diff --git a/compiler/frontend/src/org/jetbrains/kotlin/resolve/TypeAliasExpander.kt b/compiler/frontend/src/org/jetbrains/kotlin/resolve/TypeAliasExpander.kt
index 53e24a674d2..dad93fb3fe7 100644
--- a/compiler/frontend/src/org/jetbrains/kotlin/resolve/TypeAliasExpander.kt
+++ b/compiler/frontend/src/org/jetbrains/kotlin/resolve/TypeAliasExpander.kt
@@ -214,25 +214,16 @@ class TypeAliasExpander(
                     withAbbreviatedType = false
                 )
 
+                val substitutedType = type.substituteArguments(typeAliasExpansion, recursionDepth)
+
                 // 'dynamic' type can't be abbreviated - will be reported separately
                 val typeWithAbbreviation =
-                    if (nestedExpandedType.isDynamic()) nestedExpandedType else nestedExpandedType.withAbbreviation(type)
+                    if (nestedExpandedType.isDynamic()) nestedExpandedType else nestedExpandedType.withAbbreviation(substitutedType)
 
                 TypeProjectionImpl(originalProjection.projectionKind, typeWithAbbreviation)
             }
             else -> {
-                val substitutedArguments = type.arguments.mapIndexed { i, originalArgument ->
-                    val projection = expandTypeProjection(
-                        originalArgument, typeAliasExpansion, typeConstructor.parameters[i], recursionDepth + 1
-                    )
-                    if (projection.isStarProjection) projection
-                    else TypeProjectionImpl(
-                        projection.projectionKind,
-                        TypeUtils.makeNullableIfNeeded(projection.type, originalArgument.type.isMarkedNullable)
-                    )
-                }
-
-                val substitutedType = type.replace(newArguments = substitutedArguments)
+                val substitutedType = type.substituteArguments(typeAliasExpansion, recursionDepth)
 
                 checkTypeArgumentsSubstitution(type, substitutedType)
 
@@ -241,6 +232,23 @@ class TypeAliasExpander(
         }
     }
 
+    private fun SimpleType.substituteArguments(typeAliasExpansion: TypeAliasExpansion, recursionDepth: Int): SimpleType {
+        val typeConstructor = this.constructor
+
+        val substitutedArguments = this.arguments.mapIndexed { i, originalArgument ->
+            val projection = expandTypeProjection(
+                originalArgument, typeAliasExpansion, typeConstructor.parameters[i], recursionDepth + 1
+            )
+            if (projection.isStarProjection) projection
+            else TypeProjectionImpl(
+                projection.projectionKind,
+                TypeUtils.makeNullableIfNeeded(projection.type, originalArgument.type.isMarkedNullable)
+            )
+        }
+
+        return this.replace(newArguments = substitutedArguments)
+    }
+
     private fun checkTypeArgumentsSubstitution(unsubstitutedType: KotlinType, substitutedType: KotlinType) {
         val typeSubstitutor = TypeSubstitutor.create(substitutedType)
 
