This might be owned by kio sftp or some other generic component.

When opening a remote ssh text file (sftp) in dolphin:
1 - Right click on the file
2 - Open With... (or other if there is an association already)
3 - type: kate %U
4 - Mark the checkbox "Remember application ...."
5 - OK

The file will open in kate and kate will know it is a remote file and save it thru sftp as expected.
e.g. [10.1.2.3]folder\_file

Now with the association, there is a context menu "Open with kate".
When using it it shows as:
14213_0\_file

As I understand, in this case is the same behaviour as not using %U in the kate call.

Dolphin/kio copies the file to some temporary folder and then passes to kate.

If I enter the file association in Properties -> File Type Options -> Application Preference Order -> kate -> Edit -> Application:

The command is "kate %U" as expected.

So, Dolphin does not respect the %U argument in the associated call.