diff --git a/internal/gcs-sidecar/handlers.go b/internal/gcs-sidecar/handlers.go
index 1cf1ebff39..c6430224f8 100644
--- a/internal/gcs-sidecar/handlers.go
+++ b/internal/gcs-sidecar/handlers.go
@@ -19,6 +19,7 @@ import (
 	"github.com/Microsoft/hcsshim/internal/copyfile"
 	"github.com/Microsoft/hcsshim/internal/fsformatter"
 	"github.com/Microsoft/hcsshim/internal/gcs/prot"
+	"github.com/Microsoft/hcsshim/internal/guestpath"
 	hcsschema "github.com/Microsoft/hcsshim/internal/hcs/schema2"
 	"github.com/Microsoft/hcsshim/internal/log"
 	oci "github.com/Microsoft/hcsshim/internal/oci"
@@ -137,6 +138,15 @@ func (b *Bridge) createContainer(req *request) (err error) {
 			return fmt.Errorf("CreateContainer operation is denied by policy: %w", err)
 		}
 
+		// Create the source directory for each mapped directory if it does not
+		// already exist. In non-confidential WCOW the host does this for
+		// sandbox:// mounts by exec'ing `cmd /c mkdir ... & dir ...` inside the
+		// UVM (see resources_wcow.go:setupMounts), but for confidential, we
+		// handle this here in the sidecar GCS.
+		if err := createSandboxMountSourceDirs(ctx, container.MappedDirectories); err != nil {
+			return fmt.Errorf("failed to create mapped directory source directories: %w", err)
+		}
+
 		commandLine := len(spec.Process.Args) > 0
 		c := &Container{
 			id:              containerID,
@@ -262,6 +272,32 @@ func stageDLL(ctx context.Context, srcPath, dstDir string) (bool, error) {
 	return true, nil
 }
 
+// createSandboxMountSourceDirs creates source directories for sandbox
+// mounts if they do not already exist.
+func createSandboxMountSourceDirs(ctx context.Context, mappedDirectories []hcsschema.MappedDirectory) error {
+	for _, md := range mappedDirectories {
+		source := md.HostPath
+		if strings.EqualFold(source, guestpath.WCOWSandboxMountPath) ||
+			strings.HasPrefix(strings.ToLower(source), strings.ToLower(guestpath.WCOWSandboxMountPath+`\`)) {
+
+			// do this stat rather than call MkdirAll unconditionally,
+			// since the latter will fail with a source file (not dir)
+			if _, err := os.Stat(source); err == nil {
+				log.G(ctx).WithField("source", source).Debug("source of mapped directory mount exists, not creating directories")
+				continue
+			} else if !os.IsNotExist(err) {
+				return fmt.Errorf("failed to stat mapped directory source %q: %w", source, err)
+			}
+
+			if err := os.MkdirAll(source, 0755); err != nil {
+				return fmt.Errorf("failed to create mapped directory source %q: %w", source, err)
+			}
+			log.G(ctx).WithField("source", source).Debug("created mapped directory source directory")
+		}
+	}
+	return nil
+}
+
 // processParamEnvToOCIEnv converts an Environment field from ProcessParameters
 // (a map from environment variable to value) into an array of environment
 // variable assignments (where each is in the form "<variable>=<value>") which
diff --git a/internal/gcs-sidecar/handlers_test.go b/internal/gcs-sidecar/handlers_test.go
index 6de3a0a605..e8b07bfd4c 100644
--- a/internal/gcs-sidecar/handlers_test.go
+++ b/internal/gcs-sidecar/handlers_test.go
@@ -7,16 +7,60 @@ import (
 	"context"
 	"encoding/json"
 	"io"
+	"os"
+	"path/filepath"
+	"strings"
 	"testing"
 	"time"
 
 	"github.com/Microsoft/go-winio/pkg/guid"
 	"github.com/Microsoft/hcsshim/internal/gcs/prot"
+	"github.com/Microsoft/hcsshim/internal/guestpath"
+	hcsschema "github.com/Microsoft/hcsshim/internal/hcs/schema2"
 	"github.com/Microsoft/hcsshim/internal/protocol/guestrequest"
 	"github.com/Microsoft/hcsshim/internal/protocol/guestresource"
 	"github.com/Microsoft/hcsshim/pkg/securitypolicy"
 )
 
