diff --git a/plugins/tools/defaulttool/referenceimagestool/ToolReferenceImagesWidget.cpp b/plugins/tools/defaulttool/referenceimagestool/ToolReferenceImagesWidget.cpp
index 06f1350549..31e9abb2d6 100644
--- a/plugins/tools/defaulttool/referenceimagestool/ToolReferenceImagesWidget.cpp
+++ b/plugins/tools/defaulttool/referenceimagestool/ToolReferenceImagesWidget.cpp
@@ -1,223 +1,250 @@
 /*
  *  Copyright (c) 2017 Eugene Ingerman
  *
  *  This program is free software; you can redistribute it and/or modify
  *  it under the terms of the GNU General Public License as published by
  *  the Free Software Foundation; either version 2 of the License, or
  *  (at your option) any later version.
  *
  *  This program is distributed in the hope that it will be useful,
  *  but WITHOUT ANY WARRANTY; without even the implied warranty of
  *  MERCHANTABILITY or FITNESS FOR A PARTICULAR PURPOSE.  See the
  *  GNU General Public License for more details.
  *
  *  You should have received a copy of the GNU General Public License
  *  along with this program; if not, write to the Free Software
  *  Foundation, Inc., 51 Franklin Street, Fifth Floor, Boston, MA 02110-1301, USA.
  */
 
 #include "ToolReferenceImagesWidget.h"
 
 #include "ui_WdgToolOptions.h"
 
 #include <KoSelection.h>
 #include <KoShapeTransparencyCommand.h>
 #include <KoShapeKeepAspectRatioCommand.h>
 #include <kis_config.h>
 #include <kis_signals_blocker.h>
 #include <KisReferenceImage.h>
 
 #include <QClipboard>
 #include <QApplication>
+#include <QStandardItemModel>
 
 #include "ToolReferenceImages.h"
 
 struct ToolReferenceImagesWidget::Private {
     Private(ToolReferenceImages *tool)
     : tool(tool)
     {
     }
 
     Ui_WdgToolOptions *ui;
     ToolReferenceImages *tool;
 };
 
 ToolReferenceImagesWidget::ToolReferenceImagesWidget(ToolReferenceImages *tool, KisCanvasResourceProvider */*provider*/, QWidget *parent)
     : QWidget(parent),
       d(new Private(tool))
 {
     d->ui = new Ui_WdgToolOptions();
     d->ui->setupUi(this);
 
     d->ui->opacitySlider->setRange(0, 100);
     d->ui->opacitySlider->setPrefixes(i18n("Opacity: "), i18n("Opacity [*varies*]: "));
     d->ui->opacitySlider->setSuffix(i18n(" %"));
     d->ui->opacitySlider->setValueGetter(
         [](KoShape *s){ return 100.0 * (1.0 - s->transparency()); }
     );
 
     d->ui->saturationSlider->setRange(0, 100);
     d->ui->saturationSlider->setPrefixes(i18n("Saturation: "), i18n("Saturation [*varies*]: "));
     d->ui->saturationSlider->setSuffix(i18n(" %"));
     d->ui->saturationSlider->setValueGetter(
         [](KoShape *s){
             auto *r = dynamic_cast<KisReferenceImage*>(s);
             KIS_SAFE_ASSERT_RECOVER_RETURN_VALUE(r, 0.0);
             return 100.0 * r->saturation();
         }
     );
 
     d->ui->bnAddReferenceImage->setToolTip(i18n("Add Reference Image"));
     d->ui->bnAddReferenceImage->setIcon(KisIconUtils::loadIcon("addlayer"));
 
 
     d->ui->bnDelete->setToolTip(i18n("Delete all Reference Images"));
     d->ui->bnDelete->setIcon(KisIconUtils::loadIcon("edit-clear"));
 
     d->ui->bnLoad->setToolTip(i18n("Load Reference Images Set"));
     d->ui->bnLoad->setIcon(KisIconUtils::loadIcon("document-open"));
 
 
     d->ui->bnSave->setToolTip(i18n("Export Reference Images Set"));
     d->ui->bnSave->setIcon(KisIconUtils::loadIcon("document-save"));
 
     d->ui->bnPasteReferenceImage->setEnabled(!QApplication::clipboard()->image().isNull());
 
 
     connect(d->ui->bnAddReferenceImage, SIGNAL(clicked()), tool, SLOT(addReferenceImage()));
     connect(d->ui->bnPasteReferenceImage, SIGNAL(clicked()), tool, SLOT(pasteReferenceImage()));
     connect(QApplication::clipboard(), SIGNAL(dataChanged()), this, SLOT(slotCheckClipboardContents()));
 
     connect(d->ui->bnDelete, SIGNAL(clicked()), tool, SLOT(removeAllReferenceImages()));
     connect(d->ui->bnSave, SIGNAL(clicked()), tool, SLOT(saveReferenceImages()));
     connect(d->ui->bnLoad, SIGNAL(clicked()), tool, SLOT(loadReferenceImages()));
 
     connect(d->ui->chkKeepAspectRatio, SIGNAL(stateChanged(int)), this, SLOT(slotKeepAspectChanged()));
     connect(d->ui->opacitySlider, SIGNAL(valueChanged(qreal)), this, SLOT(slotOpacitySliderChanged(qreal)));
     connect(d->ui->saturationSlider, SIGNAL(valueChanged(qreal)), this, SLOT(slotSaturationSliderChanged(qreal)));
 
     d->ui->referenceImageLocationCombobox->addItem(i18n("Embed to .KRA"));
     d->ui->referenceImageLocationCombobox->addItem(i18n("Link to Image"));
     connect(d->ui->referenceImageLocationCombobox, SIGNAL(currentIndexChanged(int)), this, SLOT(slotSaveLocationChanged(int)));
 
     updateVisibility(false); // no selection when we start
 }
 
 ToolReferenceImagesWidget::~ToolReferenceImagesWidget()
 {
 }
 
 void ToolReferenceImagesWidget::selectionChanged(KoSelection *selection)
 {
     QList<KoShape*> shapes = selection->selectedEditableShapes();
 
     d->ui->opacitySlider->setSelection(shapes);
     d->ui->saturationSlider->setSelection(shapes);
 
     bool anyKeepingAspectRatio = false;
     bool anyNotKeepingAspectRatio = false;
     bool anyEmbedded = false;
     bool anyLinked = false;
     bool anyNonLinkable = false;
     bool anySelected = selection->count() > 0;
 
