diff --git a/src/compiler/commandLineParser.ts b/src/compiler/commandLineParser.ts
index 86d073f7d49..d29a287b950 100644
--- a/src/compiler/commandLineParser.ts
+++ b/src/compiler/commandLineParser.ts
@@ -17,6 +17,12 @@ namespace ts {
             type: "boolean",
             description: Diagnostics.Generates_corresponding_d_ts_file,
         },
+        {
+            name: "declarationDir",
+            type: "string",
+            isFilePath: true,
+            paramType: Diagnostics.DIRECTORY,
+        },
         {
             name: "diagnostics",
             type: "boolean",
diff --git a/src/compiler/program.ts b/src/compiler/program.ts
index d41f34df0b3..2f832e72c51 100644
--- a/src/compiler/program.ts
+++ b/src/compiler/program.ts
@@ -1670,6 +1670,15 @@ namespace ts {
                 }
             }
 
+            if (options.declarationDir) {
+                if (!options.declaration) {
+                    programDiagnostics.add(createCompilerDiagnostic(Diagnostics.Option_0_cannot_be_specified_without_specifying_option_1, "declarationDir", "declaration"));
+                }
+                if (options.out || options.outFile) {
+                    programDiagnostics.add(createCompilerDiagnostic(Diagnostics.Option_0_cannot_be_specified_with_option_1, "declarationDir", options.out ? "out" : "outFile"));
+                }
+            }
+
             const languageVersion = options.target || ScriptTarget.ES3;
             const outFile = options.outFile || options.out;
 
diff --git a/src/compiler/types.ts b/src/compiler/types.ts
index ca662d6ac46..c065478a20a 100644
--- a/src/compiler/types.ts
+++ b/src/compiler/types.ts
@@ -2371,6 +2371,7 @@ namespace ts {
         allowNonTsExtensions?: boolean;
         charset?: string;
         declaration?: boolean;
+        declarationDir?: string;
         diagnostics?: boolean;
         emitBOM?: boolean;
         help?: boolean;
diff --git a/src/compiler/utilities.ts b/src/compiler/utilities.ts
index d8474f85f6b..9c598da9069 100644
--- a/src/compiler/utilities.ts
+++ b/src/compiler/utilities.ts
@@ -2012,6 +2012,18 @@ namespace ts {
         return emitOutputFilePathWithoutExtension + extension;
     }
 
+    export function getDeclarationEmitOutputFilePath(sourceFile: SourceFile, host: EmitHost) {
+        const options = host.getCompilerOptions();
+        const outputDir = options.declarationDir || options.outDir; // Prefer declaration folder if specified
+
+        if (options.declaration) {
+            const path = outputDir
+                ? getSourceFilePathInNewDir(sourceFile, host, outputDir)
+                : sourceFile.fileName;
+            return removeFileExtension(path) + ".d.ts";
+        }
+    }
+
     export function getEmitScriptTarget(compilerOptions: CompilerOptions) {
         return compilerOptions.target || ScriptTarget.ES3;
     }
@@ -2065,23 +2077,23 @@ namespace ts {
             const emitFileNames: EmitFileNames = {
                 jsFilePath,
                 sourceMapFilePath: getSourceMapFilePath(jsFilePath, options),
-                declarationFilePath: !isSourceFileJavaScript(sourceFile) ? getDeclarationEmitFilePath(jsFilePath, options) : undefined
+                declarationFilePath: !isSourceFileJavaScript(sourceFile) ? getDeclarationEmitOutputFilePath(sourceFile, host) : undefined
             };
             action(emitFileNames, [sourceFile], /*isBundledEmit*/false);
         }
 
         function onBundledEmit(host: EmitHost) {
             // Can emit only sources that are not declaration file and are either non module code or module with --module or --target es6 specified
