I got it working by passing source kit server arguments:
there is a demo project available here: GitHub - markst/hotreloading-vscode-ios: Demonstrating iOS development environment in VSCode using XcodeGen + HotReloading.
i.e:
"sourcekit-lsp.serverArguments": [
"-Xswiftc",
"-sdk",
"-Xswiftc",
"/Applications/Xcode.app/Contents/Developer/Platforms/iPhoneSimulator.platform/Developer/SDKs/iPhoneSimulator.sdk",
"-Xswiftc",
"-target",
"-Xswiftc",
"arm64-apple-ios13.0-simulator",
"-Xcc",
"-DSWIFT_PACKAGE=0" // Build package as if it were Application?
]