     Q_FOREACH(KoShape *shape, shapes) {
         KisReferenceImage *reference = dynamic_cast<KisReferenceImage*>(shape);
 
         anyKeepingAspectRatio |= shape->keepAspectRatio();
         anyNotKeepingAspectRatio |= !shape->keepAspectRatio();
 
         if (reference) {
             anyEmbedded |= reference->embed();
             anyLinked |= !reference->embed();
             anyNonLinkable |= !reference->hasLocalFile();
         }
     }
 
     KisSignalsBlocker blocker(
         d->ui->chkKeepAspectRatio,
         d->ui->referenceImageLocationCombobox
     );
 
     d->ui->chkKeepAspectRatio->setCheckState(
         (anyKeepingAspectRatio && anyNotKeepingAspectRatio) ? Qt::PartiallyChecked :
          anyKeepingAspectRatio ? Qt::Checked : Qt::Unchecked);
 
 
     // set save location combobox
     bool imagesEmbedded = anyEmbedded && !anyLinked;
     int comboBoxIndex = imagesEmbedded ? 0 : 1; // maps state to combobox index
     d->ui->referenceImageLocationCombobox->setCurrentIndex(comboBoxIndex);
 
 
     updateVisibility(anySelected);
 }
 
 void ToolReferenceImagesWidget::slotCheckClipboardContents() {
     d->ui->bnPasteReferenceImage->setEnabled(!QApplication::clipboard()->image().isNull());
 }
 
 void ToolReferenceImagesWidget::slotKeepAspectChanged()
 {
     KoSelection *selection = d->tool->koSelection();
     QList<KoShape*> shapes = selection->selectedEditableShapes();
 
     KUndo2Command *cmd =
             new KoShapeKeepAspectRatioCommand(shapes, d->ui->chkKeepAspectRatio->isChecked());
 
     d->tool->canvas()->addCommand(cmd);
 }
 
 void ToolReferenceImagesWidget::slotOpacitySliderChanged(qreal newOpacity)
 {
     QList<KoShape*> shapes = d->ui->opacitySlider->selection();
     if (shapes.isEmpty()) return;
 
     KUndo2Command *cmd =
         new KoShapeTransparencyCommand(shapes, 1.0 - newOpacity / 100.0);
 
     d->tool->canvas()->addCommand(cmd);
 }
 
 void ToolReferenceImagesWidget::slotSaturationSliderChanged(qreal newSaturation)
 {
     QList<KoShape*> shapes = d->ui->saturationSlider->selection();
     if (shapes.isEmpty()) return;
 
     KUndo2Command *cmd =
             new KisReferenceImage::SetSaturationCommand(shapes, newSaturation / 100.0);
 
     d->tool->canvas()->addCommand(cmd);
 }
 
 void ToolReferenceImagesWidget::slotSaveLocationChanged(int index)
 {
     KoSelection *selection = d->tool->koSelection();
     QList<KoShape*> shapes = selection->selectedEditableShapes();
 
 
     Q_FOREACH(KoShape *shape, shapes) {
         KisReferenceImage *reference = dynamic_cast<KisReferenceImage*>(shape);
         KIS_SAFE_ASSERT_RECOVER_RETURN(reference);
 
         if (index == 0) { // embed to KRA
             reference->setEmbed(true);
         } else { // link to file
-            reference->setEmbed(false);
+            if (reference->hasLocalFile()) {
+                reference->setEmbed(false);
+            } else {
+                //In the case no local file is found, switch back to embed file data.
+                d->ui->referenceImageLocationCombobox->setCurrentIndex(0);
+            }
         }
     }
 }
 
 void ToolReferenceImagesWidget::updateVisibility(bool hasSelection)
 {
     // hide UI elements if nothing is selected.
     d->ui->referenceImageLocationCombobox->setVisible(hasSelection);
     d->ui->chkKeepAspectRatio->setVisible(hasSelection);
     d->ui->saveLocationLabel->setVisible(hasSelection);
     d->ui->opacitySlider->setVisible(hasSelection);
     d->ui->saturationSlider->setVisible(hasSelection);
 
     // show a label indicating that a selection is required to show options
     d->ui->referenceImageOptionsLabel->setVisible(!hasSelection);
 
+    if (hasSelection) {
+        KoSelection* selection = d->tool->koSelection();
+        QList<KoShape*> shapes = selection->selectedEditableShapes();
+        bool usesLocalFile = true;
+
+        Q_FOREACH(KoShape *shape, shapes) {
+            KisReferenceImage *reference = dynamic_cast<KisReferenceImage*>(shape);
+
+            if (reference) {
+                usesLocalFile &= reference->hasLocalFile();
+            }
+        }
+
+        QStandardItemModel* model = dynamic_cast<QStandardItemModel*>(d->ui->referenceImageLocationCombobox->model());
+
+        if (model) {
+            QStandardItem* item = model->item(1);
+            item->setFlags(usesLocalFile ? item->flags() | Qt::ItemIsEnabled :
+                                           item->flags() & ~Qt::ItemIsEnabled);
+        }
+    }
 }