-            const bundledSources = filter(host.getSourceFiles(),
-                sourceFile => !isDeclarationFile(sourceFile) && // Not a declaration file
-                    (!isExternalModule(sourceFile) || // non module file
-                        (getEmitModuleKind(options) && isExternalModule(sourceFile)))); // module that can emit - note falsy value from getEmitModuleKind means the module kind that shouldn't be emitted
+            const bundledSources = filter(host.getSourceFiles(), sourceFile =>
+                !isDeclarationFile(sourceFile)                                       // Not a declaration file
+                && (!isExternalModule(sourceFile) || !!getEmitModuleKind(options))); // and not a module, unless module emit enabled
+
             if (bundledSources.length) {
                 const jsFilePath = options.outFile || options.out;
                 const emitFileNames: EmitFileNames = {
                     jsFilePath,
                     sourceMapFilePath: getSourceMapFilePath(jsFilePath, options),
-                    declarationFilePath: getDeclarationEmitFilePath(jsFilePath, options)
+                    declarationFilePath: options.declaration ? removeFileExtension(jsFilePath) + ".d.ts" : undefined
                 };
                 action(emitFileNames, bundledSources, /*isBundledEmit*/true);
             }
@@ -2090,10 +2102,6 @@ namespace ts {
         function getSourceMapFilePath(jsFilePath: string, options: CompilerOptions) {
             return options.sourceMap ? jsFilePath + ".map" : undefined;
         }
-
-        function getDeclarationEmitFilePath(jsFilePath: string, options: CompilerOptions) {
-            return options.declaration ? removeFileExtension(jsFilePath) + ".d.ts" : undefined;
-        }
     }
 
     export function getSourceFilePathInNewDir(sourceFile: SourceFile, host: EmitHost, newDirPath: string) {
diff --git a/tests/baselines/reference/project/declarationDir/amd/a.js b/tests/baselines/reference/project/declarationDir/amd/a.js
new file mode 100644
index 00000000000..331c004bd67
--- /dev/null
+++ b/tests/baselines/reference/project/declarationDir/amd/a.js
@@ -0,0 +1,9 @@
+define(["require", "exports"], function (require, exports) {
+    "use strict";
+    var A = (function () {
+        function A() {
+        }
+        return A;
+    }());
+    exports.A = A;
+});
diff --git a/tests/baselines/reference/project/declarationDir/amd/declarationDir.json b/tests/baselines/reference/project/declarationDir/amd/declarationDir.json
new file mode 100644
index 00000000000..83e17dc949c
--- /dev/null
+++ b/tests/baselines/reference/project/declarationDir/amd/declarationDir.json
@@ -0,0 +1,26 @@
+{
+    "scenario": "declarationDir: specify declarationDir only",
+    "projectRoot": "tests/cases/projects/declarationDir",
+    "inputFiles": [
+        "a.ts",
+        "subfolder/b.ts",
+        "subfolder/c.ts"
+    ],
+    "declaration": true,
+    "declarationDir": "declarations",
+    "baselineCheck": true,
+    "resolvedInputFiles": [
+        "lib.d.ts",
+        "subfolder/b.ts",
+        "a.ts",
+        "subfolder/c.ts"
+    ],
+    "emittedFiles": [
+        "subfolder/b.js",
+        "declarations/subfolder/b.d.ts",
+        "a.js",
+        "declarations/a.d.ts",
+        "subfolder/c.js",
+        "declarations/subfolder/c.d.ts"
+    ]
+}
\ No newline at end of file
diff --git a/tests/baselines/reference/project/declarationDir/amd/declarations/a.d.ts b/tests/baselines/reference/project/declarationDir/amd/declarations/a.d.ts
