Costa said on-going legal and personal matters in his home country meant he couldn't leave and return to complete his two-year deal.
The 35-year-old former Brazil international, who's enjoyed successful spells at Shakhtar Donetsk, Bayern Munich and Juventus, was a marquee signing for the Sky Blues last year but hadn't played for the five-times A-League champions since May.
An update on Douglas Costa's situation ahead of the 2025-26 Isuzu UTE A-League season.— Sydney FC (@SydneyFC) September 17, 2025
He had been given two months' grace by the club to resolve his issues back in Brazil but it reported on Wednesday: "Costa has informed Sydney FC there is no end in sight.
Costa said in a statement: "I want to thank Sydney FC for giving me the opportunity to play in Australia – it was an incredible year in Sky Blue.
"I am very sorry that I cannot return at this time due to the matters I must resolve at home, but I will always remember my time in Sydney fondly.
"To the members and fans, I truly appreciate the support you gave me and the team. Playing in front of you was very special, and I will never forget it."
Sydney coach Ufuk Talay also paid tribute, saying: "Douglas gave us some entertaining performances during his season here, and I want to thank him for the effort and quality he brought to the squad.
"We have supported him over the last couple months to try and resolve his issues, however we've agreed this is the best path forward for the squad as we prepare for the season ahead."
Costa's exit will open up a fifth foreign player spot, which Sydney can fill in January.
