How can I set the 'Path' variable in a .desktop file to be relative to the location where the desktop file is located?

You can kludge around this by using an in-line bash mini-script on your Exec. This will add the .desktop file's path to PATH prior to running your command.

Exec=bash -c "export PATH=$PATH:`dirname %k`; your_command"

%k will be substituted by the path of the desktop file itself. The dirname command chops off the filename part, leaving only the directory. Once PATH is set like this, your_command can be invoked without a full path.

You cannot set the CWD inside a .desktop file. If you want an application to have a specific CWD, you will need to write a simple wrapper script for the application, that looks something like this:

#!/bin/sh

(cd /where/you/want/it/to/be && exec your_program)

You can replace your_program there with $@ and run the script with your_program as an argument, like run-in-dir.sh your_program. This way you can use the same script to wrap any program you want to start in that directory.

I used this:

Exec=bash -c 'cd $(dirname %k) && ./SCRIPT_NAME'

The %k is the full name of the .desktop file including its path. It's then used by dirname to get a location and change directory to that location. Finally, now that it's in the right place, it finds the script and runs it.

For directory names with spaces in the name, this finally worked for me:

Exec=/bin/bash -c 'cd "$(dirname "$0")"; wine game.exe -windowed' %k

Credit to https://unix.stackexchange.com/a/144428/61349