new file mode 100644
index 00000000000..d8c7642c262
--- /dev/null
+++ b/tests/baselines/reference/project/declarationDir/amd/declarations/a.d.ts
@@ -0,0 +1,4 @@
+import { B } from './subfolder/b';
+export declare class A {
+    b: B;
+}
diff --git a/tests/baselines/reference/project/declarationDir/amd/declarations/subfolder/b.d.ts b/tests/baselines/reference/project/declarationDir/amd/declarations/subfolder/b.d.ts
new file mode 100644
index 00000000000..a03032c2d62
--- /dev/null
+++ b/tests/baselines/reference/project/declarationDir/amd/declarations/subfolder/b.d.ts
@@ -0,0 +1,2 @@
+export declare class B {
+}
diff --git a/tests/baselines/reference/project/declarationDir/amd/declarations/subfolder/c.d.ts b/tests/baselines/reference/project/declarationDir/amd/declarations/subfolder/c.d.ts
new file mode 100644
index 00000000000..c45525d0c5f
--- /dev/null
+++ b/tests/baselines/reference/project/declarationDir/amd/declarations/subfolder/c.d.ts
@@ -0,0 +1,4 @@
+import { A } from '../a';
+export declare class C {
+    a: A;
+}
diff --git a/tests/baselines/reference/project/declarationDir/amd/subfolder/b.js b/tests/baselines/reference/project/declarationDir/amd/subfolder/b.js
new file mode 100644
index 00000000000..e2cdda8530b
--- /dev/null
+++ b/tests/baselines/reference/project/declarationDir/amd/subfolder/b.js
@@ -0,0 +1,9 @@
+define(["require", "exports"], function (require, exports) {
+    "use strict";
+    var B = (function () {
+        function B() {
+        }
+        return B;
+    }());
+    exports.B = B;
+});
diff --git a/tests/baselines/reference/project/declarationDir/amd/subfolder/c.js b/tests/baselines/reference/project/declarationDir/amd/subfolder/c.js
new file mode 100644
index 00000000000..212511f2bf5
--- /dev/null
+++ b/tests/baselines/reference/project/declarationDir/amd/subfolder/c.js
@@ -0,0 +1,9 @@
+define(["require", "exports"], function (require, exports) {
+    "use strict";
+    var C = (function () {
+        function C() {
+        }
+        return C;
+    }());
+    exports.C = C;
+});
diff --git a/tests/baselines/reference/project/declarationDir/node/a.js b/tests/baselines/reference/project/declarationDir/node/a.js
new file mode 100644
index 00000000000..35f5adf27f0
--- /dev/null
+++ b/tests/baselines/reference/project/declarationDir/node/a.js
@@ -0,0 +1,7 @@
+"use strict";
+var A = (function () {
+    function A() {
+    }
+    return A;
+}());
+exports.A = A;
diff --git a/tests/baselines/reference/project/declarationDir/node/declarationDir.json b/tests/baselines/reference/project/declarationDir/node/declarationDir.json
new file mode 100644
index 00000000000..83e17dc949c
--- /dev/null
+++ b/tests/baselines/reference/project/declarationDir/node/declarationDir.json
@@ -0,0 +1,26 @@
+{
+    "scenario": "declarationDir: specify declarationDir only",
+    "projectRoot": "tests/cases/projects/declarationDir",
+    "inputFiles": [
+        "a.ts",
+        "subfolder/b.ts",
+        "subfolder/c.ts"
+    ],
+    "declaration": true,
+    "declarationDir": "declarations",
+    "baselineCheck": true,
+    "resolvedInputFiles": [
+        "lib.d.ts",
+        "subfolder/b.ts",
+        "a.ts",
+        "subfolder/c.ts"
+    ],
+    "emittedFiles": [
+        "subfolder/b.js",
+        "declarations/subfolder/b.d.ts",
+        "a.js",
+        "declarations/a.d.ts",
+        "subfolder/c.js",
+        "declarations/subfolder/c.d.ts"
+    ]
+}
\ No newline at end of file
diff --git a/tests/baselines/reference/project/declarationDir/node/declarations/a.d.ts b/tests/baselines/reference/project/declarationDir/node/declarations/a.d.ts