+func TestCreateSandboxMountSourceDirs(t *testing.T) {
+	testRoot := filepath.Join(guestpath.WCOWSandboxMountPath, filepath.Base(t.TempDir()))
+	if err := os.MkdirAll(testRoot, 0755); err != nil {
+		t.Fatalf("failed to create test root: %v", err)
+	}
+	t.Cleanup(func() { _ = os.RemoveAll(testRoot) })
+
+	existingFile := filepath.Join(testRoot, "existing-file")
+	if err := os.WriteFile(existingFile, nil, 0644); err != nil {
+		t.Fatalf("failed to create existing source file: %v", err)
+	}
+
+	createdDir := filepath.Join(strings.ToLower(testRoot), "created", "nested")
+	outsideDir := filepath.Join(t.TempDir(), "outside")
+	mappedDirectories := []hcsschema.MappedDirectory{
+		{HostPath: createdDir},
+		{HostPath: existingFile},
+		{HostPath: outsideDir},
+	}
+
+	if err := createSandboxMountSourceDirs(context.Background(), mappedDirectories); err != nil {
+		t.Fatalf("createSandboxMountSourceDirs returned error: %v", err)
+	}
+
+	if info, err := os.Stat(createdDir); err != nil {
+		t.Fatalf("failed to stat created sandbox directory: %v", err)
+	} else if !info.IsDir() {
+		t.Fatalf("sandbox source %q is not a directory", createdDir)
+	}
+	if info, err := os.Stat(existingFile); err != nil {
+		t.Fatalf("failed to stat existing sandbox source file: %v", err)
+	} else if info.IsDir() {
+		t.Fatalf("existing sandbox source file %q was replaced by a directory", existingFile)
+	}
+	if _, err := os.Stat(outsideDir); !os.IsNotExist(err) {
+		t.Fatalf("outside source %q was created or returned unexpected error: %v", outsideDir, err)
+	}
+}
+
 // buildModifySettingsRequest creates a serialized ModifySettings request message
 // for the given resource type and settings.
 func buildModifySettingsRequest(t *testing.T, resourceType guestrequest.ResourceType, requestType guestrequest.RequestType, settings interface{}) []byte {
diff --git a/internal/guestpath/paths.go b/internal/guestpath/paths.go
index d616efc646..b5baccd5dd 100644
--- a/internal/guestpath/paths.go
+++ b/internal/guestpath/paths.go
@@ -11,6 +11,9 @@ const (
 	// WCOWRootPrefixInUVM is the path inside UVM where WCOW container's root
 	// file system will be mounted
 	WCOWRootPrefixInUVM = `C:\c`
+	// WCOWSandboxMountPath is the path inside the UVM where WCOW sandbox mounts
+	// are created.
+	WCOWSandboxMountPath = `C:\SandboxMounts`
 	// SandboxMountPrefix is mount prefix used in container spec to mark a
 	// sandbox-mount
 	SandboxMountPrefix = "sandbox://"
diff --git a/internal/hcsoci/resources_wcow.go b/internal/hcsoci/resources_wcow.go
index ebf353546d..6cf56f2c4c 100644
--- a/internal/hcsoci/resources_wcow.go
+++ b/internal/hcsoci/resources_wcow.go
@@ -27,8 +27,6 @@ import (
 	"github.com/Microsoft/hcsshim/internal/uvm/scsi"
 )
 
-const wcowSandboxMountPath = "C:\\SandboxMounts"
-
 func allocateWindowsResources(ctx context.Context, coi *createOptionsInternal, r *resources.Resources, isSandbox bool) error {
 	if coi.Spec.Root == nil {
 		coi.Spec.Root = &specs.Root{}
@@ -203,23 +201,30 @@ func setupMounts(ctx context.Context, coi *createOptionsInternal, r *resources.R
 			// so first convert to a path in the sandboxmounts path itself.
 			sandboxPath := convertToWCOWSandboxMountPath(mount.Source)
 
-			// Now we need to exec a process in the vm that will make these directories as theres
+			// Now we need to exec a process in the vm that will make these directories as there's
 			// no functionality in the Windows gcs to create an arbitrary directory.
 			//
-			// Create the directory, but also run dir afterwards regardless of if mkdir succeeded to handle the case where the directory already exists
-			// e.g. from a previous container specifying the same mount (and thus creating the same directory).
-			b := &bytes.Buffer{}
-			stderr, err := cmd.CreatePipeAndListen(b, false)
-			if err != nil {
-				return err
-			}
-			req := &cmd.CmdProcessRequest{
-				Args:   []string{"cmd", "/c", "mkdir", sandboxPath, "&", "dir", sandboxPath},
-				Stderr: stderr,
-			}
-			exitCode, err := coi.HostingSystem.ExecInUVM(ctx, req)
-			if err != nil {
-				return errors.Wrapf(err, "failed to create sandbox mount directory in utility VM with exit code %d %q", exitCode, b.String())
+			// We do not need to do this for Confidential WCOW, because in that case the gcs-sidecar
+			// handles the create container request and will do this for us.  This way the policy
+			// does not have to have exceptions for allowing such mkdir commands.
+			//
+			// Create the directory, but also run dir afterwards regardless of if mkdir succeeded to
+			// handle the case where the directory already exists e.g. from a previous container
+			// specifying the same mount (and thus creating the same directory).
+			if !coi.HostingSystem.HasConfidentialPolicy() {
+				b := &bytes.Buffer{}
+				stderr, err := cmd.CreatePipeAndListen(b, false)
+				if err != nil {
+					return err
+				}
+				req := &cmd.CmdProcessRequest{
+					Args:   []string{"cmd", "/c", "mkdir", sandboxPath, "&", "dir", sandboxPath},
+					Stderr: stderr,
+				}
+				exitCode, err := coi.HostingSystem.ExecInUVM(ctx, req)
+				if err != nil {
+					return errors.Wrapf(err, "failed to create sandbox mount directory in utility VM with exit code %d %q", exitCode, b.String())
+				}
 			}
 		} else if np, ok := uvm.ParseNamedPipe(coi.HostingSystem, mount); ok {
 			if !np.UVMPipe {
@@ -248,5 +253,5 @@ func setupMounts(ctx context.Context, coi *createOptionsInternal, r *resources.R
 
 func convertToWCOWSandboxMountPath(source string) string {
 	subPath := strings.TrimPrefix(source, guestpath.SandboxMountPrefix)
-	return filepath.Join(wcowSandboxMountPath, subPath)
+	return filepath.Join(guestpath.WCOWSandboxMountPath, subPath)
 }