The need for models that recapitulate liver physiology is perceived for drug development, study of liver disease and bioartificial liver support. The bipotent cell line HepaRG constitutes an efficient surrogate of liver function, yet its differentiated status relies on high concentrations of DMSO, which may compromise the study of drug metabolism and limit the applicability of this hepatic model. Herein, we present a three-dimensional (3D) strategy for the differentiation of HepaRG based on alginate microencapsulation of cell spheroids and culture in dimethyl sulfoxide (DMSO)-free conditions. A ratio of 2.9:1 hepatocyte-like to biliary-like cells was obtained in the 3D culture, with an improvement of 35.9 % in the hepatocyte differentiation when compared with two-dimensional (2D) cultures. The expression of the hepatic identity genes HNF4α and PXR in 3D cultures was comparable to 2D differentiated cultures, while the expression of homeostatic-associated genes albumin and carbamoyl phosphate synthase 1 was higher in 3D. Moreover, the spheroids presented a polarized organization, exhibiting an interconnected bile canalicular network and excretory functionality, assessed by specific activity of MRP2. Importantly, despite variability in basal gene expression levels, the activity of the phase I enzymes cytochrome P450 family 3, subfamily A, polypeptide 4 and cytochrome P450 family 1, subfamily A, polypeptide 2 upon induction was comparable to differentiated 2D cultures and albumin production and ammonia detoxification were enhanced in 3D. The presented model is suitable for toxicological applications, as it allows high throughput analysis of multiple compounds in a DMSO-free setting. Due to the high xenobiotic metabolism and maintenance of biosynthetic functions, the applicability of this model might be broadened to understand liver physiology and for bioartificial liver applications.