new file mode 100644
index 00000000000..d8c7642c262
--- /dev/null
+++ b/tests/baselines/reference/project/declarationDir/node/declarations/a.d.ts
@@ -0,0 +1,4 @@
+import { B } from './subfolder/b';
+export declare class A {
+    b: B;
+}
diff --git a/tests/baselines/reference/project/declarationDir/node/declarations/subfolder/b.d.ts b/tests/baselines/reference/project/declarationDir/node/declarations/subfolder/b.d.ts
new file mode 100644
index 00000000000..a03032c2d62
--- /dev/null
+++ b/tests/baselines/reference/project/declarationDir/node/declarations/subfolder/b.d.ts
@@ -0,0 +1,2 @@
+export declare class B {
+}
diff --git a/tests/baselines/reference/project/declarationDir/node/declarations/subfolder/c.d.ts b/tests/baselines/reference/project/declarationDir/node/declarations/subfolder/c.d.ts
new file mode 100644
index 00000000000..c45525d0c5f
--- /dev/null
+++ b/tests/baselines/reference/project/declarationDir/node/declarations/subfolder/c.d.ts
@@ -0,0 +1,4 @@
+import { A } from '../a';
+export declare class C {
+    a: A;
+}
diff --git a/tests/baselines/reference/project/declarationDir/node/subfolder/b.js b/tests/baselines/reference/project/declarationDir/node/subfolder/b.js
new file mode 100644
index 00000000000..7b46df97ac3
--- /dev/null
+++ b/tests/baselines/reference/project/declarationDir/node/subfolder/b.js
@@ -0,0 +1,7 @@
+"use strict";
+var B = (function () {
+    function B() {
+    }
+    return B;
+}());
+exports.B = B;
diff --git a/tests/baselines/reference/project/declarationDir/node/subfolder/c.js b/tests/baselines/reference/project/declarationDir/node/subfolder/c.js
new file mode 100644
index 00000000000..65238579edc
--- /dev/null
+++ b/tests/baselines/reference/project/declarationDir/node/subfolder/c.js
@@ -0,0 +1,7 @@
+"use strict";
+var C = (function () {
+    function C() {
+    }
+    return C;
+}());
+exports.C = C;
diff --git a/tests/baselines/reference/project/declarationDir2/amd/declarationDir2.json b/tests/baselines/reference/project/declarationDir2/amd/declarationDir2.json
new file mode 100644
index 00000000000..a746ea58a7c
--- /dev/null
+++ b/tests/baselines/reference/project/declarationDir2/amd/declarationDir2.json
@@ -0,0 +1,27 @@
+{
+    "scenario": "declarationDir: specify declarationDir with outDir",
+    "projectRoot": "tests/cases/projects/declarationDir",
+    "inputFiles": [
+        "a.ts",
+        "subfolder/b.ts",
+        "subfolder/c.ts"
+    ],
+    "outDir": "out",
+    "declaration": true,
+    "declarationDir": "declarations",
+    "baselineCheck": true,
+    "resolvedInputFiles": [
+        "lib.d.ts",
+        "subfolder/b.ts",
+        "a.ts",
+        "subfolder/c.ts"
+    ],
+    "emittedFiles": [
+        "out/subfolder/b.js",
+        "declarations/subfolder/b.d.ts",
+        "out/a.js",
+        "declarations/a.d.ts",
+        "out/subfolder/c.js",
+        "declarations/subfolder/c.d.ts"
+    ]
+}
\ No newline at end of file
diff --git a/tests/baselines/reference/project/declarationDir2/amd/declarations/a.d.ts b/tests/baselines/reference/project/declarationDir2/amd/declarations/a.d.ts
new file mode 100644
index 00000000000..d8c7642c262
--- /dev/null
+++ b/tests/baselines/reference/project/declarationDir2/amd/declarations/a.d.ts
@@ -0,0 +1,4 @@
+import { B } from './subfolder/b';
+export declare class A {
+    b: B;
+}
diff --git a/tests/baselines/reference/project/declarationDir2/amd/declarations/subfolder/b.d.ts b/tests/baselines/reference/project/declarationDir2/amd/declarations/subfolder/b.d.ts
new file mode 100644
