kotlin/types/AbstractTypeApproximator.kt
+++ b/compiler/resolution.common/src/org/jetbrains/kotlin/types/AbstractTypeApproximator.kt
@@ -8,6 +8,7 @@ package org.jetbrains.kotlin.types
 import org.jetbrains.kotlin.config.LanguageFeature
 import org.jetbrains.kotlin.config.LanguageVersionSettings
 import org.jetbrains.kotlin.resolve.calls.NewCommonSuperTypeCalculator.commonSuperType
+import org.jetbrains.kotlin.resolve.calls.inference.hasRecursiveTypeParametersWithGivenSelfType
 import org.jetbrains.kotlin.types.model.*
 import org.jetbrains.kotlin.utils.addToStdlib.runIf
 import java.util.concurrent.ConcurrentHashMap
@@ -481,7 +482,11 @@ abstract class AbstractTypeApproximator(
             // In approximateCapturedType, we check if the super/subtypes of captured types need approximation even if captured types
             // themselves don't need approximation, and will land here.
             // To support this case, we also don't want to approximate captured types here if the configuration says so.
-            if (capturedType != null && isK2 && !conf.capturedType(ctx, capturedType)) {
+            if (capturedType != null &&
+                isK2 &&
+                !conf.capturedType(ctx, capturedType) &&
+                ctx.hasRecursiveTypeParametersWithGivenSelfType(capturedType.typeConstructor())
+            ) {
                 continue@loop
             }
 
diff --git a/compiler/testData/diagnostics/tests/inference/capturedTypes/capturedForIncorporationEscapes.kt b/compiler/testData/diagnostics/tests/inference/capturedTypes/capturedForIncorporationEscapes.kt
new file mode 100644
index 00000000000..43a0c8ca0aa
--- /dev/null
+++ b/compiler/testData/diagnostics/tests/inference/capturedTypes/capturedForIncorporationEscapes.kt
@@ -0,0 +1,18 @@
+// FIR_IDENTICAL
+// ISSUE: KT-65050
+
+interface HttpResponse<T>
+
+class GitLabMergeRequestShortRestDTO
+
+fun loadMergeRequests(): HttpResponse<out List<GitLabMergeRequestShortRestDTO>> = TODO()
+
+inline fun <reified T> loadList(): HttpResponse<out List<T>> = TODO()
+
+fun loadMergeRequests(boolean: Boolean) {
+    val response = if (boolean) {
+        loadMergeRequests()
+    } else {
+        loadList()
+    }
+}
\ No newline at end of file
diff --git a/compiler/tests-common-new/tests-gen/org/jetbrains/kotlin/test/runners/DiagnosticTestGenerated.java b/compiler/tests-common-new/tests-gen/org/jetbrains/kotlin/test/runners/DiagnosticTestGenerated.java
index d49ec3412d6..7c097723e45 100644
--- a/compiler/tests-common-new/tests-gen/org/jetbrains/kotlin/test/runners/DiagnosticTestGenerated.java
+++ b/compiler/tests-common-new/tests-gen/org/jetbrains/kotlin/test/runners/DiagnosticTestGenerated.java
@@ -17899,6 +17899,12 @@ public class DiagnosticTestGenerated extends AbstractDiagnosticTest {
                     runTest("compiler/testData/diagnostics/tests/inference/capturedTypes/capturedFlexibleIntersectionTypesWithDifferentConstructors.kt");
                 }
 
+                @Test
+                @TestMetadata("capturedForIncorporationEscapes.kt")
+                public void testCapturedForIncorporationEscapes() throws Exception {
+                    runTest("compiler/testData/diagnostics/tests/inference/capturedTypes/capturedForIncorporationEscapes.kt");
+                }
+
                 @Test
                 @TestMetadata("capturedInTypeInference.kt")
                 public void testCapturedInTypeInference() throws Exception {