diff --git a/pkg/vm/slot.go b/pkg/vm/slot.go
index 1f4107ee2..18a65ac85 100644
--- a/pkg/vm/slot.go
+++ b/pkg/vm/slot.go
@@ -45,3 +45,10 @@ func (s *Slot) Get(i int) stackitem.Item {
 
 // Size returns slot size.
 func (s *Slot) Size() int { return len(s.storage) }
+
+// Clear removes all slot variables from reference counter.
+func (s *Slot) Clear() {
+	for _, item := range s.storage {
+		s.refs.Remove(item)
+	}
+}
diff --git a/pkg/vm/vm.go b/pkg/vm/vm.go
index 627ed480c..cd2e0e74a 100644
--- a/pkg/vm/vm.go
+++ b/pkg/vm/vm.go
@@ -1262,9 +1262,10 @@ func (v *VM) execute(ctx *Context, op opcode.Opcode, parameter []byte) (err erro
 		}
 
 	case opcode.RET:
-		v.istack.Pop()
+		oldCtx := v.istack.Pop().Value().(*Context)
 		oldEstack := v.estack
 
+		v.unloadContext(oldCtx)
 		if v.istack.Len() == 0 {
 			v.state = haltState
 			break
@@ -1372,6 +1373,19 @@ func (v *VM) execute(ctx *Context, op opcode.Opcode, parameter []byte) (err erro
 	return
 }
 
+func (v *VM) unloadContext(ctx *Context) {
+	if ctx.local != nil {
+		ctx.local.Clear()
+	}
+	if ctx.arguments != nil {
+		ctx.arguments.Clear()
+	}
+	currCtx := v.Context()
+	if ctx.static != nil && currCtx != nil && ctx.static != currCtx.static {
+		ctx.static.Clear()
+	}
+}
+
 // getJumpCondition performs opcode specific comparison of a and b
 func getJumpCondition(op opcode.Opcode, a, b *big.Int) bool {
 	cmp := a.Cmp(b)
diff --git a/pkg/vm/vm_test.go b/pkg/vm/vm_test.go
index 8075e94e6..ca2c3cdca 100644
--- a/pkg/vm/vm_test.go
+++ b/pkg/vm/vm_test.go
@@ -1142,6 +1142,46 @@ func getTestFuncForVM(prog []byte, result interface{}, args ...interface{}) func
 	return getCustomTestFuncForVM(prog, f, args...)
 }
 
+func makeRETProgram(t *testing.T, argCount, localCount int) []byte {
+	require.True(t, argCount+localCount <= 255)
+
+	fProg := []opcode.Opcode{opcode.INITSLOT, opcode.Opcode(localCount), opcode.Opcode(argCount)}
+	for i := 0; i < localCount; i++ {
+		fProg = append(fProg, opcode.PUSH8, opcode.STLOC, opcode.Opcode(i))
+	}
+	fProg = append(fProg, opcode.RET)
+
+	offset := uint32(len(fProg) + 5)
+	param := make([]byte, 4)
+	binary.LittleEndian.PutUint32(param, offset)
+
+	ops := []opcode.Opcode{
+		opcode.INITSSLOT, 0x01,
+		opcode.PUSHA, 11, 0, 0, 0,
+		opcode.STSFLD0,
+		opcode.JMPL, opcode.Opcode(param[0]), opcode.Opcode(param[1]), opcode.Opcode(param[2]), opcode.Opcode(param[3]),
+	}
+	ops = append(ops, fProg...)
+
+	// execute func multiple times to ensure total reference count is less than max
+	callCount := MaxStackSize/(argCount+localCount) + 1
+	args := make([]opcode.Opcode, argCount)
+	for i := range args {
+		args[i] = opcode.PUSH7
+	}
+	for i := 0; i < callCount; i++ {
+		ops = append(ops, args...)
+		ops = append(ops, opcode.LDSFLD0, opcode.CALLA)
+	}
+	return makeProgram(ops...)
+}
+
+func TestRETReferenceClear(t *testing.T) {
+	// 42 is a canary
+	t.Run("Argument", getTestFuncForVM(makeRETProgram(t, 100, 0), 42, 42))
+	t.Run("Local", getTestFuncForVM(makeRETProgram(t, 0, 100), 42, 42))
+}
+
 func TestNOTEQUALByteArray(t *testing.T) {
 	prog := makeProgram(opcode.NOTEQUAL)
 	t.Run("True", getTestFuncForVM(prog, true, []byte{1, 2}, []byte{0, 1, 2}))