index 00000000000..a03032c2d62
--- /dev/null
+++ b/tests/baselines/reference/project/declarationDir2/amd/declarations/subfolder/b.d.ts
@@ -0,0 +1,2 @@
+export declare class B {
+}
diff --git a/tests/baselines/reference/project/declarationDir2/amd/declarations/subfolder/c.d.ts b/tests/baselines/reference/project/declarationDir2/amd/declarations/subfolder/c.d.ts
new file mode 100644
index 00000000000..c45525d0c5f
--- /dev/null
+++ b/tests/baselines/reference/project/declarationDir2/amd/declarations/subfolder/c.d.ts
@@ -0,0 +1,4 @@
+import { A } from '../a';
+export declare class C {
+    a: A;
+}
diff --git a/tests/baselines/reference/project/declarationDir2/amd/out/a.js b/tests/baselines/reference/project/declarationDir2/amd/out/a.js
new file mode 100644
index 00000000000..331c004bd67
--- /dev/null
+++ b/tests/baselines/reference/project/declarationDir2/amd/out/a.js
@@ -0,0 +1,9 @@
+define(["require", "exports"], function (require, exports) {
+    "use strict";
+    var A = (function () {
+        function A() {
+        }
+        return A;
+    }());
+    exports.A = A;
+});
diff --git a/tests/baselines/reference/project/declarationDir2/amd/out/subfolder/b.js b/tests/baselines/reference/project/declarationDir2/amd/out/subfolder/b.js
new file mode 100644
index 00000000000..e2cdda8530b
--- /dev/null
+++ b/tests/baselines/reference/project/declarationDir2/amd/out/subfolder/b.js
@@ -0,0 +1,9 @@
+define(["require", "exports"], function (require, exports) {
+    "use strict";
+    var B = (function () {
+        function B() {
+        }
+        return B;
+    }());
+    exports.B = B;
+});
diff --git a/tests/baselines/reference/project/declarationDir2/amd/out/subfolder/c.js b/tests/baselines/reference/project/declarationDir2/amd/out/subfolder/c.js
new file mode 100644
index 00000000000..212511f2bf5
--- /dev/null
+++ b/tests/baselines/reference/project/declarationDir2/amd/out/subfolder/c.js
@@ -0,0 +1,9 @@
+define(["require", "exports"], function (require, exports) {
+    "use strict";
+    var C = (function () {
+        function C() {
+        }
+        return C;
+    }());
+    exports.C = C;
+});
diff --git a/tests/baselines/reference/project/declarationDir2/node/declarationDir2.json b/tests/baselines/reference/project/declarationDir2/node/declarationDir2.json
new file mode 100644
index 00000000000..a746ea58a7c
--- /dev/null
+++ b/tests/baselines/reference/project/declarationDir2/node/declarationDir2.json
@@ -0,0 +1,27 @@
+{
+    "scenario": "declarationDir: specify declarationDir with outDir",
+    "projectRoot": "tests/cases/projects/declarationDir",
+    "inputFiles": [
+        "a.ts",
+        "subfolder/b.ts",
+        "subfolder/c.ts"
+    ],
+    "outDir": "out",
+    "declaration": true,
+    "declarationDir": "declarations",
+    "baselineCheck": true,
+    "resolvedInputFiles": [
+        "lib.d.ts",
+        "subfolder/b.ts",
+        "a.ts",
+        "subfolder/c.ts"
+    ],
+    "emittedFiles": [
+        "out/subfolder/b.js",
+        "declarations/subfolder/b.d.ts",
+        "out/a.js",
+        "declarations/a.d.ts",
+        "out/subfolder/c.js",
+        "declarations/subfolder/c.d.ts"
+    ]
+}
\ No newline at end of file
diff --git a/tests/baselines/reference/project/declarationDir2/node/declarations/a.d.ts b/tests/baselines/reference/project/declarationDir2/node/declarations/a.d.ts
new file mode 100644
index 00000000000..d8c7642c262
--- /dev/null
+++ b/tests/baselines/reference/project/declarationDir2/node/declarations/a.d.ts
@@ -0,0 +1,4 @@
+import { B } from './subfolder/b';
+export declare class A {