diff --git a/compiler/testData/compileKotlinAgainstKotlin/kt21775.kt b/compiler/testData/compileKotlinAgainstKotlin/kt21775.kt
new file mode 100644
index 00000000000..a683731e927
--- /dev/null
+++ b/compiler/testData/compileKotlinAgainstKotlin/kt21775.kt
@@ -0,0 +1,43 @@
+// FILE: lib.kt
+
+package lib
+
+class TestObserver<T> {
+    fun assertValue(valuePredicate: (T) -> Boolean): Unit = TODO()
+}
+
+class Single<T> {
+    fun test(): TestObserver<T> = TODO()
+}
+
+class Employee
+
+class Either<T>
+
+typealias DomainEither<T> = Either<T>
+typealias DomainSingle<T> = Single<DomainEither<T>>
+
+fun provideDomainSingle(): DomainSingle<Employee> = TODO()
+
+class CreateEmployeeUseCaseAccessor {
+    fun testNormalName() {
+        val testObs = provideDomainSingle().test()
+        testObs.assertValue { true }
+    }
+}
+
+
+// FILE: main.kt
+
+import lib.*
+
+class CreateEmployeeUseCaseTest {
+    fun testNormalName() {
+        val testObs = provideDomainSingle().test()
+        testObs.assertValue { true }
+    }
+}
+
+fun box(): String {
+    return "OK"
+}
\ No newline at end of file
diff --git a/compiler/testData/compileKotlinAgainstKotlin/nestedFunctionTypeAliasExpansion.kt b/compiler/testData/compileKotlinAgainstKotlin/nestedFunctionTypeAliasExpansion.kt
new file mode 100644
index 00000000000..dd56222f2ed
--- /dev/null
+++ b/compiler/testData/compileKotlinAgainstKotlin/nestedFunctionTypeAliasExpansion.kt
@@ -0,0 +1,17 @@
+// FILE: lib.kt
+
+package lib
+
+typealias Dispatch<Msg> = (Msg) -> Unit
+typealias Effect<Msg> = (Dispatch<Msg>) -> Unit
+
+fun <Msg> noEffect(): Effect<Msg> = TODO()
+
+// FILE: main.kt
+
+import lib.*
+
+fun box(): String {
+    val s = { noEffect<Unit>() }
+    return "OK"
+}
\ No newline at end of file
diff --git a/compiler/testData/compileKotlinAgainstKotlin/nestedTypeAliasExpansion.kt b/compiler/testData/compileKotlinAgainstKotlin/nestedTypeAliasExpansion.kt
new file mode 100644
index 00000000000..4ec42b0eb62
--- /dev/null
+++ b/compiler/testData/compileKotlinAgainstKotlin/nestedTypeAliasExpansion.kt
@@ -0,0 +1,19 @@
+// FILE: lib.kt
+
+package lib
+
+class Inv<K>
+
+typealias A<V> = Inv<V>
+typealias B<T> = Inv<A<T>>
+
+fun <U> materialize(): B<U>? = null
+
+// FILE: main.kt
+
+import lib.*
+
+fun box(): String {
+    val s = { materialize<Unit>() }
+    return "OK"
+}
\ No newline at end of file
diff --git a/compiler/tests/org/jetbrains/kotlin/codegen/CompileKotlinAgainstKotlinTestGenerated.java b/compiler/tests/org/jetbrains/kotlin/codegen/CompileKotlinAgainstKotlinTestGenerated.java
index 57f579db828..683a2c03ddd 100644
--- a/compiler/tests/org/jetbrains/kotlin/codegen/CompileKotlinAgainstKotlinTestGenerated.java
+++ b/compiler/tests/org/jetbrains/kotlin/codegen/CompileKotlinAgainstKotlinTestGenerated.java
@@ -213,6 +213,11 @@ public class CompileKotlinAgainstKotlinTestGenerated extends AbstractCompileKotl
         runTest("compiler/testData/compileKotlinAgainstKotlin/kt14012_multi.kt");
     }
 
+    @TestMetadata("kt21775.kt")
+    public void testKt21775() throws Exception {
+        runTest("compiler/testData/compileKotlinAgainstKotlin/kt21775.kt");
+    }
+
     @TestMetadata("multifileClassInlineFunctionAccessingProperty.kt")
     public void testMultifileClassInlineFunctionAccessingProperty() throws Exception {
         runTest("compiler/testData/compileKotlinAgainstKotlin/multifileClassInlineFunctionAccessingProperty.kt");
@@ -233,11 +238,21 @@ public class CompileKotlinAgainstKotlinTestGenerated extends AbstractCompileKotl
         runTest("compiler/testData/compileKotlinAgainstKotlin/nestedEnum.kt");
     }
 
+    @TestMetadata("nestedFunctionTypeAliasExpansion.kt")
+    public void testNestedFunctionTypeAliasExpansion() throws Exception {
+        runTest("compiler/testData/compileKotlinAgainstKotlin/nestedFunctionTypeAliasExpansion.kt");
+    }
+
     @TestMetadata("nestedObject.kt")
     public void testNestedObject() throws Exception {
         runTest("compiler/testData/compileKotlinAgainstKotlin/nestedObject.kt");
     }
 
+    @TestMetadata("nestedTypeAliasExpansion.kt")
+    public void testNestedTypeAliasExpansion() throws Exception {
+        runTest("compiler/testData/compileKotlinAgainstKotlin/nestedTypeAliasExpansion.kt");
+    }
+
     @TestMetadata("optionalAnnotation.kt")
     public void testOptionalAnnotation() throws Exception {
         runTest("compiler/testData/compileKotlinAgainstKotlin/optionalAnnotation.kt");