This cost me a few hours today. I thought my ssh config was messed up as nothing i did would allow me to get onto my remote workstation, but it worked fine on some other systems.
Short answer - change your default shell to /bin/bash on the remote system.
Mine is set in LDAP to /bin/zsh, which meant I had to go change it there and not by using chsh Looks to have been fixed now, but in the version I’m running in Manjaro/Arch I still have to do the workaround.
The shell override in vscode is only for the terminal. It must use bash to install/upgrade the server remotely.
References:
https://github.com/microsoft/vscode-remote-release/issues/6394