+    b: B;
+}
diff --git a/tests/baselines/reference/project/declarationDir2/node/declarations/subfolder/b.d.ts b/tests/baselines/reference/project/declarationDir2/node/declarations/subfolder/b.d.ts
new file mode 100644
index 00000000000..a03032c2d62
--- /dev/null
+++ b/tests/baselines/reference/project/declarationDir2/node/declarations/subfolder/b.d.ts
@@ -0,0 +1,2 @@
+export declare class B {
+}
diff --git a/tests/baselines/reference/project/declarationDir2/node/declarations/subfolder/c.d.ts b/tests/baselines/reference/project/declarationDir2/node/declarations/subfolder/c.d.ts
new file mode 100644
index 00000000000..c45525d0c5f
--- /dev/null
+++ b/tests/baselines/reference/project/declarationDir2/node/declarations/subfolder/c.d.ts
@@ -0,0 +1,4 @@
+import { A } from '../a';
+export declare class C {
+    a: A;
+}
diff --git a/tests/baselines/reference/project/declarationDir2/node/out/a.js b/tests/baselines/reference/project/declarationDir2/node/out/a.js
new file mode 100644
index 00000000000..35f5adf27f0
--- /dev/null
+++ b/tests/baselines/reference/project/declarationDir2/node/out/a.js
@@ -0,0 +1,7 @@
+"use strict";
+var A = (function () {
+    function A() {
+    }
+    return A;
+}());
+exports.A = A;
diff --git a/tests/baselines/reference/project/declarationDir2/node/out/subfolder/b.js b/tests/baselines/reference/project/declarationDir2/node/out/subfolder/b.js
new file mode 100644
index 00000000000..7b46df97ac3
--- /dev/null
+++ b/tests/baselines/reference/project/declarationDir2/node/out/subfolder/b.js
@@ -0,0 +1,7 @@
+"use strict";
+var B = (function () {
+    function B() {
+    }
+    return B;
+}());
+exports.B = B;
diff --git a/tests/baselines/reference/project/declarationDir2/node/out/subfolder/c.js b/tests/baselines/reference/project/declarationDir2/node/out/subfolder/c.js
new file mode 100644
index 00000000000..65238579edc
--- /dev/null
+++ b/tests/baselines/reference/project/declarationDir2/node/out/subfolder/c.js
@@ -0,0 +1,7 @@
+"use strict";
+var C = (function () {
+    function C() {
+    }
+    return C;
+}());
+exports.C = C;
diff --git a/tests/baselines/reference/project/declarationDir3/amd/declarationDir3.errors.txt b/tests/baselines/reference/project/declarationDir3/amd/declarationDir3.errors.txt
new file mode 100644
index 00000000000..a152ace6f11
--- /dev/null
+++ b/tests/baselines/reference/project/declarationDir3/amd/declarationDir3.errors.txt
@@ -0,0 +1,19 @@
+error TS5053: Option 'declarationDir' cannot be specified with option 'out'.
+
+
+!!! error TS5053: Option 'declarationDir' cannot be specified with option 'out'.
+==== b.ts (0 errors) ====
+    export class B {
+        
+    }
+==== a.ts (0 errors) ====
+    import {B} from './subfolder/b';
+    export class A {
+        b: B;
+    }
+==== subfolder/c.ts (0 errors) ====
+    import {A} from '../a';
+    
+    export class C {
+        a: A;
+    }
\ No newline at end of file
diff --git a/tests/baselines/reference/project/declarationDir3/amd/declarationDir3.json b/tests/baselines/reference/project/declarationDir3/amd/declarationDir3.json
new file mode 100644
index 00000000000..7c26154e17b
--- /dev/null
+++ b/tests/baselines/reference/project/declarationDir3/amd/declarationDir3.json
@@ -0,0 +1,23 @@
+{
+    "scenario": "declarationDir: specify declarationDir with bundled output file",
+    "projectRoot": "tests/cases/projects/declarationDir",
+    "inputFiles": [
+        "a.ts",
+        "subfolder/b.ts",
+        "subfolder/c.ts"
+    ],
+    "out": "out.js",
+    "declaration": true,
+    "declarationDir": "declarations",
+    "baselineCheck": true,
+    "resolvedInputFiles": [
+        "lib.d.ts",
+        "subfolder/b.ts",
+        "a.ts",
+        "subfolder/c.ts"
+    ],
+    "emittedFiles": [
+        "out.js",
+        "out.d.ts"
+    ]
+}
\ No newline at end of file
diff --git a/tests/baselines/reference/project/declarationDir3/amd/out.d.ts b/tests/baselines/reference/project/declarationDir3/amd/out.d.ts
new file mode 100644
index 00000000000..60950f066bc
--- /dev/null
+++ b/tests/baselines/reference/project/declarationDir3/amd/out.d.ts
@@ -0,0 +1,16 @@
+declare module "subfolder/b" {
+    export class B {
+    }
+}
+declare module "a" {
+    import { B } from "subfolder/b";
+    export class A {
+        b: B;
+    }
+}
+declare module "subfolder/c" {
+    import { A } from "a";
+    export class C {
+        a: A;
+    }
+}
diff --git a/tests/baselines/reference/project/declarationDir3/amd/out.js b/tests/baselines/reference/project/declarationDir3/amd/out.js
new file mode 100644
index 00000000000..6c49867c908
--- /dev/null
+++ b/tests/baselines/reference/project/declarationDir3/amd/out.js
@@ -0,0 +1,27 @@
+define("subfolder/b", ["require", "exports"], function (require, exports) {
+    "use strict";
+    var B = (function () {
+        function B() {
+        }
+        return B;
+    }());
+    exports.B = B;
+});
+define("a", ["require", "exports"], function (require, exports) {
+    "use strict";
+    var A = (function () {
+        function A() {
+        }
+        return A;
+    }());
+    exports.A = A;
+});
+define("subfolder/c", ["require", "exports"], function (require, exports) {
+    "use strict";
+    var C = (function () {
+        function C() {
+        }
+        return C;
+    }());
+    exports.C = C;
+});
diff --git a/tests/baselines/reference/project/declarationDir3/node/declarationDir3.errors.txt b/tests/baselines/reference/project/declarationDir3/node/declarationDir3.errors.txt
new file mode 100644
index 00000000000..19e15ce8fef
--- /dev/null
+++ b/tests/baselines/reference/project/declarationDir3/node/declarationDir3.errors.txt
@@ -0,0 +1,21 @@
+error TS5053: Option 'declarationDir' cannot be specified with option 'out'.
+error TS6082: Only 'amd' and 'system' modules are supported alongside --out.
+
+
+!!! error TS5053: Option 'declarationDir' cannot be specified with option 'out'.
+!!! error TS6082: Only 'amd' and 'system' modules are supported alongside --out.
+==== b.ts (0 errors) ====
+    export class B {
+        
+    }
+==== a.ts (0 errors) ====
+    import {B} from './subfolder/b';
+    export class A {
+        b: B;
+    }
+==== subfolder/c.ts (0 errors) ====
+    import {A} from '../a';
+    
+    export class C {
+        a: A;
+    }
\ No newline at end of file
diff --git a/tests/baselines/reference/project/declarationDir3/node/declarationDir3.json b/tests/baselines/reference/project/declarationDir3/node/declarationDir3.json
new file mode 100644
index 00000000000..7c26154e17b
--- /dev/null
+++ b/tests/baselines/reference/project/declarationDir3/node/declarationDir3.json
@@ -0,0 +1,23 @@
+{
+    "scenario": "declarationDir: specify declarationDir with bundled output file",
+    "projectRoot": "tests/cases/projects/declarationDir",
+    "inputFiles": [
+        "a.ts",
+        "subfolder/b.ts",
+        "subfolder/c.ts"
+    ],
+    "out": "out.js",
+    "declaration": true,
+    "declarationDir": "declarations",
+    "baselineCheck": true,
+    "resolvedInputFiles": [
+        "lib.d.ts",
+        "subfolder/b.ts",
+        "a.ts",
+        "subfolder/c.ts"
+    ],
+    "emittedFiles": [
+        "out.js",
+        "out.d.ts"
+    ]
+}
\ No newline at end of file
diff --git a/tests/baselines/reference/project/declarationDir3/node/out.d.ts b/tests/baselines/reference/project/declarationDir3/node/out.d.ts
new file mode 100644
index 00000000000..60950f066bc
--- /dev/null
+++ b/tests/baselines/reference/project/declarationDir3/node/out.d.ts
@@ -0,0 +1,16 @@
+declare module "subfolder/b" {
+    export class B {
+    }
+}
+declare module "a" {
+    import { B } from "subfolder/b";
+    export class A {
+        b: B;
+    }
+}
+declare module "subfolder/c" {
+    import { A } from "a";
+    export class C {
+        a: A;
+    }
+}
diff --git a/tests/baselines/reference/project/declarationDir3/node/out.js b/tests/baselines/reference/project/declarationDir3/node/out.js
new file mode 100644
index 00000000000..e69de29bb2d
diff --git a/tests/cases/project/declarationDir.json b/tests/cases/project/declarationDir.json
new file mode 100644
index 00000000000..3322694ddbd
--- /dev/null
+++ b/tests/cases/project/declarationDir.json
@@ -0,0 +1,12 @@
+{
+    "scenario": "declarationDir: specify declarationDir only",
+    "projectRoot": "tests/cases/projects/declarationDir",
+    "inputFiles": [
+        "a.ts",
+        "subfolder/b.ts",
+        "subfolder/c.ts"
+    ],
+    "declaration": true,
+    "declarationDir": "declarations",
+    "baselineCheck": true
+}
\ No newline at end of file
diff --git a/tests/cases/project/declarationDir2.json b/tests/cases/project/declarationDir2.json
new file mode 100644
index 00000000000..c943ed7f57b
--- /dev/null
+++ b/tests/cases/project/declarationDir2.json
@@ -0,0 +1,13 @@
+{
+    "scenario": "declarationDir: specify declarationDir with outDir",
+    "projectRoot": "tests/cases/projects/declarationDir",
+    "inputFiles": [
+        "a.ts",
+        "subfolder/b.ts",
+        "subfolder/c.ts"
+    ],
+    "outDir": "out",
+    "declaration": true,
+    "declarationDir": "declarations",
+    "baselineCheck": true
+}
\ No newline at end of file
diff --git a/tests/cases/project/declarationDir3.json b/tests/cases/project/declarationDir3.json
new file mode 100644
index 00000000000..b86e454c69d
--- /dev/null
+++ b/tests/cases/project/declarationDir3.json
@@ -0,0 +1,13 @@
+{
+    "scenario": "declarationDir: specify declarationDir with bundled output file",
+    "projectRoot": "tests/cases/projects/declarationDir",
+    "inputFiles": [
+        "a.ts",
+        "subfolder/b.ts",
+        "subfolder/c.ts"
+    ],
+    "out": "out.js",
+    "declaration": true,
+    "declarationDir": "declarations",
+    "baselineCheck": true
+}
\ No newline at end of file
diff --git a/tests/cases/projects/declarationDir/a.ts b/tests/cases/projects/declarationDir/a.ts
new file mode 100644
index 00000000000..1b2c4286dc1
--- /dev/null
+++ b/tests/cases/projects/declarationDir/a.ts
@@ -0,0 +1,4 @@
+import {B} from './subfolder/b';
+export class A {
+    b: B;
+}
\ No newline at end of file
diff --git a/tests/cases/projects/declarationDir/subfolder/b.ts b/tests/cases/projects/declarationDir/subfolder/b.ts
new file mode 100644
index 00000000000..d87c6898050
--- /dev/null
+++ b/tests/cases/projects/declarationDir/subfolder/b.ts
@@ -0,0 +1,3 @@
+export class B {
+    
+}
\ No newline at end of file
diff --git a/tests/cases/projects/declarationDir/subfolder/c.ts b/tests/cases/projects/declarationDir/subfolder/c.ts
new file mode 100644
index 00000000000..17b540b0346
--- /dev/null
+++ b/tests/cases/projects/declarationDir/subfolder/c.ts
@@ -0,0 +1,5 @@
+import {A} from '../a';
+
+export class C {
+    a: A;
+}
\ No newline at end of file